Government proposition to adjust auto loans

[blue_myriddn]

Full details here (sort of): http://oppositelock.jalopnik.com/government-says-10-downpayment-required-on-auto-loans-1486177241

Quick summary:
Goal ~ reduce the amount of debt that Americans load on to themselves.
Original proposal ~ auto loans will need to require 20% down and cannot extend past 5 years.
Revised proposal ~ changed to 10% down & 6 years.

I personally think this is a good call. I have no problem with the government playing referee and designing rules for the overall health of the economy.

Shortcomings that I see include:

1. Enforcement
2. Leases should sky rocket, and they are bad news for people in high credit risk situations.

I know that many of you have extensive knowledge of the automotive sales business though, so I would be curious on your thoughts.

 

[BATMANs]

Shortcomings that I see include:

3. A slow down on car purchases (especially new cars)
4. Auto maker lobbyist do some bitch slapping around at capital hill and gain more power
5. NSX goes down in value for the ones that can be financed (usually no older than 10 years old cars)

 

[docjohn]

are the proposed rules same for new vs used?

 

[blue_myriddn]

are the proposed rules same for new vs used?

Good question, and the article I linked to only had this to say, which wasn't very satisfactory to me. I am hoping someone more knowledgeable will chime in.

"For a used vehicle, the loan agreement must provide that the term of the loan, plus the difference between the current model year and the vehicle's model year, cannot exceed 5 years"

So lets say you are buying a 1991 NSX. What is the "current model year?". If you used 2005, you would yield a difference of 14 years which clearly exceeds 5 years!
On a more realistic note, lets say you are buying a 2008 Camry, that already exceeds the 5 year max - so is the car unable to be financed?

There has to be more to the story.

 

[bngl3rt]

Yes, car makers would really love to kill the used market dead, since it takes money out of their pocket... they want dealerships to have a monopoly on financing by making it illegal to finance any car that's not either new or CPO.

Awesome.

But of course, it's "to help Americans" by not *tempting* them to finance irresponsible old cars like the NSX. uh huh. of course.

 

[BATMANs]

Actually I think dealers like to sell used cars since it's hard to compare prices since no 2 used car have the exact same condition and miles and options and mods - even among the same make/models.

There are usually more margin with selling used cars on average.

 

[naaman]

I really hope this gets shot down....

- - - Updated - - -

Come to think of it, this might just reduce auto purchases altogether as people will not be able to afford the monthly payments, so they will just keep what they have and fix/maintain it.

I, for one, dont like the idea of a $500/month payment on a Corolla or some other equally lame piece of "practicality." Economic cars need to be economic in all areas, not just at the pump, or the purpose is defeated.

 

[Juice]

Hmm mm.... The government placing controls over the "free market". Every time I here about the next great thing our government will do for us, I start looking into the cost of one way tickets to lands that offer better weather options.

 

[jond]

Anything more than a 6 year loan, and people are really going to get hurt IMO.
What happens on year 5 when you need a timing belt, water pump and you still have car payments you can barely afford?
If they're going to regulate payday loans, capping interest at 30% or whatever, then this seems like the same thing to me.

.

 

[DRIFTER]

So the government can be trillions in debt but they say I need 20% down to buy a car GTFO. Wake me for the revolution.

 

[naaman]

LOL!!!!

I really don't see how this will "help" anyone. It seems like some sort of strategy to get older vehicles off the road (for what purpose? I don't know, maybe newer cars will have tracking devices in them mandated by federal regs). It's a total load of crap.

 

[blue_myriddn]

Person #1 wants to buy a $8000 2009 Used Chevy Malibu from their dealership. They don't have a lot of money, so they are looking to finance the car. They also don't have great credit, so they aren't going to be getting a 5% deal - more like 8-10%. Lets say 8.9%.

They put 20% down ($1600) to reduce the loan cost to $6400 and opt for the 5 year loan which gives them monthly payments of $132.54. After 5 years, they have paid a total of $1552.28 to the bank in interest for the loan - or roughly 20% of the value of their car. Another way to look at this is that when you finance a car over 5 years and have mediocre credit, it is like the opposite of having a 20% off coupon, you have a 20% MORE coupon.

That kind of sucks, but that is just part of the downside to not saving money and is sort of how the system work.

But wait - here comes the savvy car salesman! He asks you not how much you want to spend, but how much PER MONTH you can afford. You answer about $132 and he says that he can drop $800 off this great 2007 Cadillac and get you special finance terms so that you can drive off in this Cadillac rather than a crappy Malibu. You also don't need any money down, save that cash to buy yourself a new suit so you look stylish in your Cadillac! You think - wow, that's a lot cooler. Financial wizards are great if they can figure out a way for that to happen!

Well, here is how the "magic" works. You get a 8 year loan, again at 8.9% yielding you $132.85 per month similar to the example above. This time however at the end of 8 years you have now paid $3653.14 to the bank in interest for the loan - that is roughly 40% of the value of the car.

As sad as it sounds, most people don't understand the math and are walking in to car dealerships with coupons that say "I will pay 40% more for this car". This is a predatory practice and is the type of thing that a government is well within their bounds to do in my opinion - protect the people. It also goes a long way towards preserving a healthy middle class which is an overall good thing for the country - rather than a country with a lot of wealthy bankers.

 

[Juice]

So your point is that people are too stupid to understand that an 8 year loan is longer than a 5 year loan?

 

[pjr300]

in some cases!

actually, most dealerships see a higher gross on used vehicles than sales of new ones.

 

[SilverStone05]

So your point is that people are too stupid to understand that an 8 year loan is longer than a 5 year loan?

His point is he, and obviously, the government knows whats best for me....and you....and everyone else.

His point is- responsible folks who know what they are getting themselves into must subsidize the stupidity of someone who wants a new Escalade and will take any financing possible to get it.

What is happening to our country? :frown:

 

[blue_myriddn]

responsible folks who know what they are getting themselves into must subsidize the stupidity of someone who wants a new Escalade and will take any financing possible to get it.

Essentially - yes. It is in our interest to do so too as it keeps them from turning to crime, violence and extensive government safety net programs. The return on capital to "subsidize" programs like this is a winning argument from my point of view.

Honestly, it has little impact on me as I do the math and use minimal financing. Should have minimal impact on any sensible customers to be honest.

 

[Juice]

So it's, "I'm better than you, smarter than you, and so shall govern you."

Got it.

 

[SilverStone05]

Essentially - yes. It is in our interest to do so too as it keeps them from turning to crime, violence and extensive government safety net programs. The return on capital to "subsidize" programs like this is a winning argument from my point of view.

Honestly, it has little impact on me as I do the math and use minimal financing. Should have minimal impact on any sensible customers to be honest.

All incorrect.

The unintended consequences of a law like this will cause havoc.

1st - the cost of capital will go up FOR ALL borrowers (including you) as banks will not be able to properly price based on risk
2nd - folks who are desperate for financing will turn to even more risky avenues (payday loans/credit cards/unsecured loans)
3nd - demand for cars, used and new will fall
4th - car sales overall will drop
5th - reduced economic activity

The cycle continues. A net negative on society, buddy- plain and simple....just look at what happened with the CARD act....its a classic example.

Individuals should bear the consequences for their actions. That's how we learn.

I can't imagine why anyone would approve of the government stripping consumers of their right to choose. This is still a free country, no?

The government should not pick winners and losers. It should guarantee equal opportunity. That's it. We all have the means to properly investigate a financing arrangement before we sign on the dotted line...the problem is some simply don't want to do so or just don't care.

 

[DocL]

...

Individuals should bear the consequences for their actions. That's how we learn.

I can't imagine why anyone would approve of the government stripping consumers of their right to choose. This is still a free country, no?

The government should not pick winners and losers. It should guarantee equal opportunity. That's it. We all have the means to properly investigate a financing arrangement before we sign on the dotted line...the problem is some simply don't want to do so or just don't care.

How is this any different than the Affordable Healthcare Act?

 

[SilverStone05]

How is this any different than the Affordable Healthcare Act?

I don't believe it is any different at all. In fact some of the unintended consequences of the not so aptly named ACA are playing out as we speak. :frown:

But there is an ACA thread somewhere here in off topic where we can discuss further if you'd like. :biggrin:

 

[blue_myriddn]

.just look at what happened with the CARD act....its a classic example

Interesting choice of example. So far, the CARD act has had zero impact on me personally and according to studies, seems to have done exactly what it intended. I would like to hear the other side of the coin though, so please elaborate in the direction you are going. As far as CARD reducing profitability for the banking industry, that simply hasn't happened. The banking industry is doing quite fine.

there is in fact a nice quote from the article I linked to, which applies to this discussion as well:
One answer may be that financial services are peculiarly suited to deception, particularly of relatively unsophisticated consumers. Reduce or eliminate the possibility of deception and you may allow competition to work to the benefit of consumers.

Individuals should bear the consequences for their actions. That's how we learn.

100% agree with this. However, it does not apply to this discussion. There is no learning for the person who takes out an 8 year, zero down loan because all it does is keep them poor and they are entirely unaware of the summation of small impacts that are keeping them poor. Sadly, people are poor at judging their own mistakes and thus do not learn that their actions are to blame. Especially when we have a well crafted media that ensures a finger is always pointed at someone other than their audience (George Bush, Obama, Congress, wealthy bankers, black kids in hooded sweatshirts, the list goes on and on).

The government should not pick winners and losers.

This is also something I 100% agree on. Investing in companies like Fiskar or Solar tech is an example of the gov't far overstepping its bounds and trying to pick a winner. The consequences there were quite clear. Eb-5 visa programs are another intrusive gov't example that continues to create failure.

I view the economy similar to a game. People can get out on the field and battle it out until the best idea/person/whatever wins the prize of $$$. As with any game though, there needs to be rules and someone to enforce those rules. That is where I see gov't stepping in - their role is to be the referee. The problem occurs when they try to participate in the game rather than staying on the sideline by favoring one side or the other.

It should guarantee equal opportunity.

This however, I do not agree with.

Thanks for chiming in though, as I said I do welcome discussion.

 

[Vega$ NSX]

Bring back Cash for Clunkers! :wink: :biggrin:

 

[SilverStone05]

Interesting choice of example. So far, the CARD act has had zero impact on me personally and according to studies, seems to have done exactly what it intended. I would like to hear the other side of the coin though, so please elaborate in the direction you are going. As far as CARD reducing profitability for the banking industry, that simply hasn't happened. The banking industry is doing quite fine.

The CARD Act was a perfect choice of example. You tell me how this bill helped consumers:

FACT: By direct cause of the CARD Act credit card interest rates as a whole have increased for everyone. In fact, the folks with poor credit are actually bearing the worst impact as they are the group that experienced the highest overall interest rate hikes and the vastly reduced availability of credit.

FACT: In addition, the folks who were more responsible with their credit have also found themselves with higher interest rates across the board as well as reduced rewards programs. 2 of my American Express cards and my Discover card were victims of the reward program reductions.

FACT: The program was and is a failure. It was essentially a revenue model transfer from fees to interest rates that reduced credit to those who needed it the most. To advise otherwise is statement of ignorance. Brilliant for the politicians and the uninformed- they can pretend they did something for Joe Blow, pat each other on the back- all the while allowing the banks to extract even MORE money from consumers in a more sophisticated way.

http://www.npr.org/templates/story/story.php?storyId=126025844

http://money.msn.com/credit-cards/is-card-reform-costing-billions-cardratngs.aspx

http://www.foxbusiness.com/personal-finance/2011/06/02/5-unintended-consequences-credit-card-act/

http://www.cbsnews.com/news/study-credit-card-law-has-cut-consumer-costs/

 

[heathbar0]

Silliness.


This is the bank's responsibility, not our Government's.

If the bank wants to give a questionable loan, let them do it.

No government bail out. Sleep in the bed you made.



This is so silly, soon the government will be making sure we use the bathroom in a timely fashion so we don't soil our pants... Just like Kindergarten.

 

[nsXgnX]

I agree with this program/policy ONLY if it is applied to people with less than perfect or below average credit (excluding finances). Why should people who are responsible be punished for the actions of people who aren't financially responsible? What are the perks for playing by the rules? What's in it for the people who never default? Why should people with excellent credit be "bundled" in this risk management when they show NO history/signs of risks?

If you have A or B credit you should be exempted; C, D or F credit, welcome to the new law. I believe most people who have excellent credit but low on income will not make stupid or uneducated decisions, they are not going to buy something they can't afford. If the threshold for DTI is 36 % but someone with excellent credit is in the 40% they shouldn't be punished, although it seems they are stretching a little, they show a history of paying on time.

People with excellent credit and low debt to income ratios EARNED the right to get ZERO down, 1% interest, and 999 month loans. If they want to keep that 10% in their investments as interest earning cashflow instead of porking it on a downpayment that's their hard earned right.