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I grew up around the family car business... my Grandfather started back in the 1920's and opened his place in 1942.
I remember he would often tell people they are looking at too much automobile if they couldn't afford to pay off a used car in 2 years or a new one in 3 years.
He would always advise people that it was not sound financially to own something where you owe more than it's worth...
Lost a few sales over the years and made many loyal customers...
Some families he had sold to 4 generations and he always had his home address and phone number on his card and never worked on Sunday... 6 days was enough.
Last edited by Ultrarunner; 09-20-2011 at 11:38 AM..
Very true... but even low interest won't keep a person from being upside down unless they have a large down payment.
I would suspect that people would take the loan with the smallest down payment possible. And invest the money.
For example, I bought my dad a car in October. I put down $5,000 and took the remaining $45,000 on loan at 1.99% from my credit union (estimating here, don't recall exact numbers).
I then took the $45,000 I was originally going to use to pay for the car in my brokerage account. I have earned 17% on it so far (due to the wacky economy).
If you were to buy a car today, it would be silly to buy it outright at these low rates.
I purged myself of what I thought was my last car note several years ago. Then in 2007 we decided we needed a van for vacation. We looked at renting but figured the cost to rent the van for a week would equal 2 car payments. We had already decided to buy a van 6 months down the road when I got my profit sharing check, so we went ahead and took out a loan figuring that, taking out what we would have paid for the rental, we would basically only be making 3 monthly payments before paying it off. Unfortunately my wife lost her job in the interim so the profit sharing check had to be used to supplement our income; shortly after we moved to be closer to her parents which meant a significant reduction in my pay and no more profit sharing.
To keep a long story from getting any longer, I'll make the last payment next February, exactly 4 years later than we would have paid it off under our original plan. I thought I had learned my lesson about car payments before, but this time I don't think I'll forget. My wife keeps dropping hints about how nice it would be to have a different vehicle, but I've driven sub-$500 beaters myself over the past 4 years in order to afford the payment on this thing so once it's paid off she can continue to drive it for awhile while I save up to get something nicer for myself.
I would suspect that people would take the loan with the smallest down payment possible. And invest the money.
For example, I bought my dad a car in October. I put down $5,000 and took the remaining $45,000 on loan at 1.99% from my credit union (estimating here, don't recall exact numbers).
I then took the $45,000 I was originally going to use to pay for the car in my brokerage account. I have earned 17% on it so far (due to the wacky economy).
If you were to buy a car today, it would be silly to buy it outright at these low rates.
If you've actually got the money to pay for it that you can invest and make money on until it's needed that's not a bad plan. Even putting it in a conservative mutual fund at 4-6% would earn you a decent return as long as making the payments won't cause cash flow problems.
Unfortunately, though, most people simply don't have the money to buy it outright so they'll finance it rather than saving up until they can afford it. These are the folks who get themselves in trouble down the road when they lose a job and can no longer afford the payment toward a $20,000 loan on a car that is now worth $10,000.
I grew up around the family car business... my Grandfather started back in the 1920's and opened his his place in 1942.
I remember he would often tell people they are looking at too much automobile if they couldn't afford to pay off a used car in 2 years or a new one in 3 years.
He would always advise people that it was not sound financially to own something where you owe more than it's worth...
Lost a few sales over the years and made many loyal customers...
Some families he had sold to 4 generations and he always had his home address and phone number on his card and never worked on Sunday... 6 days was enough.
But of course interest rates on car then where much higher. how days people make much mroe and if they have good creidt can get less than 1% on most cars. I remmber when a 125 dolalr car note for 3 years after 20% down was a big payment eve in the 60's.
When it is so easy and cheap to finance a car... they also tend not to hold value as well because why buy an older model when new is so easy... it can often be easier than buying used in the late model field.
As for the market... never had any success myself... I just have an aversion to loss and the only realized losses I have have ever sustained are market related... no problem for those that do well and understand it.
Even my older cars have appreciated... just sold one I used to drive as a Student... bought it for $800 and drove it for many years... about 15 and then parked it... sold it for $2500 and never did a major repair... only brake pads, battery and one water pump... 72 Plymouth Valiant.
Right now my brother in law who had bought a Ford Ranger new with low finance and easy credit 18 months ago after his last one bit the dust with 230k miles very desperately needs a family vehicle... he and his wife have a newborn and can't go anywhere as a family because they both have Ranger Pickups... both had them before they met. He still has a payoff around 20k for his loaded truck and getting people offering 12k... can get a new one here for less than 20k out the door.
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