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Vehicle Financing: How Long is Too Long?

Kirstie_HKirstie_H Posts: 11,077
edited March 2014 in General
Should you stop at 36 months, or is 72 months OK on some vehicles? Ask questions & get advice here.

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  • mako1amako1a VirginiaPosts: 1,855
    Vehicles are depreciating assets and should never be purchased on time payments. Homes are appreciating assets and even homes can get you in a bind if the market falls and you're over-extended. Vehicles lose value faster than any payment plan can overcome. Unless you bought a 1968 Shelby in 1968 you're losing money. Don't add to your loss by tacking on finance charges. If vehicle financing was eliminated the price of cars would drop so fast people would wonder how they ever got so high to begin with. Drive what you can afford.

    2013 Mustang GT, 2001 GMC Yukon Denali

  • nj2pa2ncnj2pa2nc Posts: 813
    It would be great if you never had to take out a loan to buy anything and were able to pay cash. We put alot of miles on our cars so we buy ones that last and we can afford but we do finance them. We do put a large downpayment. We currently own a 06 acura with a 60 month loan on $10,000.00. The payments are about $200.00 but I pay $300.00 so the loan will be paid off sooner. Yes I could have bought a cheaper car but I did not want to.
  • cccompsoncccompson Posts: 2,388
    Never say never. I was happy to finance my '06 Mustang GT convertible through Ford Credit at 0% for 72 months last summer.
  • Sorry that is just incorrect.

    Never say never and such to be exact.

    If the finance rates are very low then it makes more sense to finance the car then to buy it out right even if you have the cash.

    If you have 30,000 dollars cash to buy a car and the finance rates are much bellow 5 percent then you are better of financing the car. You can get more then 5 percent rate of return in most money market accounts so even after taxes you are probably going to be better of financing.
  • mako1amako1a VirginiaPosts: 1,855
    Rover, not even close. You would have to pay taxes on the interest from the Money Market negating the minute difference of a low interest loan. Car loan interest is not tax deductible. It's just lost money along with depreciation making vehicle financing an unwise financial decision. And unless you are the principle of a business needing a tax deferral, leasing is an even worse situation. Drive what you can afford and everyone will benefit.

    2013 Mustang GT, 2001 GMC Yukon Denali

  • It all depends on the vehicle. For a honda accord I wouldn't go past 48 months, on the other hand if you keep a car for 10 years 72 months isn't that bad of a deal. I purchased a 2003 Ford Mustang cobra 10th aniversary, for 30k for 72 months and they are still going for about 28K. It also depends on you budget and your needs. So is 72 months too long? It really depends on what you think.

    However 84 months is definetly way too long, for any kind of car.
  • kronykrony Posts: 110
    Like mentioned above I think a lot depend on your downpayment. Today my local credit union has the following rates for New Model Years 2007 / 2002: 36 Months 4.99% / 48 Months 5.24% / 60 Months 5.49% / 72 Months 5.74%

    With only a 0.75% split (and 5.49%) I like the idea of the flexibility of the 72mo, but would plan to pay it early. I think the key is you should not do 72 if your plan is to not put at least 25+% down. Now if you are putting nothing down, you'll be upside down forever...like mentioned before buy what you can afford...flipping burgers won't cash flow a BMW, or a new Honda for that matter.
  • tidestertidester Posts: 10,059
    With only a 0.75% split ...

    Even with a 0% split, you're still paying (more than) twice the interest on a 72 month loan compared with a 36 month loan with the same principal. Flexibility has its price.

    tidester, host
  • I don't like to finance past the warranty period. If something goes wrong while you are still making payments, it can really make a dent in your monthly expenses. Extended warranties may make sense for some families who could not absorb a $400-$600 repair post warranty while still making payments.

    I have been lucky enough to be able to pay off a loan in 36 months mainly because I try to live under my means. It's not popular in America, but I can live with that ;)
  • explorerx4explorerx4 Central CTPosts: 13,579
    the longer you finance, the more likey semi expensive maintenance events(tune up, tires, brakes) should be figured into your budget.
    2017 Ford Fusion SE 2017 Ford F-150 Limited
  • nj2pa2ncnj2pa2nc Posts: 813
    we also have 4 credit cards with zero balances. When we do charge we pay the balance in full each month. We seldom use the charge cards. If we can not pay cash we try to do without. The last time we charged was for tires.
  • snakeweaselsnakeweasel a Certified Edmunds Poster.Posts: 15,256
    Should you stop at 36 months, or is 72 months OK on some vehicles?

    Personally I think that if you have to go out beyond 60 months you're buying to much car.

    2008 Sebring Ragtop, 2011 Hyundai Sonata, 2015 Honda CTX700D

  • snakeweaselsnakeweasel a Certified Edmunds Poster.Posts: 15,256
    I will have to strongly disagree with your statement. Cars are big ticket items, even a decent used car will cost at least 30-35% of what the average American household makes in a year. Because of that it is very difficult for most people to pay cash for a car.

    Plus you are looking at it in a very simplistic way. While cars are a depreciatable asset you have to look at the cost of not having a car. For me not having a car would mean earning far less than I am now. The cost of the car and financing fees are much less than the additional income having a cars allows me. For that reason alone it makes sense to finance a car.

    If vehicle financing was eliminated the price of cars would drop so fast people would wonder how they ever got so high to begin with.

    What a contemptible lie.

    Drive what you can afford.

    I agree, but what you can afford does include proper use of credit. If the loan is easily serviced then you can afford it. There is nothing wrong with having debt, its how its used (or abused).

    2008 Sebring Ragtop, 2011 Hyundai Sonata, 2015 Honda CTX700D

  • snakeweaselsnakeweasel a Certified Edmunds Poster.Posts: 15,256
    As long as the return on the investment less the marginal tax rate is more than the interest rate on the car loan you will be ahead. My investments make far more than BR's 5% after taxes.

    2008 Sebring Ragtop, 2011 Hyundai Sonata, 2015 Honda CTX700D

  • mako1amako1a VirginiaPosts: 1,855
    It would be great if you never had to take out a loan to buy anything and were able to pay cash.
    It didn't just happen and I wasn't a trust fund kid. Proper financial planning and basic rules of not overextending yourself. Sure you don't drive the newest car to work and it takes years of telling yourself that it will all pay off later. It does! Now when I buy a car I bypass the credit guy. That alone was worth not financing during my max pay years. Also having the title in hand when you trade means you never hear that dreaded "you're upside down". Sure, your wants will always exceed your finances, but if tempered with logically sound financial principles like "never finance a vehicle" it will pay off. You just can't buy this kind of info. Don't ever be upside down again. A title in hand is worth 2 in the bank (humor). Drive what you can afford and you'll be able to afford anything. :shades:

    2013 Mustang GT, 2001 GMC Yukon Denali

  • By my calculations, I'll be fine with 72 months on the new Honda Accord which I bought yesterday. I financed 82% of what someone would pay OTD on MSRP. As mentioned above, I like the flexibility of 72 months (various reasons; we're remodeling our house, and I am considering a small business, so smaller minimum payments were attractive).

    But even making just minimum payments, based on Edmunds TMV looking at 1-6 year old used Accord trade-in values for "Clean" and "Average" conditions with 12k miles/year, I'll have positive equity in one year looking at "Clean" values and two years looking at "Average" values. That's not even considering private sale, just dealer trade.

    Also, the total amount of my payments including interest is about equal to the MSRP of the car. I invest overseas and make 2 or 3 times the interest rate on the loan.

    I agree, it all depends on the individual situation.
  • Putting 20% down plus taxes and reg then financing for 5 years or less will keep you from being upside down either.

    Unless you just paid way too much for the car 20% should cover your first year depreciation for most cars.

    If vehicle financing was eliminated the price of cars would drop so fast people would wonder how they ever got so high to begin with.

    I was thinking about this and if vehicle financing was eliminated the price of cars might go up. :surprise:

    Many car compaines make more money from their finacing arms then they do from making the cars. If they couldn't finance people anymore they would have to charge more for the cars.

    :shades:
  • mako1amako1a VirginiaPosts: 1,855
    OK you win. Sell me a car. I want a Maybach for $250/mo. Number of months doesn't matter.
    I just won the lottery. First prize was a million dollars.
    Fine Print: A dollar a year for a million years.

    2013 Mustang GT, 2001 GMC Yukon Denali

  • That doesn't even make any sense...

    I just said finance less then 5 years with at least 20% down pluss all taxes and registration.
  • mako1amako1a VirginiaPosts: 1,855
    I've said what I had to say. Hopefully 5 or 6 % got the message and will benefit from it. The rest will continue living the American Dream on borrowed money. The economy is much more fragile than most people know. That aside, my concern now is gasoline availability. Not price, but just being able to get it. Nice car + no gas = no car. If Chevy makes the Volt available soon I'll get one. Until then lets hope for the best.

    2013 Mustang GT, 2001 GMC Yukon Denali

  • snakeweaselsnakeweasel a Certified Edmunds Poster.Posts: 15,256
    I was thinking about this and if vehicle financing was eliminated the price of cars might go up.

    I was thinking about that too and I think they might go up too. But not for the reason you think. I think that if everyone bought with cash they would keep cars much longer and spend more in keeping their car lasting longer. New car production would slow and since lower production levels mean higher per car costs prices would tend to climb to cover those costs.

    2008 Sebring Ragtop, 2011 Hyundai Sonata, 2015 Honda CTX700D

  • snakeweaselsnakeweasel a Certified Edmunds Poster.Posts: 15,256
    That can be done with the right downpayment.

    2008 Sebring Ragtop, 2011 Hyundai Sonata, 2015 Honda CTX700D

  • I can see that happening as well.

    For many years Japan had restricted access to consumer credit and it did not drive the price of vehicles down.
  • kronykrony Posts: 110
    tidester...agree that flexibility has it's price and if you pay for the full 72 months you pay over double the interest (over double the time of course).

    Here's the real interest payments you would make on a $14K loan at the rates I gave in my original post...
    36mo(4.99%) $1,155.28
    48mo(5.24%) $1,603.84
    60mo(5.49%) $2,102.80
    72mo(5.74%) $2,642.08
    I think your interest rate difference between the loan durations and intent to pay off early is the key. If the 72 is 2% higher or I have no intent to pay off early it certainly doesn't make sense to go there...
  • tidestertidester Posts: 10,059
    I got slightly different numbers than you did.This is what I got:

       36 mo. at 4.99% -> $1,103.07

       48 mo. at 5.24% -> $1,548.85

       60 mo. at 5.49% -> $2,041.10

       72 mo. at 5.74% -> $2,582.04

    One other consideration is that many lenders charge additional fees for early payoff of the loan.

    tidester, host
  • nj2pa2ncnj2pa2nc Posts: 813
    I was not a trust fund kid either. I worked hard for my money (overtime, two-three jobs at one time, etc) I saved all the extra income. It has payed-off. I only work at one job with no overtime.
  • ltmarltmar Posts: 45
    I also tend to keep my vehicles until I have saved enough to pay cash for the replacement. This has encouraged me to properly maintain my vehicles and really take my time to do my research on the new ones. It really frustrates the salesmen as they can't push something they have on the lot since I don't mind waiting a few months on what I want since I don't buy very often. I also don't have to worry about a difference in my opinion of trade-in value vs. the dealers since I don't buy until I feel that I have used up the value of whatever I paid for the vehicle, whatever I get is a plus. I normally get more than I expect anyway. Not having car payments has also allowed my family to weather job layoffs and poor economic conditions without major budget adjustments.
  • lemkolemko Philadelphia, PAPosts: 15,306
    I never trade in a vehicle on which I still owe money. My car is long since paid for by the time I buy another one and is still in excellent shape. The last time I bought a car, I traded in a 1994 Cadillac DeVille for a 2002 Cadillac Seville STS. My car was in such nice shape, they paid top dollar for it and it was sold within the week from their used car lot despite the 96K miles on the clock. A nice trade and a significant down payment made the terms easy. I took out a 60 month loan, but paid it off in less than 36. Why did I take out a 60 month loan? Well, I can't see into the future. I don't know if I'd be out of work or sick, so the minimum monthly payment would've still been managable under catastrophic conditions. I definately would not go beyond the 60 month mark.
  • lokkilokki Posts: 1,200
    I get a little weary of those who suffer so much now to be rich some day. I'm sick of "the millionaire next door", who eats beans and dresses his children in cast-off clothing, because at 50, he's going to retire to Hawaii. Yeah, right. He never will.

    He'll retire lonely, and afraid to spend his money after years of disciplining himself to never spend a penny. Great personality trait in an Uncle who has no other heirs....not such a good husband or father to have. "Daddy, can I have a lollipop?" "Not now, but when I'm 60, I'll buy you a Candy Store with cash, sweetie". What way to live is that?

    36 mo. at 4.99% -> $1,103.07

    48 mo. at 5.24% -> $1,548.85

    60 mo. at 5.49% -> $2,041.10

    72 mo. at 5.74% -> $2,582.04

    If I've done the math right, the difference in having a 36 month loan and a 72 month loan is $1478.97 for the three additional years. That's $246.50 extra for each year of the loan. Big deal.

    Even the additional $2582.04 paid for the car over paying cash. for it isn't significant on a $14K loan. Sure in percentage terms it's noticeable, but in real world terms, the amounts are inconsequential.

    Now, I don't approve of 72 month loans personally, and I'm hesitant on 60 month loans for most cars, because you can LOSE money if you ever want to get rid of the car and you're upside down. But the argument about cost of interest (with rates the way they are)doesn't move me. Credit rates are low, savings returns are low, and I don't use my retirement savings to buy cars anyhow.

    My statement is this: You only live so long and you only have so much money. At some point in your life, you're going to eat beans. You can eat only beans now and hope that you live long enough to eat steak someday. If you only eat steak now, you will eat beans when you're old - if you live to be old. However, I think the best answer is to eat mostly beans now, but it's OK to have steak now and again - in case you don't get old.

    For what it's worth.
  • lemkolemko Philadelphia, PAPosts: 15,306
    Usually the only one who benefits from a guy like that is his widow.
This discussion has been closed.