For people that know they will only keep a vehicle for 24/36 months and there is no lease option a reduced payment loan make a lot of sense.
This is how it works. (int free for discussion) $50,000 loan for 60 months. $834 a month for 60 months. That's out of most peoples budget.
BUT if they had a loan like this... $50,000 loan for 60 months. $350 a month for 36 months, then $1,039 a month for 36 months after.
Both of these amount to the same total $$ amount. BUT the second one would make it affordable for a person on a lower budget to own a more expensive vehicle as a "personal" lease only paying depreciation. But different from a lease because the owner is responsible to sell the vehicle after 36 months to PIF the loan before payments go up. It's tricky, but the math works out better for the banks.
I once got a loan where I only had to pay interest only for the full term of the loan then on the last payment I had to pay the full amount. So I figure loans like this should exist right? Do they exist for Autos? I understand that I would be paying a lot more in interest so the rate would need to be lower.
Message Edited by ilovepizza on 04-27-200809:39 PM
But you'd be totally upside-down when you went to get out of the car in 36 months, wouldn't you??? This would ONLY work if you were paying enough to keep up with the depreciation, and then were able to sell the car for the full amount of the new depreciated value... which means either selling it to a private owner who would take out a loan from their bank (and usually if they can afford a fairly new car that isn't significantly below KBB, they would go through a dealership anyway) or selling it do a dealership where you'll NEVER get the full am't for it anyway...
If you did an ARM on a car you'd be in the same position that most people are with ARMS on their homes.. the purchase doesn't appreciate, it DEpreciates & they're stuck with an interest rate that suddenly turns into Kreuger overnight.
Cars never appreciate.. at least with homes you have a *chance* that the value will go up...
I wanted to lease but it was not available on a used car. This was an option to lower the monthly payment. I would definitely trade out the auto after 36 months to a dealer so this would work great for me and I would make sure to make the payment would be higher than depreciation to be on the safe side. Sounded good for this example. It's the same as a lease but this could be used for used autos where leases are not available.
Message Edited by ilovepizza on 04-27-200810:20 PM
The problem it is massively more risky for the bank.
Sure if you trade any car after 36mo (if you bought w/ no money down) you are upside down. In this loan you are massively upside down. If the consumer defaults on the loan the bank will lose much much more. The default rate will be higher and the amount the bank loses on each defaulted loan is higher. The interest rates would have to be much much higher just for bank to break even.
The difference between houses & cars is generally (current market notwithstanding) houses are worth more overtime while cars lose value.
Well, the carmakers are desperate to move metal right now, so I wouldn't be surprised to see them doing all sorts of stunts, some of which may end up as front page news a couple years from now when the chickens come home to roost. BEFORE the current credit mess default rates on auto loans were already rising because average loan terms are getting longer and longer which means more people are upside down. In my opinion, if you cannot afford at least a 10% down payment on a house or a 25% down payment on a car, you should not be getting that house or that car due to the risk of being upside down. Even better would be 20% down on a house or 50% down on a car.
I appreciate creativity in the arts and sciences but in financial matters I'm rather old school and right now very glad I've stayed away from any sort of slick financial wizardry!
TU 791 02/11/2013, EQ 800 1/29/2011 , EX Plus FAKO 812, EX Vantage Score 955 3/19/2010 wife's EQ 9/23/2009 803 EX always was my highest when we could pull all three Always remember: big print giveth, small print taketh away If you dunno what tanstaafl means you must Google it
Normal Loan Is 60 months at 5.29 %. Payments are $931.21. (49,000 financed) Total of Payments $55,872.89.
Normal Lease from Jaguar for 36 months/12k miles gives a residual value of 42% on an s-type. So 42% of 49,000 is 20,580 leaving 28,420 financed for the lease. A 0 down lease at 5.29% would be 855 a month. A $5000 down lease is 704 a month.
Your loan of 350 a month would have a balance at end 43,784.88 if amortized at 5.29% for the first 3 years and 1317.98 for the next 3 years. Total of Payments 60,047.30
2005 Jaguar S-Type with 36,000 miles Condition Trade Value Private Excellent $16,400 $19,375 Good $15,455 $18,280 Fair $13,770 $16,795
So with your idea you would have to sell the car for payoff which is 43,784.88 on a car worth no more then 20,000. How would this be good for anyone at all?
I say just buy the car you can afford and don't worry about trying to impress someone else with a car you can't afford. The loan idea brings back memories of the mortgage meltdown and crazy stupid loan schemes.