December 4, 2013

In years to come it could be a problem for manufacturers, lenders and dealers to continue at the present rapid pace with long term loans. The fastest growing category in new and used financing is the 73 to 84 month loan. And to a lesser degree, 96 month loans.

It is a positive for the dealer when a customer can purchase a more expensive auto with a longer term and lower monthly payments than they otherwise could afford. But the downside is several-fold. Consider the fact those 84 months equals 7 years. After 7 years will the vehicle have a reasonable trade-in value? What are the odds that the customer will return to the same dealership? What if the customer decides to trade the vehicle after 5 years, will there be any equity?

Lorraine Sommerfeld, a writer for the Globe and Mail, Toronto, ON, Canada wrote:

My favorite argument, ever, on why leasing is magic goes like this: the money you save by leasing over buying goes into a separate account. At the end of the leasing term, you have a pot of gold to go buy another car. Except you didn’t have that margin of cash to begin with, which is why you are leasing. Hans Christian Andersen had nothing on a good salesman.

Just because you can, does that mean you should?

Most of us know the answer to that. There is a time to stop wearing miniskirts just as there is a time to stop using the word “dude.” Most of us recognize that time, even if it’s a little belatedly in some cases.

So who thinks a 96-month-car loan is a good idea? Everyone has heard someone say they have a 23-month-old child, and your brain tells you they have a two-year-old. Though that parent is striving to be precise, in the car industry that number fudging is being done for the opposite reason: to muffle the noise around the fact you just signed on to take eight years to pay off your car.

Snoop past the icing on these deals, the zero percent financing and the no-money down. Add up the total cost, take a hard look at the shiny asset that will only become a liability and decide if you want to be making payments when your third grader starts driving.

Sorry, I mean your 96-month-old.