Are car loans really that bad?

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sls239
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Re: Are car loans really that bad?

Post by sls239 » Mon Feb 02, 2015 1:40 pm

Well it is hard to separate the loans themselves from all the issues that they present.

What I have heard many times is someone will look at a lightly used car, then look at a new car. They'll see that the new car is only a few thousand more than the lightly used one but they can get a 0.9% loan on the new car, but the used car is a 2% loan.

They then decide that it isn't "worth it" to buy lightly used.

And these are often the same people that will go to an entirely different store to pick up an item because it is $1 cheaper at that store.

If you are paying cash, it is simply harder to forget that a few thousand dollars is a few thousand dollars.

I'd suggest that there is some cognitive bias in play here - but I can't quite put my finger on what it is exactly.

john94549
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Re: Are car loans really that bad?

Post by john94549 » Mon Feb 02, 2015 1:59 pm

I think the only time I took out a car loan was over twenty years ago, when I really didn't want to tap other funds. The interest rate was grotesque, like 15%. Paid it off in a year. Vowed "never again'".

Note: I wasn't suggesting one borrow to buy a car at 1.99% and also invest in a CD. I was merely expressing my quandry over how credit unions can offer such low rates on car loans.

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Re: Are car loans really that bad?

Post by mickeyd » Mon Feb 02, 2015 2:18 pm

The only car loan that I have had in the last 30 years or so was a 0% 36month deal a few years ago that I accepted rather than paying cash for the new Toyota. Any rate higher than 0% is not acceptable to me. Car dealers probably hate me, but I'll get over it.
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mnsportsgeek
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Re: Are car loans really that bad?

Post by mnsportsgeek » Mon Feb 02, 2015 2:21 pm

sls239 wrote:Well it is hard to separate the loans themselves from all the issues that they present.

What I have heard many times is someone will look at a lightly used car, then look at a new car. They'll see that the new car is only a few thousand more than the lightly used one but they can get a 0.9% loan on the new car, but the used car is a 2% loan.

They then decide that it isn't "worth it" to buy lightly used.

And these are often the same people that will go to an entirely different store to pick up an item because it is $1 cheaper at that store.

If you are paying cash, it is simply harder to forget that a few thousand dollars is a few thousand dollars.

I'd suggest that there is some cognitive bias in play here - but I can't quite put my finger on what it is exactly.
But in the case of cars, a lightly used car for a few thousand less means you aren't going to be driving that car as long as a new car. I get your point I'd you're buying something that you will keep forever. But a car is going to break. Would you rather save a few thousand up front? Or replace your car sooner. The choice is yours.

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Re: Are car loans really that bad?

Post by Johno » Mon Feb 02, 2015 5:40 pm

robert88 wrote:
Johno wrote:The Suze Orman 3 yr test sounds reasonable to me. If you can't afford afford a basic new car with a 3 yr loan, there's probably nothing special about your job that you couldn't get an approximately equivalent one along a bus route, etc.
That advice works in NYC. If you live in the Midwest(Chicago excluded) or the South, public transportation is truly abysmal. If you can't afford to own a car, your best bet is to make friends with someone who can or live close enough to walk or bike to work.
Bringing up NY (the city) makes it seem I said people don't need cars, because there you don't need one, period. I live right next door and don't need one, but money isn't much of a constraint so I have one. But I didn't say people don't need cars in general in the US. I said it sounds reasonable to me to put a 3 yr limit on a loan for a car. For a basic new car that's ballpark of $7k a year (give or take interest and what car one deems 'basic'). I would stick with saying that if you can't make room in a budget for that, you probably need to rethink the idea you 'need' a new car, and/or rethink your job situation and where your finances are headed generally. And also though any generalization is just that, IME a lot of people who say they 'can't possibly' use public transportation just don't want to, including not wanting to ride with the people in their area who do use it, which in most areas there are (again generalizing, not every far corner of the rural US, but poorer workers taking the bus is far from limited to just a couple of huge cities). And that's not necessarily just about crime either, but self image. But again that's fine IMO, with a new car, if one can fit that into a short car loan. I'm far from the most extreme person here about avoiding debt, but stretching a car loan to 5 or more years to fit it into a budget is highly questionable just IMO. I really think any car loan is something people should look to get past as they get established in life: use the period after the short loan on the first car is paid off to save up to buy any subsequent one with cash. But it's a free country, obviously, and I realize that statistics say few people take that advice.

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Re: Are car loans really that bad?

Post by sls239 » Mon Feb 02, 2015 5:51 pm

But in the case of cars, a lightly used car for a few thousand less means you aren't going to be driving that car as long as a new car. I get your point I'd you're buying something that you will keep forever. But a car is going to break. Would you rather save a few thousand up front? Or replace your car sooner. The choice is yours.
The value of the new car asymptotically approaches the value of the lightly used one. That is, the difference between an 8 year old car and a 9 year old car is much much less than the difference between a brand new car and a 1 year old car. You never get back the extra amount - generally not even 50% of that extra amount - if you are paying market prices no matter how briefly or long you keep the car.

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JupiterJones
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Re: Are car loans really that bad?

Post by JupiterJones » Mon Feb 02, 2015 6:02 pm

Grt2bOutdoors wrote:Stop making payments on the loan, then you'll see how bad they can be when the tow truck repossesses your car - now you have no money and you have no car and there you are! :twisted:
That's the main problem I have with a car loan (or any loan). It puts you "on the hook" for the payment every month.

Maybe not that big of a deal as long as you have a nice, steady income for the life of the loan. But what if you don't? What if you don't make as much as you thought you would next year? What if you lose your job?

Maybe I spent to much of my 20s working in jobs with varying and not-always-certain incomes, but I just don't like taking on that kind of risk if I don't have to.

The less of my money coming in that it earmarked to go right back out without me having any say in the matter, the better!
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Re: Are car loans really that bad?

Post by robert88 » Mon Feb 02, 2015 6:39 pm

Johno wrote: Bringing up NY (the city) makes it seem I said people don't need cars, because there you don't need one, period. I live right next door and don't need one, but money isn't much of a constraint so I have one. But I didn't say people don't need cars in general in the US. I said it sounds reasonable to me to put a 3 yr limit on a loan for a car. For a basic new car that's ballpark of $7k a year (give or take interest and what car one deems 'basic'). I would stick with saying that if you can't make room in a budget for that, you probably need to rethink the idea you 'need' a new car, and/or rethink your job situation and where your finances are headed generally. And also though any generalization is just that, IME a lot of people who say they 'can't possibly' use public transportation just don't want to, including not wanting to ride with the people in their area who do use it, which in most areas there are (again generalizing, not every far corner of the rural US, but poorer workers taking the bus is far from limited to just a couple of huge cities).
Yes, public image plays a role, but there's a lot of practical problems too. I know someone who lives in a city of ~300 thousand people and over 1 million in the metro area, which is fairly large by mid-west standards, and the city buses don't run late at night. Since that person works the night shift, they need to walk or else find a ride to get to and from work. Suppose taking the bus adds an hour each way to someone's day versus driving. If you have kids, then that could be an additional 2 hours a day you have to hire a babysitter, which at the very least cuts into whatever financial gain you win by not driving a car. The reality is that the working "poor" usually don't have car insurance(liability or collision), which reduces their cost of ownership a lot.
Last edited by robert88 on Mon Feb 02, 2015 7:21 pm, edited 2 times in total.

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kenyan
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Re: Are car loans really that bad?

Post by kenyan » Mon Feb 02, 2015 6:51 pm

Ketawa wrote: The fact that a car is a depreciating asset doesn't matter. An auto loan is just debt. The car is merely collateral to secure the debt. As soon as it is purchased, its value has nothing to do with the amount of debt.
That's always been my take. I've never understood the "don't finance a depreciating asset" camp. Prudence is always required, but as long as there is no absence of that, then the depreciating asset part of the argument is immaterial to me.

My auto loan is for 0.9%. I could have paid cash, but preferred to keep my liquidity intact for such a cheap cost of capital.

As for the 'lightly used' argument, I do not disagree that you can save a little money doing that, but whether or not you save very much depends upon the make/model/year of the car you are looking at. I would've saved very little buying a lightly used Subaru Outback - I looked - unless I went back at least 5-6 model years (at which point the car did not resemble the one I purchased very much, and wouldn't have served my needs very well). A 4-year-old model with 40-50k miles would have saved me ~25%. That's wasn't worth it for me when you consider that (a) you've used up the best four years of the car's life, and probably a quarter of its usable life, (b) you've used up the warranty, and (c) the newer model is a bit more feature-rich overall. Now, I didn't have to buy an Outback, but I did have a number of requirements for our car. Someone with a bit more flexibility on their purchase probably could've done better, but I have no regrets.

Using a car loan to finance something that you can't really afford is very bad. Using a loan because it allows you a net positive given the opportunity cost of capital is not so bad.
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sls239
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Re: Are car loans really that bad?

Post by sls239 » Tue Feb 03, 2015 3:07 pm

A 4-year-old model with 40-50k miles would have saved me ~25%
But percentage of purchase price is not the appropriate way to measure the savings.

And that is the problem. If a $50 item is on sale for 50% off, many would go out of their way to get it. But 5% of $5000 is deemed "not worth it." That 5% is 10 times the amount you can save by getting that other item for 50% off.

One dollar, no matter what percentage of purchase price it represents is worth exactly one dollar. A few thousand dollars, even if it is only a very small percentage of a purchase price is still worth a few thousand dollars.

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Re: Are car loans really that bad?

Post by Aptenodytes » Tue Feb 03, 2015 3:17 pm

Whether it is a depreciating asset or not is immaterial, I think. If the duration of the car loan is shorter than the life span of the car, there's nothing inherently wrong with taking out a loan. Whether any given loan makes sense depends on the terms, the opportunity costs, and the behavioral traps the loan might engender. Those are all case-specific considerations.

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kenyan
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Re: Are car loans really that bad?

Post by kenyan » Tue Feb 03, 2015 3:30 pm

sls239 wrote:
A 4-year-old model with 40-50k miles would have saved me ~25%
But percentage of purchase price is not the appropriate way to measure the savings.

And that is the problem. If a $50 item is on sale for 50% off, many would go out of their way to get it. But 5% of $5000 is deemed "not worth it." That 5% is 10 times the amount you can save by getting that other item for 50% off.

One dollar, no matter what percentage of purchase price it represents is worth exactly one dollar. A few thousand dollars, even if it is only a very small percentage of a purchase price is still worth a few thousand dollars.
It's not that the savings is 'not worth it,' it's the fact that the car is a limited life item that will require replacement. If you save 25%, but have used up 25% of the life of the car, have you really saved anything? Whether it be $5k or $50 saved, you have to replace the car that much sooner.

Purchase car new every 16 years at $20k real = $60k over 48 years.
Purchase car 4 years used every 12 years at $15k real = $60k over 48 years.

Now, you could do better than either of these scenarios from a financial standpoint by purchasing a beater every so often, but there would be non-financial costs involved with repairs (inconvenience/time in the shop/breakdowns), lower safety levels, lower convenience, and so on.
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Re: Are car loans really that bad?

Post by Userdc » Tue Feb 03, 2015 3:39 pm

sls239 wrote:
A 4-year-old model with 40-50k miles would have saved me ~25%
But percentage of purchase price is not the appropriate way to measure the savings.
That's a very low depreciation rate for a car. But if it really only depreciates 25% in 4 years, it's potentially cheaper to own the new car.

Let's say the new car costs $20K and will cost $5K in depreciation and virtually $0 in repairs over the next 4 years.

The 4 year old car costs $15K and assuming the same depreciation rate, will cost $3,750 in depreciation, and would need to have less than $1,250 in repairs in years 5 - 8 to be cheaper to own than the new car.

I'm taking the new car, too.

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Re: Are car loans really that bad?

Post by mnsportsgeek » Tue Feb 03, 2015 4:05 pm

sls239 wrote:
But in the case of cars, a lightly used car for a few thousand less means you aren't going to be driving that car as long as a new car. I get your point I'd you're buying something that you will keep forever. But a car is going to break. Would you rather save a few thousand up front? Or replace your car sooner. The choice is yours.
The value of the new car asymptotically approaches the value of the lightly used one. That is, the difference between an 8 year old car and a 9 year old car is much much less than the difference between a brand new car and a 1 year old car. You never get back the extra amount - generally not even 50% of that extra amount - if you are paying market prices no matter how briefly or long you keep the car.
A brand new Honda Accord is roughly $23,000.

A 3 year old Honda Accord is roughly $16,000 based on some quick searching.

Let's say you drive the car for 10 years. A pretty reasonable length of time.

The Honda Accord is worth $5,000 in 10 years based on some quick searching.

The cost per year to drive a new Accord: (23000-5000)/10 = $1800/year

The cost per year to drive a used Accord: (16000-5000)/7 = $1571.42/year

It costs $19/month to drive a new car off the lot for 10 years than it does to drive a 3 year old car for 7 years.

I'll take the new car with full warranty and peace of mind every single day for $19 a month. Nobody ever takes into account the simple fact that you can't drive a used car for as long as you can drive a new car. Taking that simple thing into account blows up their argument.

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kenyan
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Re: Are car loans really that bad?

Post by kenyan » Tue Feb 03, 2015 4:07 pm

Userdc wrote:
sls239 wrote:
A 4-year-old model with 40-50k miles would have saved me ~25%
But percentage of purchase price is not the appropriate way to measure the savings.
That's a very low depreciation rate for a car. But if it really only depreciates 25% in 4 years, it's potentially cheaper to own the new car.

Let's say the new car costs $20K and will cost $5K in depreciation and virtually $0 in repairs over the next 4 years.

The 4 year old car costs $15K and assuming the same depreciation rate, will cost $3,750 in depreciation, and would need to have less than $1,250 in repairs in years 5 - 8 to be cheaper to own than the new car.

I'm taking the new car, too.
Exactly - assuming my numbers are correct, then the new car makes sense. Are they correct? Well, a good deal was to be had on the new one due to the interest in clearing out inventory for the redesigned 2015. A quick check of Autotrader.com shows that the numbers are pretty good (comparing what I bought it for 15 months ago versus what you could buy a 4-year-old model today). Even if it's not cheaper to own the new car, it's barely more expensive (per year of ownership), and there are some benefits to having a newer model.

Many cars do depreciate faster, so a used would be a better deal in those cases.
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Re: Are car loans really that bad?

Post by sls239 » Tue Feb 03, 2015 7:56 pm

I don't know where you are getting those numbers.

There is a 2013 Accord LX with 20K miles on it with an asking price of 19K - meaning you could probably get it for 18K. A new Accord LX probably costs about 22K. So for getting a car virtually identical, but with 20K miles on it (leaving 15K miles left under factory warranty) you save $4K dollars.

You can claim that 20K miles will shorten the life of the car by a year, but you won't convince me that a 2005 Accord LX with 200K miles on it is worth $4K less than a 2006 Accord LX with 180K miles on it. At that point, random chance - the condition of the car itself plays a much more important role in the value of the car and how long you can drive it.

That isn't to say it is never worth it to buy a brand new car. I've done that and believed it to be worth it. But in the case that the used one is virtually identical to the new one, and is available - the used one is the better deal.

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wander
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Re: Are car loans really that bad?

Post by wander » Tue Feb 03, 2015 8:33 pm

Long time ago, I was for buying new car and drove it into the ground. Now I can fix car so I rather buy used cars with cash and keep investing the extra. Instead of buying $30k car, I can off for a $10,000 used car and let the $20k grow without giving up the 2% I lost for the amount I owe the bank. Currently, my car is at 350,000 miles and still running well. I drove 14 hours one way last month to a freezing Canadian city and came back without any problem. Buy new or used is up to individual. I feel confident driving an old car but you don't have to feel the same. :sharebeer

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Re: Are car loans really that bad?

Post by randomguy » Tue Feb 03, 2015 8:52 pm

sls239 wrote:I don't know where you are getting those numbers.

There is a 2013 Accord LX with 20K miles on it with an asking price of 19K - meaning you could probably get it for 18K. A new Accord LX probably costs about 22K. So for getting a car virtually identical, but with 20K miles on it (leaving 15K miles left under factory warranty) you save $4K dollars.

You can claim that 20K miles will shorten the life of the car by a year, but you won't convince me that a 2005 Accord LX with 200K miles on it is worth $4K less than a 2006 Accord LX with 180K miles on it. At that point, random chance - the condition of the car itself plays a much more important role in the value of the car and how long you can drive it.

That isn't to say it is never worth it to buy a brand new car. I've done that and believed it to be worth it. But in the case that the used one is virtually identical to the new one, and is available - the used one is the better deal.
The car isn't worth 4k more. It does however have 1-2 more years of life. The math ends up being something like

18/9 = 2k/yr vs 22/10 = 2.2k/y or a 2k/yr difference between new and old. There is also some opportunity, insurance, and taxes that favor the older car and newer tires/warranty that add some value to the new car. You can change your year assumptions and get slightly different results.

But it all comes down to your purchase prices. I mean right now I can walk into the dealer and walk out with a 2015 accord LX for 20,205+ taxes from true car. Is that a better deal than a 2013 for 17.996 with 13k miles on it or the 16k car with 47k I think so. Find some private seller dumping that same accord for 15k (or 10k), and my opinion might change. It should be pointed out accords are in generally bad used cars. They hold their value well due to reputations for quality.

And for what it is worth, I think the best way to buy a car is to buy last years model new. You get it cheap (cars start depreciating the day they are announced because everyone knows a new, "better" model is coming in 12 months) and get to baby it from day 1 until it dies in 15+ years. It isn't the cheapest (buying the 10 year old beater and doing the work yourself tends to win that) but it is pretty darn close to buying that used car.

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Re: Are car loans really that bad?

Post by 3CT_Paddler » Tue Feb 03, 2015 10:11 pm

Using a Honda Accord as an example of depreciation is going to slant the answer in favor of new. Change the car to a Toyota Camry or something similar and the equation changes. New Camry msrp - $22k. 2012 Camry with $50k mi - $13k. That is a very sharp depreciation hit for buying new...

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Re: Are car loans really that bad?

Post by randomguy » Tue Feb 03, 2015 10:30 pm

3CT_Paddler wrote:Using a Honda Accord as an example of depreciation is going to slant the answer in favor of new. Change the car to a Toyota Camry or something similar and the equation changes. New Camry msrp - $22k. 2012 Camry with $50k mi - $13k. That is a very sharp depreciation hit for buying new...
You can't look at MSRP. You need to look at out the door which is about 3k cheaper. Lets call it 21k (Cheapest one I saw was about 24k) and you are driving 15k/yr until 200k miles.

Used car 1.3k
new = 21/13.3 = 1.57k

Again your paying ~300 bucks/yr for a new car versus used. Your 8k purchase difference is 4k over the life of the car. Still a nice chunk of change. Changing the new or used price by 1500 bucks either way (or trading in at 150k/miles, driving 20k/yr vs 10k,...) changes the numbers a bit. For example in my area a quick search of Camary's suggest that I am likely to pay 16k at a dealer. To get to 13k you would have to start craigslisting.

But new versus used isn't really an issue with loans. You can get loans on used cars pretty easily these days. Is it better to pay some low interest on a loan and invest or not is the same discussion that comes up every time about paying off the mortgage. Nobody will convince the other side that their approach is right.

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Re: Are car loans really that bad?

Post by 3CT_Paddler » Tue Feb 03, 2015 11:02 pm

I dont quite agree with the comparison... Both cars could easily be driven for an additional $200k. The difference in price of a 10 vs 13 year old Camry would be $1-2k at most. Maybe add an extra 500-$1000 for extra repairs of the older car. The person who chooses the slightly used car is saving $6-8k in this example.

Depreciation is always going to be front loaded on vehicles (unless your car is a classic muscle car).

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Re: Are car loans really that bad?

Post by sls239 » Wed Feb 04, 2015 1:53 pm

So my point was - to bring it back around to the loans - it is one of the ways they talk you into spending more than you would otherwise.

You can go in thinking I'll buy used and pay cash - then they say don't you want to buy new, it only costs a little more and you can get this great interest rate.

So you end up buying a car with a higher purchase price and paying for the financing (not to mention higher taxes).

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Re: Are car loans really that bad?

Post by yosef » Wed Feb 04, 2015 3:00 pm

JupiterJones wrote:
Grt2bOutdoors wrote:Stop making payments on the loan, then you'll see how bad they can be when the tow truck repossesses your car - now you have no money and you have no car and there you are! :twisted:
That's the main problem I have with a car loan (or any loan). It puts you "on the hook" for the payment every month.

Maybe not that big of a deal as long as you have a nice, steady income for the life of the loan. But what if you don't? What if you don't make as much as you thought you would next year? What if you lose your job?

Maybe I spent to much of my 20s working in jobs with varying and not-always-certain incomes, but I just don't like taking on that kind of risk if I don't have to.

The less of my money coming in that it earmarked to go right back out without me having any say in the matter, the better!
The prospect of losing my job (in addition to the 0.9% rate ;) ) is exactly the reason I now have a car loan. I could have paid cash, but at the time the liquidity was more valuable to me. If I'm jobless I'd rather have a $300 monthly obligation and $20k+ in the bank. That said, I feel more secure now and plan on paying the loan off in less than a year.

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Re: Are car loans really that bad?

Post by randomguy » Wed Feb 04, 2015 4:17 pm

3CT_Paddler wrote:I dont quite agree with the comparison... Both cars could easily be driven for an additional $200k. The difference in price of a 10 vs 13 year old Camry would be $1-2k at most. Maybe add an extra 500-$1000 for extra repairs of the older car. The person who chooses the slightly used car is saving $6-8k in this example.

Depreciation is always going to be front loaded on vehicles (unless your car is a classic muscle car).
The price difference between a 10 year old car and a 13 year old one doesn't matter. If you are willing to drive a 13 year old car, your choices to get to that point are to drive a 3 year old used one for 10 years or drive a new one for 13. Used is definitely cheaper almost all the time. But the savings are not the price difference between a new car and a used one.

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Re: Are car loans really that bad?

Post by surfstar » Wed Feb 04, 2015 4:32 pm

Car purchases [of economical vehicles] are along a scale.

Beater <-> used <-> CPO <-> new


The closer to the left on that scale, the cheaper your costs. I believe reduced insurance and registration costs will cover a good amount of repairs, especially because I know how to turn a wrench. I bought mine somewhere in the used to beater range and love how low-maintenance and cost they are.
I do get tempted by something new, but that'll come later on...

Note, not all people have to worry about their car prices; but for those who truly do, not all of them actually take notice of the lifetime costs their getting into! (the new car every few years trend)

*CPO = Certified Pre-Owned.

Oh, and if/when we buy that new car - you bet I'll take a 0-2% loan on it. Anything less than inflation is fine with me.

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Re: Are car loans really that bad?

Post by 3CT_Paddler » Wed Feb 04, 2015 4:41 pm

randomguy wrote:
3CT_Paddler wrote:I dont quite agree with the comparison... Both cars could easily be driven for an additional $200k. The difference in price of a 10 vs 13 year old Camry would be $1-2k at most. Maybe add an extra 500-$1000 for extra repairs of the older car. The person who chooses the slightly used car is saving $6-8k in this example.

Depreciation is always going to be front loaded on vehicles (unless your car is a classic muscle car).
The price difference between a 10 year old car and a 13 year old one doesn't matter. If you are willing to drive a 13 year old car, your choices to get to that point are to drive a 3 year old used one for 10 years or drive a new one for 13. Used is definitely cheaper almost all the time. But the savings are not the price difference between a new car and a used one.
Why does the person with the new car get to drive 3 fewer years in the car? A fair comparison of costs is for the owners to hold the car for the same length of time.

I don't even know why I am arguing over this... I hope more people are convinced that buying new is the best way to go... it only helps people like me get better prices on those slightly used cars. :sharebeer

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Re: Are car loans really that bad?

Post by Rodc » Wed Feb 04, 2015 4:53 pm

3CT_Paddler wrote:
randomguy wrote:
3CT_Paddler wrote:I dont quite agree with the comparison... Both cars could easily be driven for an additional $200k. The difference in price of a 10 vs 13 year old Camry would be $1-2k at most. Maybe add an extra 500-$1000 for extra repairs of the older car. The person who chooses the slightly used car is saving $6-8k in this example.

Depreciation is always going to be front loaded on vehicles (unless your car is a classic muscle car).
The price difference between a 10 year old car and a 13 year old one doesn't matter. If you are willing to drive a 13 year old car, your choices to get to that point are to drive a 3 year old used one for 10 years or drive a new one for 13. Used is definitely cheaper almost all the time. But the savings are not the price difference between a new car and a used one.
Why does the person with the new car get to drive 3 fewer years in the car? A fair comparison of costs is for the owners to hold the car for the same length of time.

I don't even know why I am arguing over this... I hope more people are convinced that buying new is the best way to go... it only helps people like me get better prices on those slightly used cars. :sharebeer
You are replying to someone suggesting driving until the car is 13 years old. How, exactly, does that help you find a slightly used car?
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

mnsportsgeek
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Re: Are car loans really that bad?

Post by mnsportsgeek » Wed Feb 04, 2015 5:20 pm

3CT_Paddler wrote:
randomguy wrote:
3CT_Paddler wrote:I dont quite agree with the comparison... Both cars could easily be driven for an additional $200k. The difference in price of a 10 vs 13 year old Camry would be $1-2k at most. Maybe add an extra 500-$1000 for extra repairs of the older car. The person who chooses the slightly used car is saving $6-8k in this example.

Depreciation is always going to be front loaded on vehicles (unless your car is a classic muscle car).
The price difference between a 10 year old car and a 13 year old one doesn't matter. If you are willing to drive a 13 year old car, your choices to get to that point are to drive a 3 year old used one for 10 years or drive a new one for 13. Used is definitely cheaper almost all the time. But the savings are not the price difference between a new car and a used one.
Why does the person with the new car get to drive 3 fewer years in the car? A fair comparison of costs is for the owners to hold the car for the same length of time.

I don't even know why I am arguing over this... I hope more people are convinced that buying new is the best way to go... it only helps people like me get better prices on those slightly used cars. :sharebeer
10 is an arbitrary number chosen because a 10 year old car approaches the point where it is no longer reliable for someone without car skills. You can argue that a 13 year old car is still reliable. But I've seen enough cars die at younger than 10 to feel that 10 is a safe estimate.

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Abe
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Re: Are car loans really that bad?

Post by Abe » Wed Feb 04, 2015 5:29 pm

I wouldn't say that car loans are really that bad, but like a lot of questions here, the answer is, it depends. In the past, I saved enough money until I could pay cash. What's the difference in (making a payment) putting aside a certain amount of money into an account earmarked for buying a car, and making a payment after buying a car? Either way, you're making a payment. In the past, most people would finance a car for 3 or 4 years and then it was paid off. Now a lot of people are leasing which is just another way of financing cars. The price of cars have gone up so much that it is much harder to finance it for a 3 or 4 year period and get the payment down to where the customer can pay it off. So now they have come up with another way to finance called leasing. In order for them to get the payment down on these high price cars, they have to put a balloon payment on the end of the loan. So at the end of the lease the buyer may still owe a substantial amount of money on the balloon payment or what they call a residual payment. The problem with balloon payments is most people don't have the money to pay them. That's why they got into this situation to start with. If the buyer wants to trade for another car at this time, the balloon payment can sometimes be structured (financed) into a new lease. So these lease buyers can get caught up into making perpetual payments. This is the price you pay for driving expensive cars. But, hey, you can impress your neighbors. :happy
Last edited by Abe on Fri Feb 06, 2015 10:25 am, edited 2 times in total.
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Re: Are car loans really that bad?

Post by randomguy » Wed Feb 04, 2015 5:36 pm

mnsportsgeek wrote:
3CT_Paddler wrote:
randomguy wrote:
3CT_Paddler wrote:I dont quite agree with the comparison... Both cars could easily be driven for an additional $200k. The difference in price of a 10 vs 13 year old Camry would be $1-2k at most. Maybe add an extra 500-$1000 for extra repairs of the older car. The person who chooses the slightly used car is saving $6-8k in this example.

Depreciation is always going to be front loaded on vehicles (unless your car is a classic muscle car).
The price difference between a 10 year old car and a 13 year old one doesn't matter. If you are willing to drive a 13 year old car, your choices to get to that point are to drive a 3 year old used one for 10 years or drive a new one for 13. Used is definitely cheaper almost all the time. But the savings are not the price difference between a new car and a used one.
Why does the person with the new car get to drive 3 fewer years in the car? A fair comparison of costs is for the owners to hold the car for the same length of time.

I don't even know why I am arguing over this... I hope more people are convinced that buying new is the best way to go... it only helps people like me get better prices on those slightly used cars. :sharebeer
10 is an arbitrary number chosen because a 10 year old car approaches the point where it is no longer reliable for someone without car skills. You can argue that a 13 year old car is still reliable. But I've seen enough cars die at younger than 10 to feel that 10 is a safe estimate.
The exact number doesn't matter. The point is the new car owner gets to write his costs off over x years while the used car owner write theirs off over x-yeas of service already used up. For some reason this basic math seems to escape a lot of people. It doesn't make new cheaper than used in most cases, but it does narrows the gap down. And once you get out of the mildly used market and start talking about buying 100k+ mile cars, all bets are off. That market is wildly inefficient and you can either get a great deal or horribly screwed.

And again none of this has anything to do with car loans. You can get car loans on new cars or used and on cheap cars or expensive ones. Personally I would rather invest and gamble that I can beat 1.9% loan versus selling some stock, paying 33% in capital gains tax, and not have a loan. Other people feel differently. AT a 7% loan on the other hand, I am writing the check.

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Re: Are car loans really that bad?

Post by Johno » Wed Feb 04, 2015 5:47 pm

Yeah seems like some basic confusion. There's no way I can see that people buying new cars and driving them till they're old car helps anyone buy slightly used cars. But anyway the cost comparison of new v slightly used is theoretical total cost for each option over a period that's the least common multiple of the periods you'd hold the new and used cars. So to make it simpler if it's new car v. two year old used car and holding till the car is 12 years old, the right comparison is 6 times the lifecycle cost of the used strategy v 5 times the lifecycle cost of the new car strategy, or ratio it by 5/6. The reasonable assumption is that the car has a given useful life from when it was placed in service (assuming that was soon after it was manufactured), not that you automatically get rid of a car when it's newer just because you bought it when it was newer.

In that fair comparison, changing the age of used car and useful life as you please, the used strategy probably does have a lower lifecycle cost. But it partly depends what kind of pricing you get on used cars (used car fans are going to assume they are great negotiators of course but might not be, whereas nowadays almost anyone can get the right price on a new car), and dealing with maintenance (again partly a matter of real or self-perceived personal abilities). Also depends the actual market for used cars, late model used as % of new car prices can vary over time. Also I don't see it as automatic that buying 2 or 3 year old cars would beat buying 5 or 6 yr old cars for the same maximum life. I guess in fact one reason a person would do the 2-3 yr old used strategy is to have a nicer car on average, but if so why are they doing all kinds of winky smileys at people who want to drive a new car at first? Same motivation. Absolute lowest cost is probably achieved by driving an absolute piece of crap, and taking the bus is generally cheaper than that. :D
Last edited by Johno on Wed Feb 04, 2015 5:49 pm, edited 1 time in total.

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Re: Are car loans really that bad?

Post by Rodc » Wed Feb 04, 2015 5:48 pm

Like active funds, it is a sliding scale where the significant problems are over on the high cost high turn over side of the scale. If you really get only a car you need and can afford and it does not effect the price paid, then clearly a 0% loan and keep the money invested is the way to go. If the interest is high or financing causes you to buy far more car than otherwise, it is bad. There is of course an area in the middle where it is a judgement call.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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Re: Are car loans really that bad?

Post by 3CT_Paddler » Wed Feb 04, 2015 10:33 pm

Just to clarify my earlier comment about preferring others to purchase new cars... If more people decide to buy new cars instead of a 3 year old used car, the price for those 3 year old cars will be lower. It's why during the recession and post cash for clunkers, the difference between new and 3-year old was much less than it historically has been for many model cars. It's those who lease or buy a new car every couple years that provide that supply of 3-year old cars.

It's not a novel approach to buy slightly used cars instead of new...
http://budgeting.thenest.com/buying-new ... 25758.html
Most cars depreciate about 47 percent in the first three years, according to Consumer Reports.

Used cars have already taken that big depreciation hit, so they are often a better value, especially cars just two or three years old. Used cars lose only about 18 percent of their value in years three to six. Cars tend to go well past 100,000 miles if they were properly maintained, and many can hit 200,000 without a major problem.
My earlier post was not meant to denigrate those who buy new.

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Re: Are car loans really that bad?

Post by randomguy » Thu Feb 05, 2015 8:47 am

3CT_Paddler wrote:Just to clarify my earlier comment about preferring others to purchase new cars... If more people decide to buy new cars instead of a 3 year old used car, the price for those 3 year old cars will be lower. It's why during the recession and post cash for clunkers, the difference between new and 3-year old was much less than it historically has been for many model cars. It's those who lease or buy a new car every couple years that provide that supply of 3-year old cars.

It's not a novel approach to buy slightly used cars instead of new...
http://budgeting.thenest.com/buying-new ... 25758.html
Most cars depreciate about 47 percent in the first three years, according to Consumer Reports.

Used cars have already taken that big depreciation hit, so they are often a better value, especially cars just two or three years old. Used cars lose only about 18 percent of their value in years three to six. Cars tend to go well past 100,000 miles if they were properly maintained, and many can hit 200,000 without a major problem.
My earlier post was not meant to denigrate those who buy new.
I thought most of the price difference was a result of the fire sales on new cars.

Depreciation is tricky. The average car depreciates 47%. But from what? Generally people use MSRP. For most of the cars with high depreciation you are buying for thousands less than MSRP.You also don't buy an average car. You buy one car. For example consumer reports has the mazda 6 going from 26k to 15k (43% drop). The honda accord on the other hand goes from 30k to 25k (17% drop). One of those models is going to make a much better used car purchase than the other.

New will tend to be more expensive than gently used and gently used is more expensive than well used. The gap between them all though tends to be much smaller than the gap in purchase prices.

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Re: Are car loans really that bad?

Post by 3CT_Paddler » Thu Feb 05, 2015 10:26 am

randomguy wrote:One of those models is going to make a much better used car purchase than the other.
I agree the amount of depreciation (and thus savings) is going to be make and model dependent. In general Accords and Acura's will tend to have a lower depreciation rate in those first three years, but there are still "good" reliable cars that will have a higher depreciation rate and present relative deals compared to buying new.

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Re: Are car loans really that bad?

Post by reneeh63 » Thu Feb 05, 2015 9:49 pm

I got a great deal on a 2012 Mazda 6 - I financed it for 3 years at 2%. I drive my cars for at least 10 years. I have no issue paying 2% for such a short time - I certainly don't want to keep that much money around in cash...and some would say that amount would have to be in addition to a 4-6 month emergency fund... But some folks do seem to feel mighty good about paying cash.

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Re: Are car loans really that bad?

Post by randomguy » Thu Feb 05, 2015 11:01 pm

3CT_Paddler wrote:
randomguy wrote:One of those models is going to make a much better used car purchase than the other.
I agree the amount of depreciation (and thus savings) is going to be make and model dependent. In general Accords and Acura's will tend to have a lower depreciation rate in those first three years, but there are still "good" reliable cars that will have a higher depreciation rate and present relative deals compared to buying new.
Yes but you have to evaluated each deal. When I was buying a honda I figured I would save ~2k over 15 years buying used. That isn't interesting to me. Buying the other car and saving 8k over 10 years (we drive it a lot more) was enough for me to be interested, Your thresholds are likely to be different. Other people would laugh at this whole discussion and say you both are way overpaying by not buying 10 year old cars with 120k miles on them. After all they still have 5+ years of life in them. I personally am not willing to do the trade offs required for that but I do recognize they are saving money,

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