"Never take a loan on a depreciating asset" is fail

[Silex]

Everyone is making good points, but we are focusing on new vehicles. Try getting a reasonable loan on a used car and all sense quickly goes out the window. I rarely buy new cars, but that's just me. I'd rather pay $15k cash on a 5 year old car than get a loan on a $30k car that will depreciate to half it's value in said time. Because even if in another 5 years it depreciates half its value again, that's only $7500 versus $15k. Ya dig?

 

[theeedude]

If you are going to buy it anyways, I see no reason not to finance it if the interest rate is right. I financed my car at 4% for 7 years. I could have paid cash for it on the spot, instead I took out a loan and invested that money, reaping a much higher return than I paid on interest.

 

[MJinZ]

If you are going to buy it anyways, I see no reason not to finance it if the interest rate is right. I financed my car at 4% for 7 years. I could have paid cash for it on the spot, instead I took out a loan and invested that money, reaping a much higher return than I paid on interest.

LOL... I'd like to see these numbers.

 

[vi edit]

Everyone is making good points, but we are focusing on new vehicles. Try getting a reasonable loan on a used car and all sense quickly goes out the window. I rarely buy new cars, but that's just me.

Eh. Local Credit Union is doing 2.9 for 60 months on '07 and newer. 4.5% on '06's and 6.25% on '05's and older. That's still pretty cheap.

 

[vi edit]

weird...there's some kind of bug with percent signs.

2.9% is f'd up
2.9% isn't

 

[MJinZ]

%%

 

[DrPizza]

We purchased a truck for our son for $1500. Looked it over well before we purchased it. 6 months later, he never had to put a penny into it except for changing the oil. He put it on Craigslist for $2000. The first people who came to look at it offered him $1500 cash on the spot. He just plain turned them down. Ditto the second people. He hadn't learned the art of counter-offering. Ended up deciding to keep it, then changed his mind a week later & relisted it. By that time, anyone watching Craigslist is going to think, "hmmmm, this has been listed for a while. What's wrong with it?" Ended up selling it for $1400. He should have been able to actually make a profit on it. So, the cost of his vehicle was $16 per month. Turned around and purchased a black ford taurus for $1200. Put some elbow grease into making the finish look nice. Wasted some money on tint. Now, he has a car that would probably last him at least 2 years without any mechanical problems. In another 6 months to a year, he can sell it for the same amount & add some money that he's saved. By the time he's 25, he should be able to work his way up to a pretty decent car without the need for car loans, and maintaining the ability to bank a lot of his paychecks. The truck was a gift from us; from this point onward, if he remains frugal, he should be able to save a shitload of money & still have a relatively reliable vehicle.

More importantly for the overall cost, he doesn't have to carry collision, etc., on the vehicle. Just mainly liability. That saves a young male a small fortune in insurance. And, if worst case scenario - his car is totaled by a deer or something, he can just turn around and purchase another used vehicle that day (or a few days later, depending on how long it takes to locate a decent one.)

There are many deals to be found; sometimes you've just gotta know where to look/have the right contacts.

 

[ElFenix]

We purchased a truck for our son for $1500. Looked it over well before we purchased it. 6 months later, he never had to put a penny into it except for changing the oil. He put it on Craigslist for $2000. The first people who came to look at it offered him $1500 cash on the spot. He just plain turned them down. Ditto the second people. He hadn't learned the art of counter-offering. Ended up deciding to keep it, then changed his mind a week later & relisted it. By that time, anyone watching Craigslist is going to think, "hmmmm, this has been listed for a while. What's wrong with it?" Ended up selling it for $1400. He should have been able to actually make a profit on it. So, the cost of his vehicle was $16 per month. Turned around and purchased a black ford taurus for $1200. Put some elbow grease into making the finish look nice. Wasted some money on tint. Now, he has a car that would probably last him at least 2 years without any mechanical problems. In another 6 months to a year, he can sell it for the same amount & add some money that he's saved. By the time he's 25, he should be able to work his way up to a pretty decent car without the need for car loans, and maintaining the ability to bank a lot of his paychecks. The truck was a gift from us; from this point onward, if he remains frugal, he should be able to save a shitload of money & still have a relatively reliable vehicle.

More importantly for the overall cost, he doesn't have to carry collision, etc., on the vehicle. Just mainly liability. That saves a young male a small fortune in insurance. And, if worst case scenario - his car is totaled by a deer or something, he can just turn around and purchase another used vehicle that day (or a few days later, depending on how long it takes to locate a decent one.)

There are many deals to be found; sometimes you've just gotta know where to look/have the right contacts.

:hmm:

 

[zsdersw]

Automobiles are never "good investments", but some are better investments than others, and not just in the collectors market.

I was upside-down on my second car (the first one I financed) to the tune of $5k. I buried that negative equity in the third car (a new 2004 Honda Accord) in a little over 2 years, and traded the Accord in. It was worth what I owed on it. That scenario is not gonna happen with a lot of other "daily driver" vehicles.

My Acura TL is worth a little more than I owe on it, and I have about a year left on the loan.. and that's with just over 100k miles.

 

[MJinZ]

Automobiles are never "good investments", but some are faster depreciating assets than others, and not just in the collectors market.

I was upside-down on my second car (the first one I financed) to the tune of $5k. I buried that negative equity in the third car (a new 2004 Honda Accord) in a little over 2 years, and traded the Accord in. It was worth what I owed on it. That scenario is not gonna happen with a lot of other "daily driver" vehicles.

My Acura TL is worth a little more than I owe on it, and I have about a year left on the loan.. and that's with just over 100k miles.

fixed

 

[JulesMaximus]

Automobiles are never "good investments", but some are better investments than others, and not just in the collectors market.

I was upside-down on my second car (the first one I financed) to the tune of $5k. I buried that negative equity in the third car (a new 2004 Honda Accord) in a little over 2 years, and traded the Accord in. It was worth what I owed on it. That scenario is not gonna happen with a lot of other "daily driver" vehicles.

My Acura TL is worth a little more than I owe on it, and I have about a year left on the loan.. and that's with just over 100k miles.

That's another minus for buying used. You end up with a 100k on it that you are still making payments on. I bought my car new and paid it off a couple years ago so I have a good, reliable car with barely 90k miles on it.

 

[Gibson486]

so...where does this argument go when you get 0 precent financing?

 

[HarryLui]

Spent $3300 to buy a Saturn 8 years ago with 87k. Still runs fine on its original engine and transmission with over 205k, been through 3 new drivers in the same family. Got 34mpg last road trip.

 

[zsdersw]

That's another minus for buying used. You end up with a 100k on it that you are still making payments on.

Mine runs and drives like new.. at 100K miles. The leather seats look good and smell like leather, too.

100K miles != not worth paying a loan for.

 

[zsdersw]

fixed

ToMAYto, ToMAHto.

 

[videogames101]

Lol, if you're buying a car to drive it, and it ends up depreciating, so what? There is value in the enjoyment of your "asset", you can't evaluate a car and say "well, because i took out a loan I lost money when I sold it" because your forgetting the intrinsic value of owning the car. I suppose if you just needs cheap transportation, then it doesn't make sense to even buy a new car in the first place. the only real reason to buy new is if you really enjoy a new car, as in it has value to you.

 

[ss284]

The average car payment today is ~$480 I think. If you put $480/month into an investment account earning 8% annually (about the long-term growth stock rate historically, I think), that's $1.6M after 40 years. You certainly haven't drive $1.6M worth of car over that time (it's $230K in principle).

So financing A CAR over your lifetime isn't a huge financial mistake but financing every car you ever own is a huge mistake. And the more you borrow money to pay for your cars, the harder it is to save up for the next one so you're more likely to have to continue the same cycle.

Pretty worthless post. You make it sound like you don't invest the cash you would still have if financing. 8% ROI in stocks is a little optimistic, but getting a loan for anywhere from 0-3.9% or so is a piece of cake in this market. As long as your loan rate is below that of your investments, it makes no sense not to finance.

 

[vi edit]

Pretty worthless post. You make it sound like you don't invest the cash you would still have if financing. 8% ROI in stocks is a little optimistic, but getting a loan for anywhere from 0-3.9% or so is a piece of cake in this market. As long as your loan rate is below that of your investments, it makes no sense not to finance.

He's just really lumping the car payment problem with the concern of paying interest. His ultimate issue is just the monthly payment and the impact that has on savings/net worth. The interest is just a small piece of a much larger problem.

 

[QuantumPion]

Taking out a loan on a depreciating asset is not necessarily a bad idea. What is a bad idea is taking out a loan on an asset which depreciates faster then the loan payments without a sufficient down payment, leaving you in a situation of having negative equity for an extended period of time.

 

[kornphlake]

Taking out a loan on a depreciating asset is not necessarily a bad idea. What is a bad idea is taking out a loan on an asset which depreciates faster then the loan payments without a sufficient down payment, leaving you in a situation of having negative equity for an extended period of time.

The value of a vehicle isn't determined by KBB, it's determined by the remaining utility for the owner. For example my 1996 Saturn SL2 has a KBB value of less than $1000, but it still runs well, has been well maintained, and gets good gas mileage, it's worth much more than $1000 to me because it would cost me several times more to replace it with something of equivalent reliability and utility. The only vehicle that is worth KBB is a vehicle that is for sale, if the owner feels the vehicle is worth more than the market price he'll keep it and use it until he feels the value is equal to the market price. Likewise a vehicle with a sticker price of $30K may be worth much more than that to the buyer who is concerned about reliability, safety, convenience, luxury, etc. When the buyer's perceived value is equal to or greater than the purchase price plus the interest on the loan, financing makes sense. Hopefully we all realize that financing will cost more than a cash purchase, rather it's a few dollars a month or a hundred dollars a month it adds to the purchase price. Just because it costs more doesn't automatically make it a bad purchase, it's just a purchase that cost more than it would have if it was made with cash. In an ideal situation the perceived value plus the market value of the item purchased is greater than the amount paid through principal plus interest.

It's irresponsible to buy a vehicle expecting that it will be worth nothing in terms of dollars and utility before the loan is repaid. Unfortunately it's tough to determine how or when a vehicle will become worthless to the owner. Some people get caught in an unfortunate situation where their vehicle wears out faster than anticipated or their lifestyle changes due to unforeseen or uncontrollable circumstances, and there are people who are just plain dumb about how and when they purchase a vehicle. Some people buy vehicles that are worth the market price and nothing more, then settle into a payment plan where the perceived value and market value depreciate faster than the loan is repaid. Truthfully these people paid too much for the vehicle to begin with then added financing costs on top of an already bad deal. This type of person often has larger problems than being upside down on their auto loan.

 

[MJinZ]

Mine runs and drives like new.. at 100K miles. The leather seats look good and smell like leather, too.

100K miles != not worth paying a loan for.

Unless you've replaced a whole bunch of stuff, a 100K car will drive like a 100K car. Basically, not even close to new.

 

[DrPizza]

The value of a vehicle isn't determined by KBB, it's determined by the remaining utility for the owner. For example my 1996 Saturn SL2 has a KBB value of less than $1000, but it still runs well, has been well maintained, and gets good gas mileage, it's worth much more than $1000 to me because it would cost me several times more to replace it with something of equivalent reliability and utility. The only vehicle that is worth KBB is a vehicle that is for sale, if the owner feels the vehicle is worth more than the market price he'll keep it and use it until he feels the value is equal to the market price. Likewise a vehicle with a sticker price of $30K may be worth much more than that to the buyer who is concerned about reliability, safety, convenience, luxury, etc. When the buyer's perceived value is equal to or greater than the purchase price plus the interest on the loan, financing makes sense. Hopefully we all realize that financing will cost more than a cash purchase, rather it's a few dollars a month or a hundred dollars a month it adds to the purchase price. Just because it costs more doesn't automatically make it a bad purchase, it's just a purchase that cost more than it would have if it was made with cash. In an ideal situation the perceived value plus the market value of the item purchased is greater than the amount paid through principal plus interest.

It's irresponsible to buy a vehicle expecting that it will be worth nothing in terms of dollars and utility before the loan is repaid. Unfortunately it's tough to determine how or when a vehicle will become worthless to the owner. Some people get caught in an unfortunate situation where their vehicle wears out faster than anticipated or their lifestyle changes due to unforeseen or uncontrollable circumstances, and there are people who are just plain dumb about how and when they purchase a vehicle. Some people buy vehicles that are worth the market price and nothing more, then settle into a payment plan where the perceived value and market value depreciate faster than the loan is repaid. Truthfully these people paid too much for the vehicle to begin with then added financing costs on top of an already bad deal. This type of person often has larger problems than being upside down on their auto loan.

That's not necessarily true. With 0% financing, many people find themselves better off by taking out the loan for the maximum term that the financing allows. In that situation, it's possible they'll be upside down on the loan, at least for a short while. Hell, anyone who doesn't put down a down payment on a new vehicle is upside down on their loan after the first month. In both cases, that's what gap insurance is for. Very cheap financial insurance.

 

[zsdersw]

Unless you've replaced a whole bunch of stuff, a 100K car will drive like a 100K car. Basically, not even close to new.

Wrong about many newer cars in general and my car in particular.

I've replaced nothing aside from brake pads and tires, and neither did the one previous owner; the Acura dealer. I bought it with 25K miles.

 

[kornphlake]

That's not necessarily true. With 0% financing, many people find themselves better off by taking out the loan for the maximum term that the financing allows. In that situation, it's possible they'll be upside down on the loan, at least for a short while. Hell, anyone who doesn't put down a down payment on a new vehicle is upside down on their loan after the first month. In both cases, that's what gap insurance is for. Very cheap financial insurance.

A vehicle isn't an investment, the assessed value isn't a reliable indicator of the vehicle's worth to the owner. Many people have an emotional attachment to their vehicles, to them the vehicle is worth much more than blue book for any number of reasons, the vehicle is a good value in the owner's eyes because he gains utility, enjoyment, convenience, status, etc. from owning the vehicle. Gap insurance is for the bank and the owner's piece of mind that he won't be in the hole in the event of a wreck, it doesn't really bolster the value of the vehicle, if the owner dislikes his vehicle, he'll dislike it regardless of gap insurance. Ideally the owner is satisfied with the purchase such that his perceived value is equal or greater than the purchase price (plus interest if applicable) for the first several years of ownership.

 

[vi edit]

A vehicle isn't an investment, the assessed value isn't a reliable indicator of the vehicle's worth to the owner. Many people have an emotional attachment to their vehicles, to them the vehicle is worth much more than blue book for any number of reasons, the vehicle is a good value in the owner's eyes because he gains utility, enjoyment, convenience, status, etc. from owning the vehicle. Gap insurance is for the bank and the owner's piece of mind that he won't be in the hole in the event of a wreck, it doesn't really bolster the value of the vehicle, if the owner dislikes his vehicle, he'll dislike it regardless of gap insurance. Ideally the owner is satisfied with the purchase such that his perceived value is equal or greater than the purchase price (plus interest if applicable) for the first several years of ownership.

What are you babbling about?

All the Dr. said is that gap insurance is cheap coverage in the event you have an accident the first year you own your car. If you buy your car for $20,000 and drive it off the lot the dealer is going to give you a trade in of $15,000. If you total your car the day after you buy it Gap covers that "gap" between wholesale and retail so you aren't stuck covering the $5,000 on your loan. It has nothing to do with "helping you like your car more".