5 ms·

Yup. Anyone that signs up, of their own free will, for a seven year loan on a depreciating asset has rocks in their head. For fucks sake.

by crikli 7y ago

VBprogrammer 7y ago
If you have kids or intend to have them in the future this is a life lesson they need to have drilled into them. I bought the cheapest house within commuting distance of where I work (in London) and am still trying to figure out how the hell to get out of that mortgage sooner than the final term. My car was bought outright as was my campervan. I don't know how the people who drop half a million on a house and 50k on a Chelsea tractor, earning the same wage as me, sleep at night.
- ed_balls 7y ago
  Maybe a warning like on a cigarette pack could help? e.g. "spending more than 15% of your income on a car can lead to a financial ruin". Warning on cigarettes reduced smoking by a few percent.
c0wb0yc0d3r 7y ago
Wait until they start extending financing on mobile phones...
- ghaff 7y ago
  They do although they don't necessarily call it that. When I had to get my dad a phone in a hurry from AT&T, the only option was to pay for it monthly as part of my phone bill.
  - cat199 7y ago
    This is better than the old days of getting it 'free' but being locked into a contract that requires you to pay the full cost of the phone if you leave..
  - scarface74 7y ago
    It’s financing at 0%. Why pay cash?
    - auiya 7y ago
      Not exactly. In many plans the cost of the phone is higher via financing than upfront purchase.
      - scarface74 7y ago
        All four of the major carriers and Apple offer 0% interest loans on phones. At least with T-mobile. Even if you have horrible credit as long as you pay your bill on time with them for 12 months, you are eligible for a no interest phone loan.
passer_byer 7y ago
Alternatively, there are individuals who live month to month and having tired of beaters and decide this looks affordable. While clearly a false economy, some individuals may have other motives, like status seeking. This doesn't mean they are rock-headed. Like all of us, they could have a blind-spot where a decisions made may not be in our long term economic interests.
- scarface74 7y ago
  I think if you are living paycheck to paycheck and don’t have disposable income, it may make more sense to buy a cheap new car with a warranty than a cheaper used car. It’s much easier to get a car with a $350/month car note where you won’t have unexpected repair expenses than getting a $200/month car note on a car without a warranty and then have an unexpected expense. Now we have a credit card with the car shop we used that has a six months/no interest program. I use that even if I do have the money. But if we had bad credit, we could get a car loan much easier than an unsecured credit card. I am at a point in life now where I can afford an expensive car repair bill and it just stings a little bit. When I was first starting out decades ago working at night as a computer operator while I was in graduate school during the day, any unexpected expense meant a call to my parents. Many people don’t have that luxury.
  - alphabettsy 7y ago
    Yea, except for the part where you’re paying 12,000 more over the course of a 7 year loan and the new car warranty ended at 4 years leaving you with a higher payment and you still can’t afford repairs. It can be rationalized with emotions, but not financial sense.
    - scarface74 7y ago
      If you don’t have access to cash or credit to take care of car repairs, the last thing you want is to be paying a car note on a car that you can’t afford to have fixed. As far as four vs seven years. You’re hoping that you can figure something out in four years.
cat199 7y ago
> Anyone that signs up, of their own free will, for a seven year loan on a depreciating asset has rocks in their head. For fucks sake. Whether this is good or not is completely dependent on the loan interest rate, a person's cash flow situation, and what they will do with the free cash flow otherwise.. $50-100/mo saved due to lower 7y payments reinvested elsewhere could quite feasibly offset the higher cost associated with the (assumed) higher interest rate of the 7y loan. And, according to the assumptions in financial/economic theory anyway, if you can get a loan at or below inflation rates, you're getting a 'discount' on the total price w/r/t paying 100% cash now But yes, this should be made as a 'financing' decision, not an 'affordability' decision - if you can only afford the vehicle with 7y loan at all, and aren't taking the longer loan as an savings/investment decision among weighing the TCO you probably should be buying a cheaper one.
- scarface74 7y ago
  They charge higher interest for longer loans and most new car dealers give you a choice between cheap financing and cash discounts.
mrep 7y ago
So I have rocks in my brain for taking a 2.9% interest loan? I don't see it that way considering my investment horizon allows me to earn 8% in a vangaurd sp500 etf with the money I could have used to pay for my car outright.
- VBprogrammer 7y ago
  The alternative isn't to buy a brand new car for the same amount of money. The alternative is to actually buy a car you can afford. You are still losing maybe 50% in the first year in depreciation. If you are paying it over 7 years then you are under water on the car from the minute you pick it up until it's paid off in full.
- imtringued 7y ago
  By that same logic you can invest more money by buying a cheaper car instead of financing a more expensive one.
  - hurricanetc 7y ago
    You can finance a cheaper car. Buying with cash carries a large opportunity cost due to compound interest being a helluva drug. If you can finance at an interest rate below what you are earning in the market then you are better off financing. People who pay in cash are leaving money on the table for non-financial reasons.
    - VBprogrammer 7y ago
      It seems improbable that dealers / manufacturers can't do simple compound interest calculations too. If they are offering loans at below market rates they are basically giving you a discount on the cost. If they are willing to do that then you should be able to get a similar discount on a cash basis.
      - hurricanetc 7y ago
        Fed rates are low enough that banks can borrow and offer financing at seemingly impossibly low rates while still making money.
hurricanetc 7y ago
It's not that simple. If you plan on keeping the car and the interest rate is low enough you are likely better off taking the longest term loan possible. Consider a $30,000 vehicle. I can finance it at 1.9% for 48 months or 84 months. The payment on the 48 month loan is $650/month (scenario 1) and the payment on the 84 month loan is $380/month (scenario 2). In scenario 1 I invest $0/month for 48 months and then $650/month for 36 months. After 7 years I paid $31,178 for the car and earned ~$26,000 from investing (at 8%). In scenario 2 I invest $270/month for 84 months. After 7 years I paid $32,062 for the car and earned ~$30,000 from investing (at 8%). In scenario 2 I paid $884 more in interest but earned an extra $4,000 from investing. There is a lot more that goes into this type of calculation but it is not nearly as cut and dry as "you're an idiot if you financed a car for 84 months."
- scarface74 7y ago
  If you listen to Freakonomics, they often say that we aren’t “Homo Economicus”. While what you say may make sense economically, that’s not how most people operate.
  - hurricanetc 7y ago
    Right. Which is why most people are better off not financing anything at all. But financing doesn’t make you an idiot.
- dirktheman 7y ago
  I'd be willing to bet that MOST people who take out 7 year car loans don't invest half of their interest rates in stocks that average at 8% or higher...
  - VBprogrammer 7y ago
    While a long term average for mutual funds at 8% is pretty reasonable, I'd argue that 3-7 years is short enough that you have a reasonable chance of ending up with less money than you put in, never mind out performing the 2% interest. Besides, as I've mentioned elsewhere, anyone offering a loan at 1.9% is aware that they are subsidising your purchase. You should be able to negotiate most of the difference into a decent cash deal. Not to mention the non-trivial risk of being involved in an accident in a car which is worth less than is outstanding on it (which for a 7 year loan is probably 6+ years).

Yup. Anyone that signs up, of their own free will, for a seven year loan on a depreciating asset has rocks in their head. For fucks sake.

by crikli 7y ago

Yup. Anyone that signs up, of their own free will, for a seven year loan on a depreciating asset has rocks in their head. For fucks sake.

VBprogrammer 7y ago

If you have kids or intend to have them in the future this is a life lesson they need to have drilled into them. I bought the cheapest house within commuting distance of where I work (in London) and am still trying to figure out how the hell to get out of that mortgage sooner than the final term. My car was bought outright as was my campervan. I don't know how the people who drop half a million on a house and 50k on a Chelsea tractor, earning the same wage as me, sleep at night.

ed_balls 7y ago
Maybe a warning like on a cigarette pack could help? e.g. "spending more than 15% of your income on a car can lead to a financial ruin". Warning on cigarettes reduced smoking by a few percent.

c0wb0yc0d3r 7y ago

Wait until they start extending financing on mobile phones...

ghaff 7y ago
They do although they don't necessarily call it that. When I had to get my dad a phone in a hurry from AT&T, the only option was to pay for it monthly as part of my phone bill.
- cat199 7y ago
  This is better than the old days of getting it 'free' but being locked into a contract that requires you to pay the full cost of the phone if you leave..
- scarface74 7y ago
  It’s financing at 0%. Why pay cash?
  - auiya 7y ago
    Not exactly. In many plans the cost of the phone is higher via financing than upfront purchase.
    - scarface74 7y ago
      All four of the major carriers and Apple offer 0% interest loans on phones. At least with T-mobile. Even if you have horrible credit as long as you pay your bill on time with them for 12 months, you are eligible for a no interest phone loan.

passer_byer 7y ago

Alternatively, there are individuals who live month to month and having tired of beaters and decide this looks affordable. While clearly a false economy, some individuals may have other motives, like status seeking. This doesn't mean they are rock-headed. Like all of us, they could have a blind-spot where a decisions made may not be in our long term economic interests.

scarface74 7y ago
I think if you are living paycheck to paycheck and don’t have disposable income, it may make more sense to buy a cheap new car with a warranty than a cheaper used car. It’s much easier to get a car with a $350/month car note where you won’t have unexpected repair expenses than getting a $200/month car note on a car without a warranty and then have an unexpected expense. Now we have a credit card with the car shop we used that has a six months/no interest program. I use that even if I do have the money. But if we had bad credit, we could get a car loan much easier than an unsecured credit card. I am at a point in life now where I can afford an expensive car repair bill and it just stings a little bit. When I was first starting out decades ago working at night as a computer operator while I was in graduate school during the day, any unexpected expense meant a call to my parents. Many people don’t have that luxury.
- alphabettsy 7y ago
  Yea, except for the part where you’re paying 12,000 more over the course of a 7 year loan and the new car warranty ended at 4 years leaving you with a higher payment and you still can’t afford repairs. It can be rationalized with emotions, but not financial sense.
  - scarface74 7y ago
    If you don’t have access to cash or credit to take care of car repairs, the last thing you want is to be paying a car note on a car that you can’t afford to have fixed. As far as four vs seven years. You’re hoping that you can figure something out in four years.

cat199 7y ago

> Anyone that signs up, of their own free will, for a seven year loan on a depreciating asset has rocks in their head. For fucks sake. Whether this is good or not is completely dependent on the loan interest rate, a person's cash flow situation, and what they will do with the free cash flow otherwise.. $50-100/mo saved due to lower 7y payments reinvested elsewhere could quite feasibly offset the higher cost associated with the (assumed) higher interest rate of the 7y loan. And, according to the assumptions in financial/economic theory anyway, if you can get a loan at or below inflation rates, you're getting a 'discount' on the total price w/r/t paying 100% cash now But yes, this should be made as a 'financing' decision, not an 'affordability' decision - if you can only afford the vehicle with 7y loan at all, and aren't taking the longer loan as an savings/investment decision among weighing the TCO you probably should be buying a cheaper one.

scarface74 7y ago
They charge higher interest for longer loans and most new car dealers give you a choice between cheap financing and cash discounts.

mrep 7y ago

So I have rocks in my brain for taking a 2.9% interest loan? I don't see it that way considering my investment horizon allows me to earn 8% in a vangaurd sp500 etf with the money I could have used to pay for my car outright.

VBprogrammer 7y ago
The alternative isn't to buy a brand new car for the same amount of money. The alternative is to actually buy a car you can afford. You are still losing maybe 50% in the first year in depreciation. If you are paying it over 7 years then you are under water on the car from the minute you pick it up until it's paid off in full.
imtringued 7y ago
By that same logic you can invest more money by buying a cheaper car instead of financing a more expensive one.
- hurricanetc 7y ago
  You can finance a cheaper car. Buying with cash carries a large opportunity cost due to compound interest being a helluva drug. If you can finance at an interest rate below what you are earning in the market then you are better off financing. People who pay in cash are leaving money on the table for non-financial reasons.
  - VBprogrammer 7y ago
    It seems improbable that dealers / manufacturers can't do simple compound interest calculations too. If they are offering loans at below market rates they are basically giving you a discount on the cost. If they are willing to do that then you should be able to get a similar discount on a cash basis.
    - hurricanetc 7y ago
      Fed rates are low enough that banks can borrow and offer financing at seemingly impossibly low rates while still making money.

hurricanetc 7y ago

It's not that simple. If you plan on keeping the car and the interest rate is low enough you are likely better off taking the longest term loan possible. Consider a $30,000 vehicle. I can finance it at 1.9% for 48 months or 84 months. The payment on the 48 month loan is $650/month (scenario 1) and the payment on the 84 month loan is $380/month (scenario 2). In scenario 1 I invest $0/month for 48 months and then $650/month for 36 months. After 7 years I paid $31,178 for the car and earned ~$26,000 from investing (at 8%). In scenario 2 I invest $270/month for 84 months. After 7 years I paid $32,062 for the car and earned ~$30,000 from investing (at 8%). In scenario 2 I paid $884 more in interest but earned an extra $4,000 from investing. There is a lot more that goes into this type of calculation but it is not nearly as cut and dry as "you're an idiot if you financed a car for 84 months."

scarface74 7y ago
If you listen to Freakonomics, they often say that we aren’t “Homo Economicus”. While what you say may make sense economically, that’s not how most people operate.
- hurricanetc 7y ago
  Right. Which is why most people are better off not financing anything at all. But financing doesn’t make you an idiot.
dirktheman 7y ago
I'd be willing to bet that MOST people who take out 7 year car loans don't invest half of their interest rates in stocks that average at 8% or higher...
- VBprogrammer 7y ago
  While a long term average for mutual funds at 8% is pretty reasonable, I'd argue that 3-7 years is short enough that you have a reasonable chance of ending up with less money than you put in, never mind out performing the 2% interest. Besides, as I've mentioned elsewhere, anyone offering a loan at 1.9% is aware that they are subsidising your purchase. You should be able to negotiate most of the difference into a decent cash deal. Not to mention the non-trivial risk of being involved in an accident in a car which is worth less than is outstanding on it (which for a 7 year loan is probably 6+ years).