Ready for the 8 year car loan?

ABC News ^ | October 6, 2003 | Jim Ryan

[yankeedame]

Loan Stretcher: Some Dealers Experiment With Eight-Year Auto Loan

By Jim Ryan

ARLINGTON, Texas, Oct. 5 — On a cool, clear morning, gigantic American and Texas flags fly over acres of new cars, trucks and sport-utility vehicles sprawled across a prairie where cattle and buffalo once roamed.

On the fringes of this modern-day stock pen wedged between Dallas and Fort Worth, car salesmen hover, ready to pounce on the next browser who wanders through the gate. It will be another long day of waiting for these hungry hunters.

Now the auto industry is rolling out a tempting new bait to boost molasses-paced new car and truck sales — an eight-year auto loan.

"That's a good way to do that," says Debbie Guthrie of Fort Worth, Texas, an SUV aficionada who recently bought her latest vehicle. She says she'd consider a 96-month note as a way to upgrade: "Now I [could] buy a Lexus or something and then you're not going to get upside-down in it."

Being "upside-down" is industry parlance meaning to exceed a lease plan's mileage allotment before the end of the term or owing a considerable amount of money on a purchased car at trade-in time.

‘In the Long Run, It Hurts Us’

While extra-long loan programs and their promise of lower monthly payments are meant to generate foot traffic through the doors of showrooms across the country, some dealers are skeptical.

"That might bring them in today and tomorrow, but in the long run, it hurts us," says Mike Mason, general sales manager of the Arlington [Texas] Auto Mall, which offers several name plates under one roof.

He calls the 96-month note an unwise way for automakers to boost short-term business because, "these people [car buyers] are out of the market for more years. If we take the people out of the market for five years, a lot of things can happen. The loyalty to the dealer and their brand diminishes," he says.

And some auto shoppers have problems with commitment, as well. Bob Beasley bought a new Chevy Tahoe three weeks ago on a four-and-a-half-year note. (He wanted five years; his wife wanted four. They compromised).

He would never consider an eight-year loan: "That's a little long," he says. "I can see how some of them are going that route with vehicles costing so much these days and trying to get their payments a little lower, but that's just a little long."

He gestures toward his new SUV: "I was really surprised at how much they cost."

Reading the Fine Print

One concern potential purchasers have about a long-term commitment is that an eight-year loan will outlive the product. "By that time, it would be falling apart," said one GMC driver.

But Mason, who began selling Chevrolet cars in 1971, says that's an unrealistic fear: "Cars are much better now; they're safer, more fuel efficient. You've got cars now that have 300 horsepower that get 25 miles per gallon. Everybody builds a pretty good car now."

But it's important to remember the automakers are as much in the business of selling money as selling cars.

And anyone considering a six- to eight-year auto loan should read the fine print carefully. The average interest rate on a four-year note is about 3.5 percent, but on a 96-month deal it can approach 9 percent.

What's more, by the time the vehicle is paid off, it may be practically worthless. Says car dealer Mason: "You start doing repairs on the (older) vehicle, all of a sudden that $400-a-month payment can be an $800-a-month payment."

Back on the lot at the Arlington Auto Mall, a husband/wife pair casually stroll among the cars as a sharp-eyed salesman swoops down from the showroom steps. It's survival of the fittest on the Texas prairie.

[lelio]

She says she'd consider a 96-month note as a way to upgrade: "Now I [could] buy a Lexus or something and then you're not going to get upside-down in it."

She went on to add "I'll do it right after my $3M fee from Nigeria comes in"

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[ladtx]

One concern potential purchasers have about a long-term commitment is that an eight-year loan will outlive the product. "By that time, it would be falling apart," said one GMC driver.

Not if you take care of them and do the required maintenance. I own 2 vehicles, one is 10 years old the other nine. I've kept up with them and neither are "falling apart." Some people buy new automobiles and think that it, just drive it. Back to the subject at hand, eight years is overly long to be paying on a vehicle though, you're racking up a lot in interest payments.

[stainlessbanner]

120k miles if you average 15k/year. Not bad - cars should last that long if you take care of them.

The best car is a paid off car.

[hopespringseternal]

Cars are just too expensive anymore. It is getting to the point where you lose $10k driving one off the lot. I just bought a new SUV last year but only because it was $8500 off MSRP and I got a great price on my tradein.

Under ordinary circumstances, the thing would have been $10k more expensive and way out of my price range.

I see more and more people making do with older and fewer cars.

[bmwcyle]

99 Jeep Cherokee Sport and I own it.

[Mears]

Madness! I'd walk before I would get an 8 year car loan at 9%. No wonder people are in such debt,they are idiots.

[ladtx]

I had one car that lasted 250,000 miles on it before it gave up the ghost. Several years ago I was trading for a new car in Alabama and my trade-in was another of my high-mileage but nice looking cars and the salesman didn't want to give me much for it. He said the problem was that I kept it too long. It had been paid off for five years, I told him, "no, I think I've kept it just long enough." I didn't buy a car from him.

[BMiles2112]

Under no circumstances would I buy new. You're right, you lose a big percentage of the value by driving off the lot. In addition, cars are getting more reliable, so you're not taking a huge risk when you buy used.

[E. Pluribus Unum]

I tried selling cars for a few weeks when I moved to Houston and was having trouble finding a job in my field.

The entire new car industry seems to be predicated upon exploiting idiots who haven't got the slightest idea about managing (staying out of) debt.

I couldn't stand selling new cars to people I knew couldn't rationally afford them.

[BMiles2112]

Yup. Both mine are paid off, one at 252k, the other at 120k miles. They both run fine and only cost gas and regular maintenence. Insurance is cheaper too since I don't need full coverage.

[Eala]

120k miles if you average 15k/year. Not bad - cars should last that long if you take care of them.

I've run all my cars to 250k miles. Except the one stolen in '81 at 180k.

[kjam22]

That's a good way to do that," says Debbie Guthrie of Fort Worth, Texas, an SUV aficionada who recently bought her latest vehicle. She says she'd consider a 96-month note as a way to upgrade: "Now I [could] buy a Lexus or something and then you're not going to get upside-down in it."

Oh yeah... she's gonna do a 8 year loan and not be upside down on it? One of the top 10 reasons that women should get males to buy their cars for them. :)

[ctlpdad]

I drive a 96 taurus wagon. gay as hell, my kids tell me, but it works and i bought it at auction for %500 a year ago. cheap to run and on taxes, etc

OK, so i don't give a damn about a status car.

[stainlessbanner]

Ya'll can take care of some cars! The most I've ever got was 160K. Keep on truckin'

[GunnyHartman]

"99 Jeep Cherokee Sport and I own it. "

I only have 52 payments to go on my new F-150.

[stainlessbanner]

I drive a 96 taurus wagon

Grocery getter, looser cruiser, paddy wagon - I've heard them all. I've even started to make up names myself.....why not?

[gathersnomoss]

Ahem, pardon me but my Crapler minivan lost it's paint after 5 years. I guess it is asking too much for the paint to stay attached to the metal beyond the warranty, isn't it?

[annyokie]

I sold cars new and used for nearly fifteen years. Most people think they are horsetraders but are clueless.

I have talked people out of buying cars they don't need, generally young couples with an infant a decent car already and widows whose children think mom needs a newer car than that old Impala with 12,000 miles on it.

By some perverse twist, most engineers take three weeks or longer and many visits to the dealership where they quiz you about compression ratios and other minutiae they memorized out of the brochures and still get taken to the cleaners when they outsmart themselves.

They were my favorites since I was quite sick of them by the time they signed their contracts but I always made big commissions off those transactions.

[BMiles2112]

What have you been driving?

[ctlpdad]

My kids call it a "window licker" car. Actually, the last wagon i bought (a 92 taurus for $400) was actually owned by the state department of mental retardation, a true window licker car!

[only1percent]

Nothing at all wrong with an 8 year loan on a new car. Useful life of a new car if driven moderate miles and properly maintained is significantly longer than 8 years. The good-credit interest rates appear high only in comparison to the abberationally low subsidized rates which the automakers have recently offered. Car makers used to MAKE money on their financing; lately, it's been a loss leader.

If it turns out that the programs are being abused, i.e., used to put people into cars they can't really afford, that problem will self-correct within a couple of years. If default rates float above the expected level, it will cost the lenders a shitload of clawbacks on their securitizations, and they'll toughen up credit requirements so that they become what they should be: a rational financing option, not a shortcut to an irrational expenditure.

[Little Bill]

My stratigy is I buy a vehicle and take a 5 year loan through my Credit Union, pay weekly, which cuts the loan to 3.5 years and then amortize, usually pay it off in 2.5 years and save a bundle in interest.

In Mass it is illegle to charge for prepayment. I never trade in, when I get done with a vehicle it is junk.

[Mad Dawgg]

"And anyone considering a six- to eight-year auto loan should read the fine print carefully. The average interest rate on a four-year note is about 3.5 percent, but on a 96-month deal it can approach 9 percent."

RULE NUMBER ONE: (for acquiring wealth) BUY ASSETS NOT LIABILITIES!

RULE NUMBER TWO: (for acquiring wealth) WHEN ONE MUST BUY A LIABILITY DO NOT FINANCE IT AND DEFINITELY DO NOT FINANCE IT LONG TERM (Except for a home loan and then no more than a 15 year term)

[FatherOfLiberty]

I recently purchased a car to replace my 1990 Chevy Corsica that had peeling paint for 6 years and was dripping oil for 2 - but it was paid for. I wanted a Mini Cooper ($21-23K), but I only needed something to accomplish my 3 mile commute and get around town - so I settled on a slightly sporty, slightly used Mazda Protege ($10K). I'll have it paid for in 3 years vs. 5 for the Mini Cooper. People confuse their wants and needs way too much. 8 years on a car loan is unimaginable to me.

Clark Howard (www.clarkhoward.com) would have a coronary if someone were to call into his nationally syndicated consumer advocacy talk show and told him they were going to get an 8 year car loan.

[ArrogantBustard]

Being "upside-down" is industry parlance meaning to exceed a lease plan's mileage allotment before the end of the term or owing a considerable amount of money on a purchased car at trade-in time.

I understood "upside down" to mean owing more than the actual cash value of the car. This can happen for some models with a low downpayment and a five year loan. It would be even worse with an 8 year loan.

[ctlpdad]

besides, in a real pinch, i can still get a yard of topsoil in the thing. can't do that in one of them there fancy bmw's with 8 years worth of payments.

[AxelPaulsenJr]

She went on to add "I'll do it right after my $3M fee from Nigeria comes in"

LOL, I can beat her. I got 20 million dollars coming in from a person in true need in Nigeria. It seems her husband was director of the state oil company, and............well. All I had to do was send her my checking and social security numbers.

Wow that silly Nigerian woman is so trusting, little does she know that I plan to keep all of the money.

[stainlessbanner]

i can still get a yard of topsoil in the thing.

LOL! I hauled hay in my "cruiser." Never did come out....

[Alberta's Child]

Here's one engineer who walked into a dealership with a price in mind on a new SUV ($107 over dealer cost) and drove away three hours later having paid that exact price.

Sales Manager: "This (about $300 more than I was willing to pay) is the best anyone can offer you on this vehicle. If you think you can get a better deal somewhere else, you're dreaming."

Me: "You aren't competing with another dealership, sir -- you're competing with my ten year-old car with 130,000 miles on it. It's November, this vehicle is still on your lot, and I know this line of SUVs is being modified next year. If you don't sell it for my price, I'm driving away in my old car and I'll wait until next year to buy a new SUV. But I'll bet this thing will still be here in January -- at which time I'll be offering about $1,000 less for it."

[ctlpdad]

that's how velcro got invented (well, almost). gotta put hay on top of the topsoil. LOL!

[snopercod]

We can thank the Japanese for the fact that cars today actually last longer than 8 years.

There is absolutely no doubt in my mind that had it not been for Datsun and Toyota, we Americans would still be driving 4000 lb. chrome-plated monsters which lasted (at most) 50,000 miles.

And had it not been for Michelin, we would still be changing tires every 20,000 miles, too.

[LizardQueen]

Mine usually last for 12 years/120K. I live in Vermont and while the engines keep going the bodies come apart. It doesn't help that I have a preference for "rice rockets" (Jap imports).

DH and I buy a new car every 6 years, and keep each car for 12 years - we alternate who gets the new one (him, me, him, me). We save up the money by paying ourselves the car payment ahead of time, then pay cash for them. By staggering them like this and keeping them about 60K miles apart we can avoid having 2 die at the same time.

Right now it's my turn - my 1992 Integra is losing a transmission bearing (not to mention the exhaust, rust, and heater problems, and that the handles keep popping out of the door so I have to get out of the car like Beau and Luke Duke exiting the "General Lee". Real fun in a skirt at work :lol: ). I love the Integra - am really going to miss it, but I think it's time for it to go.

I can't imagine having a car payment for 8 years, especially on something that depreciates so fast. I buy 'em new, pay cash, try to take care of them, then drive 'em till they are dead dead dead.

LQ

[annyokie]

AC, I said "some" engineers. I was married to a smart one, too.

I meant no offense. The guys I was referring to all seemed to work for General Dynamics. ; )

[BMiles2112]

Thanks for the defense of engineers, though I'll avoid the problem altogether by never buying from a dealership. They simply can't compete with private sellers, who are not making commision and typically are only selling privately to avoid getting screwed on a trade-in.

[Alberta's Child]

Rule #3: A vehicle is only a "liability" until you put a dollar value on the use that you get out of it.

Rule #4: Never pay cash for a vehicle (even if you have the money to do so) if you can afford to make monthly payments on it. If you have $25,000 on hand and you can afford to pay off a $25,000 auto loan, put the money in a 5-year CD instead. Most banks will offer you a loan against your CD up to an identical amount of money (since the loan is fully secured) for no more than 2% (even less!) over the rate they are paying you on your CD.

After five years, you have a car, you have $25,000 cash to your name (plus interest), and the effective rate that you paid on the loan is almost certainly less than the rate of inflation.

[ravingnutter]

I understood "upside down" to mean owing more than the actual cash value of the car. This can happen for some models with a low downpayment and a five year loan.

You are correct, it depends on the mileage. We are upside down on our 99 GMC truck, which is on a five-year note, because I drive 104 miles round trip just to work every day (currently have 140,000 mi. on it). Hubby was talking about trading it in recently, so I plunked the car payment schedule down in front of him and told him to look at the balance...funny, he hasn't mentioned trading it since :)

[kjam22]

RULE NUMBER ONE: (for acquiring wealth) BUY ASSETS NOT LIABILITIES!

RULE NUMBER TWO: (for acquiring wealth) WHEN ONE MUST BUY A LIABILITY DO NOT FINANCE IT AND DEFINITELY DO NOT FINANCE IT LONG TERM (Except for a home loan and then no more than a 15 year term)

Not bad rules. But I have to wonder. Am I better to spend 30k cash on a car... that I know will eventually be worth basically nothing. Or am I better to put no money into the car. Borrow the money at 1.9% interest and invest my 30K with a goal of 12% return? And if I buy the car "right" enough to not be upside down at the end of 2 years, am I better of borrowing the money instead of sinking cash into it?

[ladtx]

Paint! We donn need no steekin' paint.

[Pure Country]

95 Tahoe, 206,000 miles and still runs great and looks great despite living back on a gravel/dirt road. My husband heard that we can put a new engine and transmission in it with a full warranty for around $5000, so I'm thinking it's going to be around for a long time.

[LizardQueen]

LOL! I hauled hay in my "cruiser." Never did come out....

The hatch of my '92 Integra is still full of hay. I've vacuumed out as much as I can but every time I have all the windows down it blows around like crazy and gets stuck in my hair. It's like being inside a miniature tornado :lol:.

Most I ever carried in that car was 100 ft of welded wire fencing and 8 10 ft pressure-treated 4x4s for a dog kennel I was building. For a tiny hatchback it could swallow an incredible amount of stuff.

We really could use a truck but neither of us want to drive one full time, nor do we have the money or room for a 3rd vehicle.

LQ

[Night Hides Not]

The entire new car industry seems to be predicated upon exploiting idiots who haven't got the slightest idea about managing (staying out of) debt.

We just purchased a new Honda Civic (sp?). My wife really does her homework when it comes to buying a new car. We had a good rate from our credit union, but we wanted to see what Honda had to offer.

To really make a long story short, I was fed up with the dealer's spiel at the 90 minute mark. I rose from my chair, saying "I'm not signing $hit, because I'm not putting up with your hard sell!" and walked out the door.

Five minutes later, my wife comes out and said, "your tantrum worked". Instead of 7% over 6 years, we ended up with 1.9% over 5.

No wonder David McDavid put in an offer to buy the Atlanta Hawks. They must make a killing on the unlearned masses out there!

[Badray]

LOL

I sold new and used also for 7 years before going into F&I for another 10 years.

My experience is that most (but certainly not all) dealers and salespeople are honest. I sold enough cars to enough guys that thought they knew it all at a high enough profit so that I could help the single mothers get a good deal. I have also talked people out of buying and others away from POS cars. In the finance office, I have killed deals when I saw a sleazy salesman taking advantage of an elderly person. I would find a way not to have the customer take immediate delivery and give him time to think it over or have a family member stop the deal.

When I first got into sales, the industry was just moving from 3 year to 4 year loans. The uproar was the same then. "How are we ever going to get these people back to buy another car?".

And now we're up to 8 years.

[Calpernia]

Check with your insurance company to see if they offer Classic Car insurance and what the terms are. 1996 is close to our coverage year in NJ. Classic car insurance is real cheap and you may qualify.

[AlanSC]

ok, "window licker" - I don't get it?

[SengirV]

I sold cars new and used for nearly fifteen years. Most people think they are horsetraders but are clueless.

By some perverse twist, most engineers take three weeks or longer and many visits to the dealership where they quiz you about compression ratios and other minutiae they memorized out of the brochures and still get taken to the cleaners when they outsmart themselves.

And my wife wonders why I detest the whole process. Where else do you shake the hand of the person lying thru their teeth right to your face? Politics, lawyers and car salesmen - the modern day cerberus. Scum of the earth.

[Petronski]

I would never gamble on a unibody car lasting eight years, I don't care who makes it. Now, a quality body-on-frame sedan, SUV or pickup truck might very well be worth the risk of an eight-year-loan.

Here's mine:

[Bloody Sam Roberts]

99 Jeep Cherokee Sport and I own it.

'95 Grand Cherokee Laredo and I own it. Best vehicle I've ever had. 90,000 miles on it and that's with some towing of my 30 foot camper too. M'Jeep's a beasty and I love it.

[Moleman]

we Americans would still be driving 4000 lb. chrome-plated monsters which lasted (at most) 50,000 miles.
I have a 1969 Camaro with 128,000 on it, runs great each sunny weekend I drive it :-)