Seven-year Auto Loans a Terrible Idea

Posted by: David Kiley on April 1, 2008

Leasetrader.com spotlights today what an awful idea it is for consumers to take out a seven year auto loan being offered by companies including Toyota’s captive finance company and others.

I have written about this before, going back to my days at USA Today hen automakers wrote tons of bad loans after the terrorist attacks on Sept. 11. One of the awful things that happens is that once upside down in a car loan, a car owner goes back to the dealer, and the dealer sells the person another car, and rolls the difference between what the trade-in is worth and what the borrower owes into the new loan. I reported a case once where some poor toad owed $12,000 on an eight-year old Escort.

Yes, people are responsible for their own borrowings. But some consumers are more sophisticated than others. And car dealers are among those who often take advantage of the less sophisticated. Sorry dealers, but it’s true.

From Leastrader.com: Consumers that agree to these terms will pay for their car for seven years. Similar to the problems plaguing the current housing situation, these loans could damage both consumers and banks that participate in the lending. At 84-month terms, a $20,000 car will cost an additional $5,335 in interest alone – roughly a quarter of the entire car’s price.

“In today’s economy, people are finding it harder to project their financial situation over a longer period of time,” said Sergio Stiberman, CEO and founder of LeaseTrader.com. “It’s much easier to calculate and project your financial situation for the next couple of years than an 84-month period. And with all the uncertainty in today’s economy, it’s very unsettling to assume your financial picture six or seven years from today.”

Leasetrader is an interesting service that matches people with lease holders who want to get out of their car leases early. If one person with a lease drives their car for two of the three year lease contract, and needs out of the deal, a consumer can pick up the remaining year of the person’s lease.”

Reader Comments

Noz

April 1, 2008 8:56 PM

Could not agree more with the assessments of this badly flawed plan to 'move the metal' at all costs. A terrible idea, just another version of the shades of the housing mess we face now. Further evidence of just how far greedy mer-chants will go in their marketing to the mentally/educa-tionally-challenged. I have to add that the buyer's con-tracts will be sold to others leaving the dealers and their manufacturers free and clear when the crunch comes. And it will just as dawn follows sunset. Big Bad Al Gore to the contrary, of course.

Po' foke should be buying used, the pickings are better than ever with the longer-lived vehicles made by many, but certainly not all. Stay clear of anything from the Failing Three, for example. Check out Consumer's Reports for the good and the otherwise and buy accordingly.

But then reading implies at least the basics of literacy with just the bare hint of simple calculations, something lacking for some two or more generations of high school/college socially-promoted graduates now. Thanks leftists. The 'lifting by the boot-straps' has resulted in a bunch of strap rip-outs/rip-offs. There is really no cure for funda-mental ignorance, GM is banking on this! Ford as well. As to once proud Chrysler, well, who knows?

Squeezebox

April 3, 2008 4:55 PM

I think the longer terms are okay, since cars are lasting longer than they used to, and they need less maintenance. What I don't like is rolling one loan into the next. Is this loan going to be fully secured by an asset (the car) or is it a credit card loan (unsecured, riskier, and at a higher rate of interest)? Lenders need to tell borrowers in plain English (or whatever language the borrower speaks) what is securing their loan and how much interest they will pay because of it.

Karl

April 4, 2008 9:36 AM

A seven year loan might not be that bad of an idea IF the person buying that car was going to keep it for 10 to 20 years. The problems are these; most peole want a new car every 3 or 4 years & almost every car made today WILL NOT LAST more than 6 or 7 years!! Google this: ENGINE SLUDGE and read all the complaints about Toyotas at the consumeraffairs website!! ESPECIALLY the 'Airbags' complaints!! Go SLOW if you drive a Toyota!! There's a 20 year old Honda in our garage that runs well & gets 35mpg. And there's a 21 year old 911 Carrera our garage that looks, runs, and smells brand new!! There is NO substitute!!

Nichole

April 4, 2008 2:26 PM

Hi, my name is Nichole from myride.com. It's important to know all the facts
about leasing before you sign anything. While it might be easier to just
think short term, leasing isn't for everyone. For instance, many leases
include a limit on the mileage you put on a car. So if you change jobs
and have to commute, you might end up paying big in end. Here is a great
article comparing the pros and cons of leasing and buying
http://www.myride.com/research/editorial/makeandmodel/mixedsources.html?
editorialId=1326

karl

April 9, 2008 3:28 PM

Your old fine cars from Honda and Porsche certainly do not meet the air quality standards of today. Please do us a favor by sparing the air, buddy? cough cough....

Gumby

April 9, 2008 3:29 PM

karl
what we are needing to discuss about now is the solvency of GM and Ford not your long lasting cars... Wait until the next recovery comes before you can resume your boasting...

Jim Ferraro

April 14, 2008 10:24 AM

This would only be a good idea on a LONG term own, like a Audi TDI or classic car that won't be driven much.

For daily drivers, this is dangerous business becuase people have shown, in general, they will gointo debt to the extent they are allowed.....just another step solidifying a debt driven society.

Kevin

January 27, 2009 12:55 PM

I disagree with this article. If I have a steady job and choose to pay all the extra interest over the life of the loan, that is my decision. I have a 20 year boat loan, why can't I get a 20 year car loan and buy a ferrari. Doesnt make sense.

yanagida

August 9, 2009 10:52 AM

Consumers have choices to make when deciding to buy or lease, to buy used or new, to assume an existing lease or initiate a new lease and for how long.

The starting point for any of the above is being an informed consumer,the automotive and general marketplace is akin to a jungle, predator and prey and thus survival of the fittest is the order of the day without regards to the other guy, that's the structure, admit it or not.

Having said that, if an informed consumer chooses to take a 7 year auto loan because it suits their needs now then who can argue about the availability of such a loan? not me.

I personally used the services of one of those lease assumption web sites http://www.switchtrader.com and it worked out fine for me. Be informed and make your choices accordingly.

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