The Trade Off with Long Car Loans

You have just test-driven a brand-new car, and you’re convinced that it is just the car for you.  You’re all ready to make it your own.  Your credit is pretty good, and your monthly income is steady and seems secure.  But then you hear that the monthly payment for a conventional $25,000 four-year loan will be $550 at a 3.5% interest rate.  You gulp and tell the salesman your budget can’t quite accommodate a monthly payment that big.

“Don’t worry,” he says. “What can you fit in your budget?  How about $380 a month?  Is that okay?”

You gulp again, but this time you do some mental figuring and decide yeah, I can pay $380 a month.  “It’ll be a stretch,” your inner voice tells you, “but it’ll be worth it.”

So how did the $550 payment drop to $380?  It wasn’t magic.  The salesperson simply moved you to a 72-month loan instead of a 48-month loan.  In other words he added two years of monthly payments to your overall cost.  By taking the 72-month loan, you’ll end up paying $2,349 in interest instead of the $1,561 you would’ve paid over the course of the four-year loan.  That’s almost $800 more.

Now, you might say getting the new car you otherwise would not have gotten is worth the $800.  Maybe it is.  That’s a value judgment, and we’re not here to judge you, just to advise you.  Because there’s another potential issue here, too.

What are we talking about?  We’re talking about being “under water” or “upside down.”  The longer the loan the more likely this is to happen as you move toward the middle of the loan period.  Being upside-down means you owe more on the car loan than the car is actually worth.  In other words, you can’t pay off the car loan from the proceeds of selling or trading in the car.

That’s just a minor footnote not even worth mentioning if you keep the car through the entire length of the loan and pay it off.  But if circumstances change and you decide you need a different car, you’ll have to pay the difference to retire your car loan and get a new one.  And that difference could be hundreds of dollars.  Many people “solve” that problem by adding that “gap” or dollar difference to their next new-car loan, but you can see the implications of that – you’re borrowing more money and paying a larger monthly payment not just based on the new car you are getting but also on the previous car you are trading in.  Suffice it to say, Warren Buffett wouldn’t do it that way.

So as to the pluses and minuses of long car loans, the obvious and perhaps only plus is that they can result in lower monthly payments.  On the minus side, you will pay longer and you will pay more in interest even if the interest rate for the longer loan is the same as for the shorter one.  Additionally, with a longer loan you run more risk of being “under water,” which means it will be expensive to switch from your current vehicle to another one during the course of the loan. Whatever you decide, we suggest you take a few minutes to think about it.  Why make a split-second decision that could cost you $1,000?

WhatÂ’s the Most Dependable Vehicle Brand?

There is a new top dog in vehicle dependability, according to the just-released 2011 J.D. Power and Associates 2011 U.S. Vehicle Dependability Study (VDS.) For the first time since the study began, Ford Motor Company’s Lincoln led all the nameplates in dependability. Lexus finished second, followed by (in order) Jaguar, Porsche and Toyota. The bottom five nameplates were (in ascending order from last) MINI, Jeep, Land Rover, Dodge and Chrysler.

So how does the market research giant define the term “dependability”? The dependability study measured problems experienced during the past 12 months by original owners of three-year-old (or, in this case, 2008 model-year) vehicles. If the vehicle had a problem prior to the last 12 months, it was not measured. Vehicle-owner participants were asked to consider 202 different problem symptoms across all areas of the vehicle. Relative overall dependability is determined by the level of problems experienced per 100 vehicles (PP100) versus other vehicles, with a lower score reflecting higher quality.

Among individual models, the Porsche 911 had the fewest problems in the industry, with just 68 PP100. Toyota Motor Corporation, which has been beleaguered by recalls in the past 14 months, continued to perform well in the J.D. Power study of long-term dependability. As a corporation, it collected seven top-in-segment awards, more than any other automaker in 2011. Other segment leaders in dependability included the Lexus RX, Scion xB, Toyota 4Runner, Toyota Prius, Toyota Sienna, Toyota Tacoma and Toyota Tundra. Ford Motor Company received four segment-leader awards for the Ford Fusion, Ford Mustang, Lincoln MKZ and Lincoln Navigator. General Motors (Buick Lucerne, Cadillac DTS, and Chevrolet Tahoe) and Honda Motor Company (Acura RL, Honda CR-V and Honda Fit) each received three segment-leader honors. Other segment leaders in dependability included the BMW X3, Mazda MX-5 Miata and Mercedes-Benz CLK.

An interesting finding was that, while domestic brands have closed the gap with import brands in initial quality (J.D. Power and Associates defines that as owner experiences in the first 90 days of ownership), there is still a considerable difference between domestic-brand vehicles and imports in long-term vehicle dependability. In the 2011 VDS, imported brands outperformed domestic brands by 18 PP100. Interestingly, domestic-brand cars actually have fewer problems (135 PP100, on average) than import-brand cars (147 PP100, on average), but import-brand trucks and crossover vehicles have considerably fewer problems than those of domestic brands. This belies the conventional wisdom that domestic manufacturers build great trucks, while the import manufacturers build great cars.

Vehicle dependability as a whole is getting better and better. In 2011, overall vehicle dependability averaged 151 PP100, which is the lowest problem rate since the inception of the study in 1990. Last year, the overall average was 170 PP100, but the pace of improvement is slowing. Between 2009 and 2011, annual improvement for the industry has averaged 6 percent, while industry improvement has averaged 8 percent each year during the past decade. The market research firm attributed the slowdown in improvement to increased rates of problems with electronic features (e.g., audio, entertainment and navigation systems) and new safety features (e.g., tire-pressure monitoring systems).

“Automakers, as a whole, have made significant improvements in reducing traditional problems -- particularly with vehicle interiors, engines and transmissions, and steering and braking during the past several years,” says David Sargent, vice president of global vehicle research at J.D. Power and Associates. “However, as manufacturers add new features and technologies to satisfy customer demand and new legislation, they face the potential for introducing new problems.”

The 2011 Vehicle Dependability Study is based on responses from more than 43,700 original owners of 2008 model-year vehicles after three years of ownership. The study was fielded between October and December 2010.


Buying Used

Today it's relatively easy to get a second-hand rose

If you buy a used car, you're buying somebody else's troubles.

That tattered bit of automotive buying advice has been making the rounds since Jack Benny bought his first Maxwell. While it might have been true in the heyday of planned obsolescence, the fact is some of today's smartest vehicle shoppers are buying used. There is no doubt that there has never been a better time to buy a used car.


There are several reasons, all working in favor of the used-car buyer. The first of these is quality. They say they don't make 'em like they used to? That's correct; they make 'em much better. Today's new vehicles are the best-designed, best-built, most reliable vehicles in history, and that means that today's one-, two-, three- and four-year-old used cars are the best in history as well. Though they are certainly more complicated than the cars of the Fifties and Sixties, today's vehicles have staying power. So if you buy a car that is, say, three years old, it should give you at least six more years of good service. Of course, it will require some preventive maintenance and some repairs, but it terms of cost-effectiveness, it will be about as good as you can get for your transportation dollar.

That ol' debbil depreciation is another key reason why today is a great time to buy a used car. You know what the number one cost of owning a new car is in the first five years of ownership? That's right. Depreciation. You don't write a check for the cost; it doesn't show up in your bank statement, but it hits you in the wallet pretty hard. For example, over the course of three years a new car might drop as much as 40 percent in value. So your spanking new 2000 model year chariot might be worth only $12,000 come 2003. Though vehicles still depreciate after the first three-year period expires, the curve flattens out so that the year-to-year drop in value is not nearly as severe. What this means is if you buy a three-year old vehicle, you can avoid a significant amount of depreciation cost.

One last bit of good news: The increasing popularity of leasing virtually guarantees that there will be a steady supply of high-quality two- and three-year-old cars to choose from when you decide to buy. These days about one-third of all new vehicles are leased as are well more than 50 percent of luxury cars.

Leasing has had a profound effect on the car business, and it has come up nothing but aces for the used car buyer. Cars coming off lease are just a few years old, plus most are well-maintained and have relatively low miles on them. Lease contracts have tight stipulations on condition and mileage so most lessees play it straight and bring back cars in good condition under the contractual mileage limits. Because of this, these "off-lease" cars can be great used car values.

Leasing has had another positive effect for used car buyers as well. It has put auto manufacturers into the used car business. They don't necessarily want to be in the used car business, but those who have a finance division end up owning thousands of used cars each year when leases expire. They have to sell these vehicles on the used-car market to meet their profit goals. And those who don't have a captive finance arm still are vitally concerned with the used-car market because used-car values help determine their new-car lease rates. Because of this many car manufacturers have put together special programs to add value to their used car offerings in the form of certified used car programs. While plans differ from manufacturer to manufacturer, virtually all of them have strict criteria for what vehicles may be included. Those vehicles are then thoroughly inspected, brought up to specs and backed by a warranty that mimics new-car warranty coverage.

For example, here are the highlights of two top certified used car programs:

BMW Certified Pre-Owned Vehicle Program

  • Eligibility: Late models, with fewer than 60,000 miles
  • Warranty: Two years/50,000 miles from the date of expiration of the four-year/50,000-mile BMW new vehicle limited warranty (total: six years/100,000 miles)
  • Safety, performance and wear inspections
  • 24-hour roadside assistance
  • Consumer inspection checklist for first-hand verification that car meets BMW's safety and quality standards
  • Lease and retail finance options for select certified vehicles through BMW Financial Services
  • Certified Pre-Owned BMW Protection Plan, which spells out all components and systems covered by the warranty and clearly states exclusions
  • Web site includes a searchable database of certified pre-owned BMWs

Honda Certified Used Cars

  • Eligibility: Models up to three years old/60,000 miles
  • Coverage: Six years/72,000 miles on the powertrain (from original in-service date); 12 month/12,000 mile non-powertrain equipment
  • No deductible
  • 150-point mechanical and appearance inspection
  • Certified used car decal for identification
  • 24-hour roadside assistance
  • Finance and leasing services
  • Web site features a dealer locator, model library, vehicle locator and special offers

As you can see from the plans, the coverage mimics that of the original new-car warranty, so if you fear buying somebody else's troubles, these plans and others like them from a wide variety of manufacturers should alleviate that worry. A key item to remember here is that you should look for factory-backed certified vehicle programs. Because the word "certified" has gained cachet as a sales tool, a number of new and used car dealers are referring to some of their used cars as "certified." Generally, that term has little or no meaning unless it is backed by an auto manufacturer program.

Okay, so we have convinced you that a used car might be a cost-effective alternative to buying a new car. After all, the quality of many used cars is very good; buying a used car allows you to escape some pretty hefty depreciation costs; and many car companies are willing to back their used vehicles with new-car-like warranty protection. Now what do you do?

Well, if you think a certified used car is for you, there are a couple ways to proceed. One is as simple as logging onto the manufacturer Web site on your computer. Most manufacturers with certified programs will give you detailed information and a dealer locator right on the Web. Some manufacturers will even list their certified used car vehicle inventory, so you can let your mouse clicks help your shopping process. Of course, another way to proceed is to call local dealers and ask them if they offer manufacturer-certified used cars.

Of course, certified used cars aren't the only good values in used cars. In fact, buyers often pay a premium for certified used cars for the peace of mind value of the warranty and other coverages. But new-car dealers also are good sources of high-quality used cars, even without certification. National chains like CarMax and AutoNation have tried to make their imprint on the used vehicle market. Their results have been mixed so far, but for those who dislike haggling, they can be good choices. In addition, car rental companies operate used car sales lots to dispose of vehicles they buy, and while this formerly was strictly domestic-vehicle territory, today some high quality imports are also showing up on these sales lots. Also, don't forget about private party sales. If you're on a budget and are somewhat astute about mechanics, you can get yourself a good deal buying a car from an individual. Of course, private party purchases are "as-is."

What should you pay for a used car? Well, every used vehicle is an individual entity, but there are good sources on the Web to get close approximate values for most late-model used cars. Of the services available, Kelly Blue Book might be the best, although Edmunds also has its adherents. Do a little research, and you could save yourself hundreds of dollars.

Sure, there's nothing like a strong whiff of new-car smell. But you might be willing to exchange that exhilarating experience for the whiff of several thousand dollars in cold, hard, flip-between-your-fingers cash. If so, good used cars await. Happy hunting.

-- Jack R. Nerad

Nerad is the author of The Complete Idiot's Guide to Buying and Leasing a Car, and he's currently in the market for a sports-utility vehicle.

You and the Dealer

How will you buy your next vehicle? Will you click on an online buying service, gather some information and then fill out a computer form to make your purchase? Or will you make the more traditional trek from dealership to dealership parrying with car salespeople before making your purchase? Or will your experience be some combination of these two extremes?

One thing is certain: the business of selling vehicles is changing minute-by-minute, but just what the process will morph into no one, not even the purported experts, is quite sure. There are those who suggest that in the future consumers will get their pre-purchase information from online services, take a test drive at a facility designed just for that activity with no salespeople or sales pressure, and purchase the vehicle via computer. The computer purchase process will include specifying the vehicle, color and options, arriving at a price and securing financing, and in this scenario the first time the consumer would see her or his vehicle would be when it’s delivered to home or office.

Others say that, though the Internet has generated a lot of heat and noise lately, the actual buying process won’t change very much in the next decade. Sure, they argue, consumers are arming themselves with more information than ever before, getting much of it from the Internet. And sure, some people are getting a firm transaction price from a dealer via the online services like Auto-by-tel. But when it comes to actually test-driving the vehicle and making the deal, the traditional dealership will remain the only game in town.

Does the Car-Buying Process Need to Change?

With the number of auto brands competing in the U.S., consumer demands are clearly driving changes in the market. But there is some controversy over whether the current system needs a big overhaul. One group that recently took a look at the issue is Automotive Retailing Today (ART), a non-profit organization of new-vehicle dealer associations and car manufacturers. An ART-funded study conducted by The Gallup Organization found that 76% of consumers were either very or extremely satisfied with their most recent experience at a new-car dealership.

Interestingly, however, while three-quarters of consumers felt well-satisfied with their most recent experience with a car dealership, they don’t think the experience others have in car dealerships is as good as the one they had. When consumers were asked, "In general, how do consumers feel about the new car buying/leasing experience?" less than half (42%) felt it was positive. And when 100 members of the automotive media were asked the same question, only 2% said they believed the experience was positive. Obviously, the media impression of the process differs from the reality. But the fact that less than half of consumers suspected the general experience in the dealership was a good one indicates that there is room for positive change in the industry.

That view is reinforced by a recent study of 33,000 new-car buyers by Strategic Vision, a San Diego-based market research firm. In its fourth annual study on the auto sales experience, the firm asserted, "Despite all the buzz about changes in automotive retailing, new-vehicle dealerships are making little headway in improving buyers sales and service experiences."

Strategic Vision’s just-released 1999 Dealer Total Quality Index (DTQI) reinforces that opinion. The DTQI compares consumers’ experiences with various car brands’ dealers against consumers' collective ideal of how the process should work.

The 1999 industry average was 839 out of a possible 1,000 -- not bad by grading standards. One might call it a solid B. It suggests that despite general media negativity about the vehicle purchase experience, the typical car buyer doesn’t think it’s all that bad.

One problem pointed up by the study, though, is the fact that the experience doesn’t appear to be getting any better. In 1998, the DTQI was an almost identical 838 and in 1997 it was 837, so progress has been moving at a crawl if at all.

If there is one area where there seems to be a disconnect between seller and buyer in the car acquisition process it’s in the area of trust.

"It’s important to people that they feel secure in their relationship with the dealer," Daniel Gorrell, vice president for Strategic Vision, "but in the current process there are obstacles in that path."

Despite being funded by car manufacturers and dealer organizations, the ART study pointed to the same basic issue. Some 89% of consumers said they considered dealer trustworthiness very important, yet only 45% were satisfied with their dealer’s trustworthiness in their most recent transaction.

One of the biggest obstacles to mutual trust, according to Gorrell, is the negotiation process. He asserted that just 10-15% of consumers actually like to negotiate purchase prices; the rest either simply put up with the process or actively dislike it.

Whether dealers diagnose this difficulty and affect a change is open to debate. Gorrell suggests a different type of automobile distribution, perhaps using the Internet, might be required to make the change that consumers seem to want.

As the Strategic Vision study pointed out, "The most interesting trend was the increase in buyers using the Internet to search for vehicle information. From 13 percent in 1997 and 26 percent in 1998, that has grown to 35 percent in 1999." Others recent studies have suggested Internet use is even higher. Armed with more information, consumers seem to be forcing a change in the traditional ways of doing business.

"More informed consumers are changing the negotiation process," says Gorrell. "Often they know exactly what the dealer paid, which is making the bargaining process more straightforward. They also feel greater freedom because Internet information makes them feel more in control of the process. Interestingly, this improvement in dealer relations is being driven by third parties."

Some would argue that the availability of information like invoice pricing hasn’t improved the level of trust between buyer and dealer. In fact, some say it has just added one more element of conflict.

At this point, with car-buying services springing up like dandelions on a suburban lawn, it remains to be seen if the information available online will change the entire dynamics of the car-buying process. But surely, it is helping to make a change that many consumers feel is for the better. And even more surely, the process will continue to evolve.