Spoiled? Car Debt and What it is Costing Our Parents

There has been some devastating news coming from the mortgage industry of people over borrowing for their homes or getting into loans that they did not fully understand. But this crisis is not limited to the housing market: it is quickly becoming a problem with the way that we buy our cars.

In a recent article in the LA Times(subscription required) and summarized in Kicking Tires, it was pointed out in an ominous way that the amount of people who couldn’t pay their car payments for 60 days was up by 20%. Additionally the average car loans are now much longer than in the 1980s and 90s- 45% of all car loans are for 6 years or longer. It is becoming common that these longer loans are in reality for more than one car because buyers are driving cars for 4 years or less and then trading in that car, debt and all, for newer and more expensive cars. The debt owed on the old loan is rolled into the new loan and the cycle begins to spiral from there with some consumers these days paying for 3 loans or more in a single car loans and owing, in some cases $30,000, in debt on a single car worth far less.

These statistics may begin to uncover an inevitable time bomb for the spoiled babies of the Baby Boomers but a similarly frightening reality is beginning to reveal how this affects the parents that raised these consumers who expect so much for themselves!

Another study done in the UK by MoneyExpert.com shows that almost 25% of parents have had to help their adult children with their car debt when they have become delinquent in their payments. The expensive reality of raising a child has now extended beyond childhood, into adulthood and threatens parents who are now in their 50’s to compromise their hard earned savings and their ability to maintain their retirement and health care needs. The real irony is that adult children today are beginning to literally spend their own inheritance at the cost of compromising their very alive parents.

So what is the solution to protecting our Gen X dollars, and more importantly, our parent’s money? We should take a ticket from their book: our parents drove their cars for much longer after they were paid off and took on much shorter loans. Today it is common to get financed on a car for 6-8 years but our parents usually had 3-4 year loans, reducing the amount that they were paying in heavy interest. Also, cars are expensive these days so foregoing a need to have a brand-spanking new car and instead choosing a car that costs less, is 2 years old at least so has lost the majority of it’s depreciation and has a loan that is realistic for long term goals.

Buying smart not only protects your hard earned money but the savings of your parents.

A great series this week at CreditWithdrawal.com about saving money as we age for retirement.

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Buying a New Car or Slightly Used?

There is something in the air- I mean, I am not an economist but there is trend that I am seeing repeatedly in the search terms people are using to hit my blog and the many questions that I see coming across the Buying & Selling forum within Yahoo Answers: people want out of expensive new car loans and into less expensive cars.

Now I have addressed that issue several times now but what if I could get people before they get into that dangerous loan zone where they end up upside down and in over their head?

If I could stand in the street with a big sign (on a soap box, of course), I would tell everyone to buy slightly used and here is why:

1. A car depreciates most the first year of its life- as much as 30% and after the 2nd year, a typical car is worth 60 % of its original cost.

2. Cars are now more reliable than ever with most models having a life expectancy that when properly maintained, will last a whopping 15 years or 225,000 miles!

3. Extended warranties on new cars from dealers will not usually cover the things that really need to be fixed so buying without a warranty will save you a load of cash.

4. More lenders- banks, savings and loans and insurance companies are offering financing for buyers who want to buy used from private parties because they know that they will be saving money.

Of course there are arguments why buying brand new with cash and hanging onto a new car forever is a good move but for those of us who need financing, saving interest payments on 2 years of massive depreciation is the best idea ever.

Just remember- when buying online and from private parties, invest in an Experian AutoCheck and get a qualified mechanic to give it the once over.

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What is a Fair Price for a Used Car

Dear Miss Mota Mouth,

One of my clients has an used BMW X5 that he would like to sell. It has been immaculately maintained and has pretty low mileage I would love to have it but he said that the Kelly Blue Book on it is $17,000 and he wants another $3,000 because he added stuff like the stereo, tinting, larger wheels and more. I just want a safe car to drive my kids in and don’t know if it is worth spending the extra for the add-ons.

Jenni K, Ocala, FL

Dear Frugal in Florida,

Jus by virtue of the fact that you called premium customizations “stuff”, this may not be the X5 for you unless he seriously lowers his price and realizes that what he found necessary is not going to be the case with most buyers.

Keep in mind that if his ego is as big as his need to have a souped up SUV then the Kelly Blue Book price that he is referring to could be the retail and not private party. Retail is usually significantly higher than both private party (with trade-in value trailing in third place). You should check the KBB yourself and remember that Excellent condition means absolutely mint which most cars are not. Psst- You don’t need to tell him this but I doubt that his is either.

You should also check current and recently completed private party auctions on eBay to get an idea of a realistic price. Just do your research and then try not to be emotional about this particular car.

Once you have decided what you think is a fair price you might try making an offer or, if he is a client that you do not want to offend, consider letting him try to sell it himself at his unrealistic price. After a while when he doesn’t get any nibbles you can swoop from behind, offer to pay your researched price and learn how to work all of that extra “stuff”.

Lavishly,

M

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