Tag Archives: 8 year car loans

Someone Asking for Help – and I’ve Got Nothing…

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Welcome to my very depressing day! My 11-year old car has a cracked thermostat cover, which translated to no heat for the last two weeks, and getting to part with $485 today.

But if that seems bad, it’s also the first time an emailer has me really depressed. Others email me and I respond with what I would do in their situation. I have no idea if they ever take the advice or if they were just looking for a quick way out – there never is one.

But this person is in it deep. I emailed him back to first decide if he wanted some painless solutions that’ll just have him in the same financial nightmare in a decade when he’s retired, or if he’s prepared to do what it takes. In other words: Not have a life for the next 18 months to work his way out of a huge hole. Today, I’m actually hoping he doesn’t email me back because this isn’t solvable for five more years. OK, I didn’t mean that, but I can explain why I said that in frustration:

He has a vehicle financed for eight years. Yes, you heard that right: EIGHT years. AND it’s one of the fastest depreciating vehicles around AND it’s a pig on gas. Right now, after two years of payments, his balance is $44,000. The most optimistic sales value today is half of that. Yup – he’s $22,000 in the hole – and won’t be at a balance that equals the value for another five years.

That’s bad enough, but the payments are $650 and $350 gas and $130 insurance and around $70 maintenance. That’s $1,200 a month. So he has to earn $2,000 of gross income, pay taxes, EI, CPP, etc. to have $1,200 left over.

So if $2,000 of his pay is gone right off the top, plus rent, plus food and normal bills, where is the ability to pay off or to pay down a $30,000 credit card, or $25,000 line of credit? With what money? Saving $50 on food won’t cut it. The car can’t be sold in order to drive a $3,000 vehicle for a couple of years, and there aren’t savings on utilities, cable TV or a $50 cell plan.

How exactly am I supposed to help this person? Oh boy, this is depressing. And he didn’t get ripped off on the vehicle – he did this to himself. Again, I’m not anti-new vehicles. I’d love to own one and would love you to drive a new vehicle. But only if you can afford it – and certainly never on the eternal eight year finance plan. The definition of afford it is to be able to write a cheque for the purchase! An eight year loan is not in the definition of being able to afford it!

I’m going to live for the day when someone emails me for help the day BEFORE they put themselves into a situation where there’s no way out!

George Boelcke – Money Tools & Rules book – yourmoneybook.com

Eight Year Car Loans? Yikes!

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The average Canadian car loan is now 71 months. That’s up almost a full year from 2008. It’s pretty clear that prices go up, but people’s budget doesn’t grow. So what’s the solution? Stretch that loan out. It used to be four years, which is reasonable financing. Then it became seven years at almost doubles the interest. But most people don’t care. They just want to know what the payment is.

To make the payment fit even better, the last year has seen a huge increase in advertisements for bi weekly payments. Want to see a smaller payment? That’ll do it. Oh, not in reality because you’re paying twice a month – but the illusion of lower payments is magic that does trick a ton of buyers. When the average vehicle payment hit $450 a month, that’s a big number to think about. OK, how about $225? Will that make you feel better? Unfortunately, it’s still $450 a month – it just sounds better – it doesn’t cost any less per month.

You can now get eight year financing – whether you prefer not to know that by just taking bi weekly payments or not – it’s insane for your budget and debt load. Your rough break-even point where you’ll owe what it’s worth is five years. If you could get a 50-year mortgage, it’d be stupid, but you know historically that your home will increase about 5% a year. Yes, there’ll be corrections, but over the long term, it will go up. With a vehicle, it’s a 100% guarantee it’ll go down in value every single day. So you have to pay enough a month to keep up with the depreciation. Whether you like it or not you gotta pay for what you use.

According to industry forecasters, Canadian sales of 1.7 million a year should continue to increase because millions of people are shrinking their buying cycle. In other words, they’re trading more often. But at the same time, they’re stretching the length of their loans, and that’s a deadly combination.

Longer financing and wanting to trade quicker means huge numbers will be upside down and owe more than their trade is worth. According to J.D. Powers, that’s already the case for more than a third of all buyers.

If you have the cash to buy a new vehicle – congratulations. For the rest of the world, spend the $20 for the It’s Your Money book. 15 minutes reading the car buying chapter will turn your $20 investment in the book into $1,000 to $4,000 in savings.

Just remember: Broke people ask: How much a month. Wealthy people ask what the price is.