Comparing auto loans

The Consumer Financial Protection Bureau (CFPB Has a helpful worksheet for persons shopping for a vehicle loan. See: https://files.consumerfinance.gov/f/documents/201606_cfpb_auto-loan-worksheet.pdf

Learn what questions to ask about vehicle financing:  https://www.consumerfinance.gov/consumer-tools/auto-loans/

If you are having trouble paying your bills during this period of high inflation, watch the video Prioritizing Bills: https://www.consumerfinance.gov/about-us/blog/tools-to-help-pay-bills/

The CFPB is a government agency with an abundance of practical financial information and advice. Check out: https://www.consumerfinance.gov/

 

The Seven-Year Auto Loan: America’s Middle Class Can’t Afford Its Cars

Do you wonder how your neighbor affords a new vehicle every few years? The truth is often ugly!

Ben Eisen and Adrienne Roberts explain in The Wall Street Journal: "Approximately one-third of loans on new vehicles agreed upon in the first half of 2019 were for more than six years,compared with less than 10% a decade ago, according to Experian. With increases in vehicle prices outstripping income growth, the trend is seen as an indication many households struggle to finance their lifestyle."

"For many Americans, the availability of loans with longer terms has created an illusion of affordability. It has helped fuel car purchases that would have been out of reach with three-, five- or even six-year loans."

If you've ever tried to buy a vehicle with cash you likely experienced the hard sell to finance it instead. A buyer can feel like they are being held captive by the dealership if they want to make a cash purchase. That's because "dealers now make more money on the loans their customers take than on the cars they sell."

"The average loan stretches for roughly 69 months, a record. Some last much longer. In the first half of the year, 1.5% of auto loans for new vehicles had terms of 85 months or longer, according to Experian. Five years ago, these eight- and nine-year loans were practically nonexistent."

"As a result, a growing share of car buyers won’t pay off the debt before they trade in their cars for new ones, either because the car is in need of repairs or because they want a newer model. A third of new-car buyers who trade in their cars roll debt from old vehicles into their new loans, according to car-shopping site Edmunds."

And people wonder why so few Americans are financially prepared for retirement!

42% of vehicle loans are for 6 years or longer!

One of my favorite quotes: "Cars depreciate faster they they roll downhill" comes from bankruptcy research by Sullivan, Warren, & Westbrook.
What are buyers thinking if they sign up for a 6 year car loan? The Consumer Financial Protection Bureau (that Republicans want to eliminate) reports that a rapidly growing number of vehicle loans are for terms of 6 years.
It never makes sense to borrow for more than a 2-3 year term to finance a vehicle. While it is best to pay cash for a depreciating asset, it can make sense to borrow a modest amount for a couple of years to build up one's credit record. Showing you can pay off a loan on a regular basis with no missed payments can be a good way for a young adult to build their credit history.

Financing an Automobile

Taking out a loan to purchase an automobile can be a significant part of consumers’ financial lives. And it is a complicated process.  The decision to obtain auto financing includes many factors, including the source of financing, features of the loan, and issues related to down payment, trade-in, and add-ons. To help consumers navigate this process and get the best loan for their situation, the CFPB has released a new set of resources called Take Control of Your Auto Loan.

1.  Take Control of Your Auto Loan website

This web page has easy-to-navigate information and tips on planning to shop for an auto loan, learning to explore loan choices, knowing what is negotiable, and understanding how to close the deal. You can access the website here.

2.  Auto Loan Worksheet

Consumers can use this worksheet to compare loan offers, see the total cost, and negotiate the best deal on an auto loan.  You can access the worksheet here.   

3.  Take Control of Your Auto Loan: A step-by-step guide

Consumers can use this printable guide to navigate the auto financing process, including budgeting considerations, understanding the auto finance process, shopping for an auto loan, negotiating and closing the deal. The guide also emphasizes how to avoid common pitfalls. As a financial educator, you can also use this guide to familiarize yourself with the auto finance process, so that you can provide helpful guidance to those you assist. You can access the guide here.

4. Consumer Voices on Automobile Financing

This report describes the findings of consumer focus groups and consumer complaint data about the challenges of navigating the auto financing process.  We found that many consumers reported they did not shop around and negotiate as much for the financing as they did for the vehicle itself.  The complaint data showed that consumers faced challenges in understanding loan features during negotiations on financing. You can learn more about these findings here.

5. Ask CFPB auto loan questions

There are updated questions and answers about auto budgeting and financing in the Ask CFPB database of consumer questions.  The Ask CFPB auto loan questions can be found here.

Beware Auto Title Loans

Rise in Loans Linked to Cars Is Hurting Poor, Christmas Day, The New York Times, describes the shift from paydayloans to auto title loans as a way to exploit consumers desperate for cash to pay bills. See: http://dealbook.nytimes.com/2014/12/25/dipping-into-auto-equity-devastates-many-borrowers/?emc=eta1&_r=0

  Within two days the article by Jessica Silver-Greenberg and Michael Corkery had generated 500 comments! Even if you haven't been tempted, it's a development that further widens the gap between the rich and poor in this country. Speak up to your legislators and let them know that these loans should be regulated. But, more important is the need to raise the minimum wage in order to allow workers to live with dignity. 

4 Rules for Vehicle Loans

Although it is ideal to pay cash for a gently used car that is rated highly by Consumer Reports, most vehicle buyers take out a loan. Note that getting a modest car loan and repaying on time will boost your credit score for young people with slim to no credit history.  One of my favorite quotes is from a team of bankruptcy researchers (Sullivan, Warren, & Westbrook): “cars depreciate faster than they toll downhill.” So keep that loan to a modest amount and be realistic about what you really “need’ in a vehicle.

1.      Know your credit situation. Go to annualcreditreport.com to review your free credit report.

2.      Shop around for a loan. NEVER get your financing from the dealer.

3.      Don’t be upsold.  Decide before you go what you can afford and stick to your plan. Skip the rust proofing (no longer needed on new cars), extended warranties, etc. Dealers push they add-ons hard because their profit margins on the vehicles themselves are slender as consumer shop on the internet.

4.      Avoid the Yo-Yo trap of conditional financing. Arrange your loan ahead of time from your credit union or bank.

Read the details at: Time/Moneyland http://moneyland.time.com/2012/06/18/4-rules-for-getting-a-car-loan/?iid=pf-main-lede