leedogg

Interest only car loan sounds like a lease to me...

SmokeyES35

why pay more money than you have to. The longer your term, the more money you "give" the loan company. That 30k car you bought ends up being 38k rather than 34k. I got a 4 yr loan and I think thats too long, im already paying more off towards the principle. I cant stand being in debt, I just dont know people do it. Paying more money in interest is flushing money down the toilet. don't do it.

geko29

Not really. If you take out an interest-only loan on a $300k house and pay it to term, you still owe $300k before you can own the house.

If you lease a $30k car and pay it to term, you owe maybe $20k before you can own the car. You have actually paid down principal in that time, just as if it were a loan. The main difference is because you don't own the car, the principal you've paid down is not yours unless you decide to purchase at the conclusion of the lease. On the flipside, you do not have to be liable for the remaining principal unless you choose to be.

Evitzee

You aren't really paying any principal on a lease because you aren't buying it. You are paying the depreciation for the time you lease it; Cap cost - residual value = depreciation. You pay for the depreciation. In the end the effect is similar, but the concept is different.

IS350jet

It has nothing to do with people wanting lower car payments. This is inflation, folks. The average price of a new car has risen considerably. If banks don't accommodate the average buyer, they won't make many car loans. In the 60's a premium luxury car was $3,000 with financing for 24 months. Today a Premium luxury car is upwards of $100k Don't you think financing options should change with the times? I mean, how much would a $100k car cost with 24 month financing?
In 30 years when the average price of a car is 70K we will see 10 and 15 year loans.

mmarshall

No. In the 60's, $3000 bought a standard, full-size, entry-level Ford, Chevy, or Plymouth. Cadillacs, Lincolns, and Imperials ran $6000-8000.

I know.....I grew up with those cars.

There is no way of gauging what the average price of a car will be in 30 years....we don't even know what kind of powertrain the average car will have. It could be anything from alcohol to fuel-cell to hybrid to pure electric to natural-gas to who-knows-what.

And inflation really hasn't been rampant among many car lines lately. For instance, the average list price of Toyota Corolla of today costs more or less what it did 10 years ago....about 16 or 17K.

Jay

iTrader: (3)

Well, cars like $250,000 plus Phantom or $1.5 Enzo, 9 year purchase loan won't be that bad idea.. IMO !!! No pre-pay penalty, then it's good to go !!

IS350jet

You may be right about the 60's. I'm just trying to make a point. You can gauge the price of a new car by using past inflation figures. Over a 30 year period it averages out pretty even. 25 years ago the cheapest car you could buy was a Mazda GLC at $3,995. What is Mazdas cheapest car today? I believe it's more than triple that. How much was a fully loaded LS400 just 19 years ago? and now? And that's just 19 years. I would hate to see what the spread would be after 30!

When I spoke of inflation I wasn't speaking of "lately", I was speaking of
the past 30 years. I have to disagree about the corolla. A corolla was not 16-17k 10 years ago. I bought a brand new accord in 1984 for $7,990 That's just 24 years ago. How much are they now?

I think it's safe to say that in 30 years we will not be seeing any mainstream cars selling for less than 40 or 50k. My point was that finance options have to change with the times and the reason is because of inflation.

geko29

Your argument falls flat because history doesn't support it. You say the Mazda at $3,995 was the cheapest car in (I'm assuming 1983), then want to know what the cheapest Mazda is today. This ignores the fact that companies can and do change their target markets. Assuming it was in fact 1983, that exact car would cost you $8647 today. The cheapest car for 2008 is the Chevy Aveo5, at $9,995. It's a bit more expensive, but not by a wide margin (13%). And I'm guessing you picked the GLC because it was an unusually inexpensive model (what we call an outlier in statistics). So we're not doing too bad at the low end.

Similarly, at the high end, the most technologically advanced luxury car in the 50s and 60s was the Cadillac Eldorado Brougham, which carried a sticker price of $13,074 for the 1957 model. This equates to $103,630 in today's dollars. How does that compare to today's most technologically advanced luxury car? The Lexus 600hL stickers for a whopping THREE HUNDRED SEVENTY dollars more, at $104,000. An increase of .36%.

As for the accord, the one you bought in 1984 (assuming an 85 model) would cost $16,580 in today's money. Yes, a new Accord is more than that. But the new Accord is also a LOT bigger than the old one, and has moved upmarket quite a bit. The new Civic, on the other hand, is almost EXACTLY the same size as the early-80s Accord, and has twice as much horsepower. The DX sedan is $15,010. So it is actually LESS than before. The midlevel LX is $16,960, about the same as your '85. If your car was actually an '84 that you bought in 1983, then it is $17,295 in today's money.

This, in my mind, proves you don't understand what inflation is:
Of course it wasn't. Prices don't fall that fast. The base price of the 1988 Corolla (as far back as I can go) ranged from $7,948 to $12,478 for the different models, which is $14,504-$21,866 in 2007 dollars. The 2008 Corolla bases from $14,405-$16,415. So prices are DOWN across the board.

So YES, nearly all of the increase in the price of cars can be explained SOLELY by inflation. But so can your increase in salary. I'm guessing you make a little more money now than you did 30 years ago. I know I'm personally making more than double what I was just 10 years ago.

Of course there's been feature creep making models more expensive, but that's been balanced out by increased efficiency of production. I think it's rather amazing that you can get a new civic, with all the advancements and refinements it's appreciated over the years, for the same money that bought you the similar-sized Accord 25 years ago. That truly is progress.

IS350jet

First, nobody's "arguing". I agree with much of what you say. Whether it's technological advancements or inflation, cars go up in price over periods of many years and that is the reason we are seeing 9 year car loans. It's the same reason we now see 40 year home loans. It's because houses (at least where I live) cost 500k. These same homes 30 years ago were 80k, so a 15 year mortgage made sense back then. 24/36/48 month car loans made sense back then, they don't anymore. I didn't mean to ruffle any feathers over detailed car values and inflation figures, if I did, I apologize, just trying to explain why we are seeing 9 year car loans.

geko29

Those are two different things though. Car prices have gone up roughly at the same rate as inflation. So today's car costs roughly the same in real dollars as one from 10, 30, 50 years ago. The advancements, etc, are just a bonus. That was kind of the point of my post. If you could afford a Corolla 20 years ago, and your situation hasn't changed, you can afford a Corolla today. It'll take the same bite out of your paycheck, percentage-wise. It's not like the price of the car doubled but you're still making $20k. Both have gone up. That's the way inflation works. Your money buys less stuff, but you have more money, so it evens out.

Houses, especially as of late, have been appreciating significantly FASTER than inflation. Your example illustrates this perfectly. An $80k house in 1978 should cost $265k in 2008, accounting only for inflation. That it costs $500k means the real value of the house has doubled in that time. So you're right there--houses DO cost more. Which is why they're (usually) such a good investment). You're also correct in that purchasing is harder because of this, and the longer-term mortgages have come about as a result. But cars have cost roughly the same for the past 5 decades. Loans are getting longer for no reason whatsoever, other than consumer irresponsibility.

Inflation is one of the most often misunderstood economic concepts, because people have a tendency to use separate bases for pricing vs. wages. They notice prices going up and say how expensive everything has gotten, while ignoring the fact that their income has also gone up in that same time period.

Sorry if I got a little ornery with my previous post. I've had my coffee now.

Och

iTrader: (3)

Geko, I'm just curious, what kind of formula are you using to convert 80ies money to today's money?

I agree with both what you and IS350Jet are saying, you both have points about inflation, and if you compare the costs of cars to inflation rates, then the cost of cars really hasn't changed much. But on the other hand, if back in the 60ies people bought cars with 24 month loans, and todays its usually 5 years loans, and with the 9 year loans now being available, it means that the inflation rate is much faster than income growth rate, as people clearly can't keep up with the prices. It is also very evident in the housing market, just ten years ago most people were buying houses on a 15 year mortgage, now its mostly 30 year mortgages and people struggle to make payments more than ever.

geko29

The Federal Reserve's Inflation/CPI Index Calculator

I disagree that the rise of these loans clearly means that people can't keep up with the prices of the same cars they would have bought before. I think this is the next sub-prime loan industry. People are stretching beyond their means to buy cars they can't afford. The family that 20 years ago would have bought a used Taurus now thinks they're entitled to a new GS or E-class, whether they can afford it or not. I don't know about you, but I've seen a LOT more "nice" cars over the past 5 years than I did 20 years ago. People's real incomes haven't changed that much, but their taste in cars has gotten pricier. That, I think, is where these loans come from.

I know I personally am guilty of this. In my lifetime, my parents have owned a Plymouth (forget the model), VW Rabbit, Ford LTD and Taurus, Toyota Camry and Avalon, and a Subaru Outback Sport, most of them base models. By contrast, over just the past 10 years, I've had two pickups (Ranger and Dakota), a 3-series, while my wife has had a Sebring Convertible and an RX350. All loaded. Our incomes are similar, but my tastes trend higher.

I don't know about most people in the past buying houses on 15 year mortgages; I've never met anyone who bought a house on one, including my parents and their parents. I do know several people who have refi'd to 15 years after the fact, when their income had gone up, and principal had gone down. Just never a purchase unless there was a MASSIVE downpayment (50% cash equity) from the sale of a previous home.

The rest of that is accurate, and I agreed with it above. Houses, unlike cars, HAVE been increasing in real price FAR faster than real wages, and the trend towards longer loans does in fact reflect this. I just don't think the comparison to auto loans is a valid one. They're entirely different situations.

mmarshall

[QUOTE]=IS350jet;3352343] 25 years ago the cheapest car you could buy was a Mazda GLC at $3,995.


$3995? In April 1984, (24 years ago) I personally bought a brand-new Mazda GLC (it was my first new Japanese car) for $7800. Granted, it was an LX...the top-trim model.



Yes it was. My late mother bought a new 1994 Corolla DX wagon with a base price of $14,888 that listed for $17,143. I saved the sticker and the records.....I'm holding the window sticker on it as we speak.




Here.....yes, you are correct. Accord prices have gone WAY up over the years. This not only reflects the car's extreme popularity, but the amount of equipment stuck on each one....back in the 1980's many of them did not even have power steering or power windows.

DzaztrBUSE

I think this isnt a bad option for those who want the option of a low payment. For people who want to purchase or refinance home this would allow them more disposable income. Residential Financing guidelines are getting tougher and tougher. I still would pay it off in 3 yrs or so, but for that tough month at least I know I can pay the low monthly payment.