The Wall Street Journal reports that Toyota's captive finance company is increasing the number of 84-month auto loans on its books. "These loans, which carry slightly higher rates than 72-month deals, have risen to represent 4% of all cars Toyota Financial Services lends money on." (This they call writing?) The Journal puts some numbers to that "slightly higher" aside (from 6.9% to 7.59% for 84-month loans, compared with 5.85% to 6.84% for 72-month financing) and ascribes the move to a general desire by automakers to avoid piling incentives on their new metal during the current sales slowdown. Although GM may face blowback for its "anyone with a pulse" zero percent financing deals, Toyota Financial Services is also on the hook for billions. An unnamed ToMoCo spokesmouth told the WSJ that her employer writes loans for about three-quarters of the cars financed at U.S. Toyota dealers, accounting for about 50 percent of total sales. She claimed the seven-year loans are given only to customers with top credit. Yes, well, is this the start of a trend? GMAC Financial Services says 84-month loans constitute a tiny portion of their car biz, and Ford Motor Co.'s credit arm says it "isn't aggressively offering them." "We don't like these loans," Ford Motor Credit Chief Executive Michael Bannister told the Journal. We shall see…
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84 month loans are bad news for everyone involved. From the customer perspective you’ve got a car that is going to depreciate faster than you can pay it off. From the lender perspective you got 84 months to worry that the customer’s financial condition doesn’t change for that 84 months and can still make the monthly payments. I still say if you finance for more than 48 months, you can’t afford what your buying.
With the exception of your house, if you can’t afford to walk in and pay in cash, you can’t afford what you’re driving…
In my area of Ohio, 2 Ford dealers that advertise regularly tout the “buy for x a month, not a lease” and they’re always 84 month loans, sometimes 96 months on a super duty truck. I agree with timoted, 3-4 years financing with a down payment that, other than the first year, keeps you from negative equity. I wonder what it would feel like to finance a Focus, pay for it for 4 years, and realize you had 3 more to go? What possibly in that price range would eat up 5,6k in negative equity at year 4? I’m sure it’s a Cobalt or another Focus.
72 and 84 month loans are TERRIBLE for the auto industry. They take the customer out of the market for too long, unless the customer gets restless around year 3 and tries to trade out. Then the customer is way upside down and blames the dealer…
With the exception of your house, if you can’t afford to walk in and pay in cash, you can’t afford what you’re driving…
That applies to plasma TVs and maybe furniture but who has 20K in checking for a new car these days?
I do agree that 84 month loans allow prices to creep up even higher by making deals doable. Higher payments at shorter terms put price pressure on what is already a loaded deal. There won’t be room for Sat-Nav, pin stripping, dealer items and other goodies when the average car costs more than 25K soon enough.
If your buying a new car these days you need a decent trade or else must sell your current whip and bring a barrel of money to the table. Walking in with no trade or little cash down puts you at a huge disadvantage.
Leases are actually an option for some people if your cashless and trade-less since you drive, you make payments, but your not on the hook for 7 years. They are even better if your planning to flip the car in 3 years or can write it off as a business expense.
I got 5 years at 0.9% on my last loan, that’s pretty cheap money. 450.00 in finance costs over 5 years on 20K is pretty cheap, taking my money out of the bank I would have lost an average of 4% interest over the same amount of time. This offsets the depreciation a bit.
They take the customer out of the market for too long, unless the customer gets restless around year 3 and tries to trade out.
Right, and unlike some consumer items cars are long term investments that can’t be swapped out easily. Going into a dealer and seeing your 20% below water on your car means you get back in and drive it home. And this is why quality, reliability and resale value factor into sales of new cars so heavily
Because of the boost in rate taking that extra year, the buyer is only reducing his payment by some $37/month on a $25K car. It hardly seems worth it.
GS650G, If they stopped buying plasma TVs and unsubscribed from cable, they’d at least have something of a down payment.
You’re right about taking offered finance deals when they work in your favor, of course. 5.9% from the bank or 0.9% from ToMoCoCred? I’ll take the 0.9%, thank you.
GS650G: “Going into a dealer and seeing your 20% below water on your car means you get back in and drive it home.”
Don’t be silly! Siddown! We can work something out!
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Who’s taking these loans? Do people come in, cash-strapped, looking for an inexpensive, reliable little car and find that, at 84 months, yes, they can just barely make the monthly payment on a Yaris and don’t have to worry about picking up a used car that turns out to be a lemon? Or do they go to 84 months because it reduces the pain of buying the leather-satnav-full-bling-equipped Sequoia? Or Lexus?
Go threeer!
GS, if you back out the math, you will see that 25% of people are paying cash for new Toyota’s. It can be done. If you have tons of investments, and don’t want to liquidate any, I think it’s a bad risk, but fine, take the loan.
However, borrow money on a luxury? A depreciating luxury? Forget it. I have said before that kids right out of college who get great entry level jobs might consider a bargain lease on a compact, but everyone else should seriously consider paying cash or waiting.
If people wanted cheap & reliable, they would buy 5 year Rangers, S-10’s, and Frontiers (before the Mississippi mistake). Even a 5-year old Taurus or Impala is cheap and relaible enough to go from Point A to Point B with minimal fuss and cost.
New cars are never the logical choice, unless you are a business and are using business costs to your advantages. Otherwise, the used modern used car ALWAYS makes logical and economic sense.
That said, new is nice, people want new, and as long as the credit train rolls, people will buy new.
if you back out the math, you will see that 25% of people are paying cash for new Toyota’s. It can be done. If you have tons of investments, and don’t want to liquidate any, I think it’s a bad risk, but fine, take the loan.
but how many of those 25% are actually paying cash? Most are probably taking paying it with home equity financing and end up paying for their car for 30 years!!
7.59% for 7 years adds 30% of the car’s cost as interest. pardon me, but holy shit
if you’re pulling that kind of stunt, you’d better take a good look at some heavily depreciated but not totally horrible detroit iron
“but how many of those 25% are actually paying cash? Most are probably taking paying it with home equity financing and end up paying for their car for 30 years!!”
It really is a disease, isn’t it? You sound like an alcoholic for Pete’s sake.
BTW, home equity lines are rarely 30 year amortization.
Whoever is paying for a car with a home equity loan needs to have their head examined!!! sure you can write off the interest, but if you can’t pay for the car anymore, the bank takes your house instead of the car!!
GS, if you back out the math, you will see that 25% of people are paying cash for new Toyota’s.
That’s not what the article says. Toyota is financing 3/4th’s of the loans placed **at the dealership**, and those 3/4th’s comprise about half of total vehicle sales.
That equates to about 2/3rd’s of total sales being financed at the dealership. It doesn’t mean that the remaining one-third aren’t financed at all. A “cash sale” to the dealership can (and often does) include the consumer’s use of loans from a bank or credit union, or proceeds obtained through other means.
Unfortunately, what this tells you is that most consumers are getting their loans at the dealership, which is often a great way to get gouged. Consumers may be good at knowing what they want, but they often are pretty awful at knowing how to best pay for it.
I’m holding out for a 15-year ARM…
My rule of thumb:
Purchase Price should be less than or equal to your yearly salary divided by 3.
If you make $100K a year, the most you should spend is $34,000 on a car.
If you make $50K, then cap it at $17K.
threeer :
February 8th, 2008 at 9:51 am
With the exception of your house, if you can’t afford to walk in and pay in cash, you can’t afford what you’re driving…
I’ll second that. that is something that my grandfather always told me and followed in his own life as well. If you can’t pay cash for it, you don’t need it.
You should avoid borrowing money to buy anything other than a house. There are exceptions to that of course, like you have a bunch of bills hitting you all at once depleting your savings, and then a storm damages the roof on your house. Obviously, you borrow the money to repair the roof and avoid further damage to your home. But, these are rare exceptions, not the norm.
While threeer has a good point, and many people would do well to follow his advice, there is a difference between being able to afford to pay a car in cash and actually doing so.
Car loan rates are among the lowest you can get, so if you have the cash to buy a car, don’t give it up all at once. Put it into a high-yield account of your choice, get the car loan, and make the payments out of said account. That way, you’ll actually be making money on the finance-rate difference between the bank account and the loan. Don’t throw away your liquid assets without thinking.
“Car loan rates are among the lowest you can get, so if you have the cash to buy a car, don’t give it up all at once. Put it into a high-yield account of your choice, get the car loan, and make the payments out of said account. That way, you’ll actually be making money on the finance-rate difference between the bank account and the loan. Don’t throw away your liquid assets without thinking.”
Not good advice. Those rates can be adjusted downward quite dramatically. I’ve had a 30 day CD that paid as high as 5.5% last year scheduled to pay only 2.76% starting the 11th. Thankfully, the bank offers to beat any other rate for a similar term CD by .05% so it will be 3.9% for now. But most folks looking at semi-liquid investments will likely have trouble finding anything north of 4% in the times to come, and that’s before taxes knocks down the return to a below-inflation rate.
There is no reason why someone can’t buy a perfectly good, conservatively driven, 7 year old car for $5000. Keep it for seven years (or more), sell it for $1500 and repeat. Tom & Ray Magliozzi from ‘Caralk’ fame have covered this issue in depth. The best car value in the market for long-term costs remains a seven to nine year old vehicle that has been maintained and driven well.
I’d assume that someone taking out either a 72- or an 84-month loan hasn’t fully pondered the implications of their car getting totaled in a collision while they’re still paying the loan.
Last time that happened to me, I came out ahead $2000 — ’cause I didn’t have no 7-year loan.
PCH,
You got the math right, thanks. AND, I made another bad assunption as well. Anyone know how many new cars are NOT financed?
OK, car weenies….
In the real world, where they don’t know why the car begins to shake at 60k, payments are all. Really.
An interest rate book is foreign to many car buyers. Not all, certainly, but a significant percentage of the market.
You are not normal.