Guest Post by Eric Peters
Bubbles are always obvious … in retrospect.
Here’s one you might not see coming.
The Car Bubble.
People are taking out eight-year car loans.
This is – or ought to be – alarming. The automotive equivalent of the zero-down, no-doc, adjustable rate mortgage on a $500,000 McMansion circa 2004.
You know – just before the housing bubble popped.
New car loans used to be 36 months (three years) and then 48 months (four years). Back when the economy was sane.
Today, the typical new car loan is 72 months (six years). This is almost double the formerly typical length of a new car loan.
But even that is not – apparently – enough to keep the music playing.
Enter the eight-year loan.
Which might be ok, if cars were not appliances.
Very expensive toasters, basically.
Though modern cars are longer-lived than the cars of the past, they are – like any other appliance – something you eventually throw away because eventually, it will wear out. Or cost too much to fix – relative to the value of the car itself.
This is why cars always decline in value over time. It is the nature of the thing.
With an eight-year loan, the odds are high that it will begin to wear out – and cost you money to fix – before you’ve paid the thing off.
Then you’ll have a car payment and repair payments.
On a car that’s not worth very much anymore.
Are people stupid?
Desperate?
Or, on dope?
Actually, they are on credit – and debt.
Just like before. 
Stretching out the loan from four to six (and now eight) years is a way to make a car you can’t afford seem affordable. To hide from view just how much a new car really costs.
Consider:
The average price paid for a new car this year was about $35k, a record high. The year prior, it was $33k.
But the average family income in the United States is around $55k. And it has been around $55k for at least a decade.
People are buying more car – with less money.
Sound familiar?
It ought to be obvious that the $55k family cannot afford a $25k car. Even a $15k car is a financial stretch given a $55k pre-tax income.
Some quick math:
A four year loan on $25k at about 3 percent interest works out to a monthly payment of about $555. How many families living on $55k can afford a $555 monthly car payment? (Don’t forget the taxes, the tags and insurance. Plus the gas. So really – conservatively – about $700 a month.)
The answer, Alex, is – not many.
Enter humbug financing.
The six-year loan.
Now the payment is “only” $380 – which seems more manageable. But it is a fantasy, like believing the hot blonde escort you rented for the night is really into you.
Eventually, the bill is presented.
The eight-year car loan is the equivalent of a really high-end escort.
One with STDs. 
Because an eight-year loan is a guaranteed loser. Worse, arguably, than the no-doc, zero-down, adjustable rate house loan… because at least the house is a place to live in; has more than transitory value.
It is not merely an appliance. Not disposable by design.
Unlike a car, a house will usually still be worth something a decade after you bought it. You might not make Monopoly money on the thing. But if you bought in at a reasonable price, you will probably not lose Monopoly money, either.
In this way, a house is still a traditional way to “store” money. It is realistic to think you will at least get out of it what you put into it.
With cars, this is almost impossible.
Even if you do not use the car. Which of course defeats the purpose of owning the car. It would be like buying a house and then not living in it.
A car’s value lies chiefly in the fact that it can be used for transportation. If it is not used, it is functionally worthless. But if you use it, inevitably, its value decreases as the miles accrue and the years go by. Eventually – after about a decade – it will be worth perhaps a fourth of what it cost you to buy new.
This is called depreciation – and she is a heartless bitch.
Most cars lose about 20 percent of their purchase price value before two years have elapsed. Five years marks the Event Horizon for the majority – the point at which their retail value has slipped to about half what they were worth when new.
At 72 months – six years out – the typical new car is already close to being under water, if it was financed. Push that loan out to 96 months (eight years) and it is all-but-certain you’ll be gargling seawater.
Which, if it affected just those who bought beyond their means, would be unfortunate but economically just.
Unfortunately, this bubble, like the housing bubble, will affect all of us when it pops.
And, before it pops.
Humbug car financing has caused car prices (like home prices, pre-bursting bubble) to rise generally – for everyone.
It is almost impossible to find a new car without an LCD touchscreen, 17 inch “rims,” a fancy stereo and (of course) AC, power windows, locks and cruise control. These have become almost givens.
The problem is, they’re not being given away.
Now add in all the stuff that’s not on the sticker – but which still pads the bottom line. Or did you think six air bags (and all the rest of it) was a freebie bestowed by the car companies because they care so very much about your safety? They – the car companies – are just middle men, really. The government decrees – the car companies build – and we pay.
All of us.
Including those of us who’d choose – if we could – to skip the six air bags and the LCD touchscreen, too. Because we’d rather live within our means than live with perpetual (and ever-rising) debt.
Eventually, the music will stop – and some people are going to find themselves without a chair to sit down on.
When I’ve shopped for a more expensive item, the big box stores have the “no payments for 1 year”, or 2 years even. I tell them I want a reduced price and I’ll pay in cash. The salesperson is then silent.
Debt is your enemy.
After my third trip to the St Louis city pound to ransom my car out of the tow yard, I forsook car ownership forever. That was nigh on 30 years ago, and I hardly ever look back, though I confess to the occasional wistful gaze at a Miatra rag top or BMW 7 series…. which I could never afford or justify anyway. Sort of like the way I now and then gaze wistfully at the listings for 20s vintage co-ops in Lincoln Park with 12 ceilings and walnut wainscotting and four fireplaces and views of the lake from the 12th floor, that cost $3M.
I ran the numbers in 1985, after watching an amount of money equal to a month’s rent on a luxury apt, slide under the scratched plexiglass window to a towyard troll. Accrued the cost of buying the car on a monthly basis, plus insurance, plus the constant repairs, the parking, the licensing, the parking tickets, al of it. My mother wanted me to move to the suburbs, where car dependence was total, while at least in the city, I could get to work and downtown on a bus, though I couldn’t get home at night on it. I told her, car dependence is the reason most people in this country are living paycheck to paycheck. They are never not buried in car payments and other car costs. They roll one car loan into another car loan. They are slaves to their bloody cars and I am sick of being a slave.
I am considered irrational by most people I know outside my own understanding circle. How can you LIVE, they ask? It’s a good question, because, thanks to our total acquiescence to the automobile in this country, 2/3 of the jobs in Chicagoland are located in the suburbs, and increasingly in the far suburbs. When you consider that the Chicago conurbation of 68 suburbs consumes 5,400 square miles, and that a resident of, say, Vernon Hills out to the far northwest, might easily get laid of and be re-employed in someplace like Mattson, in the far south burbs, and thus have an 80 mile commute, and that half the people in this area commute at least 50 miles each direction every damn day, you can see why people feel that their cars are their life lines, and why a male friend of mine, a denizen of the far burbs, chose to live in his car rather than give it up to pay his apt. rent. Meanwhile, I cling not only to the city, but to neighborhoods withing easy reach of a CTA rail line and all-night buses. These are the neighborhoods that have the most retail and other urban amenities within walking distance or a short transit ride. People ask, how do you shop for groceries? Easy, I have them delivered for about $15, brought to my door more cheaply than taking them home in a cab. I get to work on the train. But you’d have higher pay in the suburbs, they say. Yeah, but I’d spend the difference and more above that buying and running a 3000 lb appliance, and I’d have to live in some stupid suburban condo complex where I’d have to drag the car around just to buy a gallon of milk.
What’s worse, I’m forced to SUBSIDIZE our suicidal car dependence, and related dependence on finite resources, and the warfare state necessary to make sure we have continued access to those resources. Other people complain about the relative pittance that goes to support public transit, while speaking of our highways that have wrecked our cities and take up such ungodly space and resources, as an “investment”. How much healthier economically would this country be if we’d never built the interstate highway system, and we still lived less than 20 miles from where we worked, in neighborhoods where we could walk or take a short bus ride to everything we bought and used? I lived in a city neighborhood like that as a kid- this country was stuffed with city neighborhoods and small, cozy towns, where you could walk, bike, or take a short bus or trolley ride to the grocery store, the doctor, the dentist, to shopping for clothes and hardware, where there were restaurants and stores and offices within easy reach. All gone now, and most people in this society alive now are too young to have any memory of these things, or any idea of how to build them and put them in place. That is what our car dependency has done to this country..
i have 2 cars. the first is a clean, nice 25 year old Dodge Ramcharger w/ 78,000 miles bot for $4k 5 years ago. fun as hell. useful also. no depreciation, low insurance cost, no black box or signal tracing, no air bags but big & safe, and 56 cents/mile business use deduction.
my other car is the last new, limited production (1,100 +) Pontiac model ever designed, bot in GM bankruptcy (the last GM product i will ever buy tho) in 2009. has barely depreciated vs cost so far.
it can be done cost effectively.
When I bought new cars I kept them until they fell apart to the point where they were not structurally sound and then I bought a new one. I don’t buy new cars any more at all. I buy 8 to 10 year old vehicles (mostly large SUVs) that are either sufficiently repaired so that they will last another 3+ years or are priced so that I can get them repaired. I pay cash. No more car loans.
And to all the new Prius owning liberal whiners who key my vehicles because they think they contribute to global warming I say bite me! Aside from the fact that anthropogenic global warming is bull crap, if you had half a brain you would realize that, given how much fossil fuels and chemicals go into the manufacturing of a new Prius you’d have to keep that Prius for at least 10 years to be as environmentally conservative as I’m being keeping my ancient SUVs out of the junk yard as long as possible.
You’re right, Araven. 90% of the energy and resources a car consumes in it’s lifetime, are consumed by the time it reaches the showroom.
If you have to be on the road a lot, say you are a “road warrior” type business person, or someone must commute 80 miles one way because your employer chose to locate out far beyond known civilization, well, then, a new gas-saver car like a Prius or some such, makes sense. But if you don’t drive often, and only need the car for an occasional trip, keeping the old gas-guzzler makes economic and environmental sense. There is about a 90% overlap between frugality and environmental sense. Use what you have, have only what you use, and make the most of your existing possessions.
Forgive grammatical lapse. I really do know better than to write its as “it’s”. Wish I could edit my posts.
Well…good for that guy.
I have been to Chicago. Last time stayed at an older hotel
near the lake. Air pollution/exhaust beyond the pale.
People use a taxi to go a few blocks. They are ubiquitous.
I have also been to the “south-side”…literally miles and miles
of identical apartment buildings in various states of decay.
Friend at church (lived in city Chi. through her career) told us
Rahm Emanuel decreed that all housing in town would
henceforth be integrated per % demographic. Thus title 8
used as enforcement for same. Wasn’t long B4 she couldn’t
get into the apt. after work. A shooting in there. Place on
lock down. Her company (financial) was one of the token “take
downs” after TARP. She was involuntarily retired.
I too look wistfully at BMW 7 series…for about a second. Nice drive…
but I need a beater Suburban for winter driving…3.5K. Cash.
House payments and car payments are main reasons most people are never able to save money. Think about it. Probably be better to rent an apartment and drive a 10 year old car especially if you’re young and need to save money.
You never own your house / car anyway. You are for ever a tax slave (property taxes) to the Government.
More than 50% of those working in the US earn less than $30k. Some of those are teenagers or women selling perfume part-time whose husbands earn six figures (if that offends anyone, sorry not sorry), but the point is that there are a shitload of people just getting by. Someone earning $15 / hour or less should not even consider buying a new car. They can’t afford it. Within the last 6 months, I bought two 2009 cars for my kids for slightly under $5k each. You can get a lot of decent used cars for $5-8k. BTW, $6,500 amortized over 24 months @ 7% is $269 / mo.
Those long-term, sub-sub-sub prime car loans are just a necessary annoyance to allow those asset-backed securities to flow.
https://www.gmfinancial.com/docs/about-us/understanding-securitizations.pdf
The idiots buying cars they can’t afford is just the tip of the iceberg.
Any of you in or near Socal, I’m parting with just the vehicle described in the comments; it’s a 1999 Exploder, 4 dr. 6 cyl, auto, 2 wheel drive, leather & loaded, less than 128k on the ticker and runs and drives excellent. Even has a Uhaul installed trailer hitch. Your TBP price? $3,695. email Admin and I’m sure he’ll put you in touch.
Chicago, living life without a car involves some logistical planning as you mention which is exactly why most sheep could never do it.
I tend to look at cars a bit differently than most. I always buy used and usually via private party. As long as it has a seat, a steering wheel and a windshield to keep the bugs out of my teeth, I’m set. My daily driver is a 29 year old 4Runner. It looks like a complete piece of shit, runs like a top, goes anywhere in any weather and has never left me stranded. Even if I spent $1k a year on repairs (which I don’t), it would still be cheaper than the registration and insurance on a new car.
Eight years for a car loan? You have to be outta yer mind!
I’ve been looking for a new car for the past year and people are running their cars into the ground in a short time span while expecting to sell for blue book valuations. Most cars I’ve seen for sale are 5-8 years old with 100k miles on them. Who drives this much? Seriously? Are they making multiple trips from the East coast to the West cost every month? I’ve never been able to put 15k to 20k miles on a car in a year. The most outrageous part is they expect to get $6,000-$10,000 when they sell these cars. They don’t understand that the Blue book is a sales tool and their vehicle is only worth what someone else is willing to pay for it.
Clammy, visit the local old folks homes and retirement villages in your area and see if you can place a want ad in their newsletter of place on on their bulletin board. Old people are a great source for low mileage, well cared for cars.
Say Steph, I’ve noticed this as well and figure most of the real high miles cars are either commuters or used by several people within a family.
BTW, the “blue book” has an automatic price adjustment for miles being either very low or very high. For example, my Explorer is worth about $500 more because it has very low miles for its age.
Also consider the car’s engine. A 4 cylinder takes much more of a beating with high miles. A 6 is your best bet for miles, gas mileage, and power.
But if you’re looking for a cheap all around good car consider getting a Prius. I’ve seen some with under 100k in the $8k price range. They’ll make 200k easy w/o major repairs.
I wouldn’t feel comfortable getting a used Prius – aren’t they hybrids? I can think of all kinds of things that might go wrong with that huge battery as they age and just having to replace it is the least of them.
@Chicago999444: You chose to live in Chicago – which is a shit hole.
Dutchman, the only Chicago people like you hear about is the part where 95% of the criminal mayhem takes place- those nasty pockets on the south and west sides with their recurring murders and shootings.
That is all a good 15 to 25 miles from where I live. This is a BIG city, with a large, extant middle class, and I live in the part of it stuffed with beautiful, walkable neighborhoods, large numbers of middle income people, and lots of great architecture and urban amenities. I have great museums, the symphony (one of the world’s finest) the opera, great libraries, and a huge array of restaurants and shopping in every price range, within easy reach, plus 24/7 public transit.
And I’ve NEVER been offered any problems on the streets, though I’ve had to be on them rather late from time to time. Normal vigilance and alertness (“situational awareness”) is sufficient to keep me safe. I find that people who avoid hanging out in areas like 71st St & Drake, or Garfield Park, tend to be pretty safe.
But it’s fine with me if everyone else thinks we’re a “shithole”. That keeps rents and house prices reasonable, and from rising to NYC and San Fran levels.
Does this bubble mean that there could be a glut of repossessed vehicles on the market in the next few years? Any good buys?