Car Loans

Car Loans, While We’re At It

Coincidence is a funny thing. I just posted an article on boat loans and then today while sipping my morning coffee and skimming Facebook, I see an article from Car and Driver summarizing the annual AAA vehicle ownership study. Apparently, AAA has been conducting this study since 1950. In short, new car ownership rose in 2019 by about 5% (that’s a lot more than inflation, as of writing estimated at 1.75%). Car and Driver surmises car loans are indeed a large part of the evil.

Finance charges and longer loan terms contributed most to the increase.

Car and Driver, Owning a New Car Will Cost you $9000 a year, Says AAA Study

Of course, loans are only part of the evil. Albeit a huge part. The cost of a new car, and light trucks and SUV’s, in particular, have gotten way-out-of-hand. My first car, a used 1974 Volkswagen Karmann Ghia, retailed for about $2500. Granted, this was a Volkswagen. It was supposed to be an affordable sports car. On the other hand, it’s namesake carriage works, Karmann was still building fine automobiles for the likes of Porsche, Audi, BMW, and Mercedes. They specialized in hand-built versions of cars, typically convertibles and special editions.

car loans
My first set of wheels, a 1974 Karmann Ghia

The Karmann Ghia was no exception. Indeed, the Karmann Ghia was a bespoke automobile for sure. It featured a custom-designed body penned by Ghia of Turin Italy. Again bespoke heritage, known for penning bodies for the likes of Ferrari. The Karmann Ghia had a one-piece body with it’s many, many panels hand soldered for a seamless appearance. It was basically a VW Thing underneath, but the style and craftsmanship of the body was something special even by today’s standards.

Let’s get back on the subject after that brief history lesson for context. Car loans, right? Yes, let us adjust that 1974 new car price for inflation to see what that would be in 2019 dollars. Using the internet inflation calculator of your choice, you will find that in today’s dollars that would be about $13,000.

But automation and robots were supposed to make things cheaper to buy? The current MSRP for a Mazda MX-5, the closest thing I can think of in the “import, economy sports car” segment I can think of, is about $25,000. So, the cost to buy a new car has doubled in 45 years by this calculation. (fuzzy logic, but it makes a point).

By contrast, let’s look at personal computers. When the IBM PC came out in 1981, it cost about $5,000. That was a honkin’ chunk of cash back then. That was only 6 years after the first owner of my Ghia had paid Scott Motors of Connecticut just $2500 for an exotic car. In today’s dollars, that would be just over $14,000. The price of a high end “IBM PC” has remarkably stayed about the same dollar figure over the years. Even today, a high-end gamers PC will set you back about $5k. Accounting for inflation, the average price for a computer has more than halved over a similar time span that cars have doubled in price.

Back to the car loans. There is a lot in play in both these markets that complicate the matter, like any. But it illustrates the point. I suspect the main culprit here to be demand, magnitude, and financing. Unless you live in a major city, you pretty much have to own a car. You are just not going to be a propper cog in the machine without one. Demand is approaching infinite. Fortunately, there’s some oversupply to keep the price from doing the same. (see Supply and Demand). However, there is still a lot of demand and cars and old ones get unreliable and expensive to maintain at some point so we are typically in the replacement car cycle every 5-10 years (if we don’t like throwing our money away). Cars, even a decent used one, will cost several times that of a PC. Easily getting out of reach of normal people in a hurry. Since we’re conditioned into borrowing money, living on monthly payments, and we need a car we simply start asking “how much a month can I allocate to a car”?

“She never asked how much it cost!”

Salesman to remain anonymous

I worked nights as a salesman at Sears while in college so that I would not have so much debt when I got done. A colleague in the neighboring department worked days at Allen Mellow Motors in Nashua. He came in one night bragging about how much he got a woman to pay for a new car. “She never asked how much it cost!” he proclaimed. We prodded for a few more details to find he had learned what she would pay per month and then stacked up the longest term loan he could find and raised the price as high as he could and still make her monthly number work. The poor woman overpaid by many, many thousand dollars.

Look at the simple math of a “good” car loan. Buy a family sedan for $30,000 over 5 years at 5%APR. You end up paying the bank $4000 for the privilege of using their money. Oh yeah, you also kissed about $6000 goodbye for the privilege of being the second party to ever sign the title (the bank you hired gets the privilege of 1st place so you even get screwed there). Wouldnt you rather keep that $10,000? At least most of it?

A slightly used car is a much better deal than a car loan. Let someone else take that $10,000 hit on the reasonable family sedan and buy it from them when their lease is up in one to two years. The same car will often now retail for $20K and still have tons of life left in it since the 1st owner was scared to drive it with all the milage penalties built into the contract. A new car these days, even American brands, should last at least 200,000 miles without major issues if you follow the manufacturer’s maintenance guidelines (not the quick-lube place guidelines!). We keep ours to over 200k and they have all had life in them still after that.

Skip the car loans, pay cash, buy used, and save huge over your lifetime.

Our Recent Car Ownership History

Honda Civic – sold with 230,000 miles. Needed brake lines but ran like a top and no rust holes

Honda Accord – sold with 210,000 miles. Child on the way, bought a wagon.

VW Passat Wagon – sold with 180,000 miles. Still ran fine, no issues but starting to get nervous

Toyota 4Runner – sold with 215,000 miles. Ran like a top, transmission occasionally slipped but all mechanics stated fluid was clean and nothing wrong. We bought a bigger camper and decided to get a bigger truck.

Current Truck, used Toyota Tundra – Just passed 100k

Current Car, Volkswagen CC – Just passed 100k

Want to help us make more content? Take a second to support Skipper Jeff on Patreon!
Become a patron at Patreon!

Leave a Reply

Your email address will not be published. Required fields are marked *