Sunday, June 25, 2006

So What's My Monthly Payment?

From Yahoo Finance:

How the Monthly Mentality Messes Up Your Wealth
by Laura Rowley

Housing prices are coming down in my New Jersey town, with properties virtually flooding the market, compared to summers past. This tempts me to surf the local realtor Web sites, trolling for deals.

But I can't bring myself to trade up. The main problem, as I explained to my realtor pal Elizabeth is the taxes. New Jersey's property taxes are, in a word, ridiculous -- especially to someone who grew up in the Midwest.

For example, it's not uncommon to find a five bedroom, two-and-a-half bath residence in my area with $20,000 in annual property taxes. This is three to five times what my siblings in the Midwest pay. The thought of spending $200,000 over 10 years to get a bigger kitchen and an extra bed and bath makes me gag.

"Most people don't look at it the way you do," Elizabeth told me. "They just look at whether they can afford the monthly payment."

And therein lies the modern personal finance conundrum. From housing to autos to material goods, Americans are bombarded with the notion that if you can afford the monthly payment, you can afford the thing you're buying. What's never discussed is the princely opportunity cost of living on borrowed money -- and how devastating the monthly mentality can be to long-term wealth. But as a variety of recent reports demonstrate, it has become a way of life for millions of Americans.
...
The monthly mentality is also evident in the auto market. Some 29 percent of U.S. vehicle buyers were "upside-down" in their loans in May -- meaning they owe more than the trade-in value of their cars. That's the second-highest level in four years, according to Jesse Toprak, executive director of industry analysis for Edmunds.com. The average amount of negative equity was $3,789.

The reason? Borrowers who otherwise can't afford the cars they want are opting for mega-term loans: In January, 2002, the average loan term was 57.3 months. Now it's 63.6 months. Toprak says 72 months is becoming the norm.

"Unfortunately, we still often see people going to the dealer and saying, 'I want to pay $400 a month,' despite the fact that it's a really bad way to buy a car," Toprak explains. "Extended terms become the only way to get the car they want. They don't see the consequences two years down the road."

Toprak says he's seen a new trend in leasing among upside-down borrowers because it allows them to finance up to 115% of the vehicle's sticker price, whereas a traditional purchase only provides 100% financing. Thus, borrowers can trade in their vehicle and add their negative equity to the lease. It results in higher monthly payments, but at the end of the lease the negative equity is gone. Of course, they don't own anything at the end of the lease, either.

18 Comments:

Anonymous Anonymous said...

I ran into this same problem at a car lot recently. There were no prices on the cars, just what the monthly payment would be. Buy a Porsche for only $550/mo! I asked the salesman why there were no prices on the car. He said no one cares about the price, only what the monthly payments are. Are people really this stupid?

6/25/2006 08:15:00 AM  
Anonymous Anonymous said...

It is what everyone is doing.

People spend $300 on a pair of Jeans or $2,000 a month on clothes and only care about the 4% minimum balance at the teaser credit card interest rate that they need to pay.

Also, you get punished for paying full cash at the auto dealership. A 'cash paying' customer is usually required to pay full sticker price + options for a new car.

Someone who finances with any other provider outside the dealers F&I department gets hosed when buying a car these days. Maybe its because cars like everything else are seeing booming sales in the NYC metro area and dealers have the upper hand.

That employee pricing bullshit of last year only applied if you opted to finance with the dealer and put a maximum of 10% down.
Used car prices (sticker prices) are almost as ridiculous. At least 10% or more over the highest kelly bluebook price. Of course you need to finance with the dealers F&I department with a maximum of 10% down to get anything off that already inflated price.

6/25/2006 08:50:00 AM  
Anonymous Anonymous said...

Very true

About 3 years ago when I bought my new Camry for cash, the salesman almost didnt know what to do..

He kept trying to convince me to either finance or get into a flease.

I got quite annoyed and said if you dont want my money I will look elsewhere. I just couldnt understand it .

6/25/2006 10:13:00 AM  
Blogger chicagofinance said...

BABABABABABBOYCOTT $300 Jeans!

6/25/2006 10:30:00 AM  
Anonymous Anonymous said...

Is true - everyone lives from monthly payment to monthly payment. Question though - what happens to this idea once they stop working?

6/25/2006 11:01:00 AM  
Anonymous Anonymous said...

He kept trying to convince me to either finance or get into a flease.

I got quite annoyed and said if you dont want my money I will look elsewhere. I just couldnt understand it .

Its like when you go to the doctor and have no insurance or the hospital with no insurance. You are charged the maximum rates possible. Same thing with buying a car. If you decide to pay cash or finance thru your own bank or credit union independent of the dealer, you are charged full price for the car or full MSRP+Options.
The employee pricing program was nothing more than a scam to get people into 72 month loans. The media never reported this. If you didn't finance thru the dealer, again full MSRP (no discount) + Options.

Used cars are ridiculous. Almost as expensive as new with less than 50,000 miles on the odometer. At least 10 - 20% priced over Kelly blue book unless you finance thru the dealer.

6/25/2006 11:30:00 AM  
Anonymous Anonymous said...

Well not everyone.

You still have all the trustafarians & e millionaires who populate most of downtown Manhattan. They always have their parents & their trust fund to bail them out and support their compulsive shopping & likely coke habits.

6/25/2006 11:32:00 AM  
Blogger Roadtripboy said...

Of course you could be charged more for a car if you pay cash then if you finance. But why would you reveal your payment approach before you negotiate the sale price? That's foolish.

Negotiating the car price is the first order of business. Once that is out of the way, then you talk trade-in and financing.

6/25/2006 02:11:00 PM  
Blogger lisoosh said...

roadtripboy is correct. Negotiate first then talk financing.

The reason why they push financing is twofold:

1. Commission paid from the financing company for the business.
2. It is much easier to hide extra cost - very few people are savvy enough to check that the payments are an accurate representation of the agreed amount and the correct interest. Excluding the interest you generally pay more if you finance.

6/25/2006 02:41:00 PM  
Blogger Richard said...

"But I can't bring myself to trade up.

oh really? trading up means you have to sell your current residence and if prices are such a 'deal' your house will have to be also to sell. very one sided thinking.

6/25/2006 10:35:00 PM  
Anonymous Anonymous said...

Negotiating the car price is the first order of business. Once that is out of the way, then you talk trade-in and financing.


Wow, spoken by the typical materialistic sheep that we see so much of in the NYC metro area.

1) 'Trading In' a car to a dealer is probably the worst thing you can do. You will always get less than Fair Market Value and of course they will roll the negative equity to your new loan.

Like How Convienient, Right????

2) Financing a car is almost as bad as financing $400 Jeans on a credit card. Cars depreciate. If you can't pay cash, you shouldn't buy. Of course everyone in this part of the country is so intent on driving a new car every two years not to mention that they are spending another few hundred per month to park in Manhattan.

3) Once they learn that you are paying cash, they will cancel the transaction unless you agree to the higher price or Full MSRP + Options and taxes. Zero Discounts, incentive apply.

6/25/2006 11:46:00 PM  
Blogger RichInNorthNJ said...

Wow, looks as if there's a Jeans bubble.
In less than 24 hours the price has gone from $300 to $400. That's a 33.3% increase!

Wow, spoken by the typical materialistic sheep that we see so much of in the NYC metro area.

I've tried in previous comment sections*, so I'm hoping being blunt will help.
You're an idiot.
Roadtrip is right, set the price first. And no, hey won't cancel the deal. No car dealer would ever walk away from money.

* http://tinyurl.com/je9rc

But hey, maybe you can start a petition, too.

6/26/2006 12:30:00 AM  
Blogger RichInNorthNJ said...

Typo: hey = they

6/26/2006 12:30:00 AM  
Blogger patient homebuyer said...

IT IS AMAZING HOW NAIVE SOME PEOPLE CAN BE WHEN MAKING A LARGE PURCHASE. IE CAR, HOME ETC,
YOU MUST GO OVER ALL THE DETAILS AND FOR GODS SAKE IF YOU CAN'T REALLY AFFORD IT DO NOT BUY IT !!

6/26/2006 08:44:00 AM  
Anonymous Anonymous said...

I work on Wall St - I wanted a Porsche 911 Turbo when I needed a car last year. I bought a VW Jetta diesel. All cash - the dealer tried to get me to "reconsider". LOL.

What am I going to do with the money I saved? Well use it to buy a house of course - in three years for 60 cents on the dollar...

6/26/2006 09:17:00 AM  
Anonymous dreamtheaterr said...

In an ideal situation, pay cash. Interest payments really increase the total cost to owning the car. Add in depreciation, and the cost is even more.

Don't go to a dealership to haggle the price of a car. You haggle once every 3-5 years; the car salesman does it 3-5 times a day. Guess who wins! Instead, send emails to 10-20 dealers via the manufacturer website (use dealer locator); the Internet salesman responds. They are paid on volume, not commission. Remember Econ 101 class - all new cars are commodities on a dealer lot, so go for the one with the lowest price.

1. Decide on the price for the car, before discussing financing and trade in. Don't bargain down from MSRP. Instead, find out approx dealer cost of the car (invoice less holdback) and work upward.

2. Get pre-approved financing from your credit union or bank. If the dealer can beat it, get them to throw in some accessories for free. It doesn't cost them much, since accessories have the highest mark up.

3. Never ever trade-in your car - sell it to a private party. If you have to trade-in to the dealer because you're upside down, you shouldn't be trading up....as simple as that.

I drive a Honda CRV (paid off in 12 months)that I bought for $1100 under invoice ....no need to impress any strangers.

6/26/2006 10:21:00 AM  
Anonymous Anonymous said...

But there is no mortgage interest deduction to interest expense and you are paying off a car for 60 months or longer than is depreciating.

Just because people in the NYC metro live and die by their purchases and feel that they must have the best car and pay sky high insurance premiums.

The conditions of the roads & stop and go traffic aren't the best either. All make owning a car a big liability, but politicians seem to favor and encourage car ownership rather than decent mass transit.

Most of the dealers won't go lower than full MSRP + Options or accessories anyway unless you finance thru them

All the dealerships in Queens especially along Northern Blvd have this policy.

Maybe you will get a better deal if you purchase in update NY

6/26/2006 11:29:00 AM  
Anonymous dreamtheaterr said...

Anon 12:29

When I got my Honda, it was $2710 below MSRP ($1080 below invoice) from a dealer in Queens (Hillside Ave, Jamaica).

I am from upstate NY and shopped there also - no dealer came lower than $500 over invoice. Higher volumes allow dealers to be more aggressive on pricing.

6/28/2006 11:58:00 AM  

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