Vehicle Financing

[Bob B.]

I had a chance to listen to a bit of the Clark Howard show this weekend. According to Clark, one out of three vehicles purchased in the US are financed for a six-year term.

I know that the general rule on this forum is to finance a vehicle for no more than 36 months, and to spend no more than 10% of income per month on the payment.

Clark's general rule was to finance for no more than 42 months. He didn't give a guideline on monthly expense, but basically said that if you can't afford the payment on a 42 month finance term, the vehicle is too expensive for you.

36 months vs. 42 months is kind of splitting hairs, when compared to advising against a 72 month term.

[bjl584]

Yes, definitely splitting hairs when compared to a 6 year loan. Rules of thumb are just that, general rules. Everyone's unique situation is different. The 36 month guideline is just a good place to start.

[disneysteve]

42 months is a rather odd number. I wonder how he arrived at that. You can't get a 42-month car loan. They are done in multiples of 12 typically so 36 or 48 (or 60 or 72 unfortunately). I have no doubt that the majority of loans exceed the 36 (or 42) month recommendation because the majority of people are clueless and broke. Houses and cars are the two biggest reasons most people are in the shape they're in.

[Bob B.]

42 months is a rather odd number. I wonder how he arrived at that. You can't get a 42-month car loan. They are done in multiples of 12

Our credit union offers vehicle loan terms in multiples of 6.

[JoeP]

I prefer to pay myself for 36 or 42 months (actually 48 months) and then pay cash for a car.

This is how we operate.

[scottgriffin]

Smaller Monthly Payment For Sure

I have bought over 14 cars in my lifetime and what I have found to be the best is this. By putting down more for the down payment you will have a much lower monthly payment depending on your interest rate. But I have found it to be beneficial to put more down on the down payment and have a lower monthly payment. What would you rather have a 500 dollar monthly payment or a 200 dollar monthly payment?

[greenskeeper]

I have bought over 14 cars in my lifetime and what I have found to be the best is this. By putting down more for the down payment you will have a much lower monthly payment depending on your interest rate. But I have found it to be beneficial to put more down on the down payment and have a lower monthly payment. What would you rather have a 500 dollar monthly payment or a 200 dollar monthly payment?

I choose no payment. Always pay cash and drive till they fall apart. Newest vehicle I've owned was 5 years old when I got it. Currently have a 98 jetta TDI and 97 F250 powerstroke. Each should be good for at least 400k miles.

[siggy_freud]

I choose no payment. Always pay cash and drive till they fall apart. Newest vehicle I've owned was 5 years old when I got it. Currently have a 98 jetta TDI and 97 F250 powerstroke. Each should be good for at least 400k miles.

If you're the type that uses/views cars as a utility this could be okay advice. For some of us, it's more than that (sometimes a hobby), and often paying cash simply isn't realistic, or even the best advice. With new car rates at 2.69% I'd rather take the cash and invest it elsewhere for a higher return.

My commute is currently 1 hr each way, about to go to 1 hr 15 minutes. I want something engaging and comfortable to drive if I'm spending 11-12 hours a week behind the wheel. This is where the car splurging comes in.

[cooliemae]

I understand the wisdom of a 36 month loan cap, however just like everything in life it's really dependent on the situation. My wife and I purchased a new car when we had our son and i recently refinanced it through PenFed to take advantage of their 1.49% APR. Even though we were well on our way to paying off the loan, we decided to refi it over 60 months in order to make our monthly payments quite a bit smaller. Even with the extended refi we would end up saving $1,000 in interest.

Why do this...uncertainty. We both work for the federal government and in times such as now, we are not sure about our job security, so we wanted to make sure that we had a small car payment just in case we were to lose our jobs. That being said, we are still paying as much on the car loan as we were, so the loan will be paid off before the 5 year mark comes close, but it brings a bit of peace of mind knowing that if something happens we have some added wiggle room in our monthly expenses.

In fact, I heard Clark Howard today talking about home loans and how everyone should just take a 30 year fixed mortgage and then simply pay off more principle as your budget allows. To me this is the same principle just applied to cars. However, like most financial products, you must be knowledgeable and disciplined in order to maximize the benefits of your financial decisions.

[disneysteve]

In fact, I heard Clark Howard today talking about home loans and how everyone should just take a 30 year fixed mortgage and then simply pay off more principle as your budget allows. To me this is the same principle just applied to cars. However, like most financial products, you must be knowledgeable and disciplined in order to maximize the benefits of your financial decisions.

I think it is both good advice and, for the vast majority of people, wrong advice. The fact is that most people don't have the discipline to maximize the benefits. They will always manage to find another use for the money that they said they would use to pay down the debt early thus losing any possible benefit.

Many of the regulars here at SA are in that minority that can really play the game to our own advantage whether it be with credit card offers, reward programs, low interest loans, etc. For us, doing these things truly does save us thousands of dollars. For the typical American, however, these things can be huge traps that just get them in deeper trouble. They sound good on the surface but unless you have the discipline to stick with them, they end up costing you money.

[snafu]

From all I've read and money problems described on SA, a majority of people buy cars based on what they believe they can manage monthly payments. At the dealership the sales staff try to qualify the buyer and push the vehicle that meets their monthly payment and whose commission satisfies the seller. The majority of buyers don't identify what they need in a vehicle and mostly love the small extras like heated seats, OnStar service, built-in blue tooth etc.

I know 3 people who have Escalades and I've been trying to figure out why they bought vehicles they can't afford, don't work very well, don't meet their city driving needs and are super expensive to insure. I wish I could think of a tactful way to ask 'what were you thinking!'

[disneysteve]

From all I've read and money problems described on SA, a majority of people buy cars based on what they believe they can manage monthly payments.

I've been trying to figure out why they bought vehicles they can't afford

I think you really answered your own question. Most people buy based on the monthly payment, not the purchase price. If they can afford $300/month, they don't care if that is for 3 years, 4 years, 5 years or 7 years. As long as the payment is "affordable" they don't care what the total is.

Why someone would buy a vehicle that doesn't meet their needs is a whole other question that goes way beyond finances.