Wednesday, February 1, 2017

Long-Term Commitments

Signing up for a commitment that lasts a decade or more is something you should approach with extreme trepidation.

Today it is possible to sign a few documents and literally sign your life away.  And today, it is possible to do this at age 18, when you reach the age of majority, by signing that first student loan document - at an age where reason is in short supply.

Student loans are not necessarily a bad deal, and the burden of them is far overstated by the media.   The media loves to over-state things, for example, as I noted in my last posting, making all feminists out to be man-hating Lesbians.  Or all Republicans as kloset Klansmen.   Or whatever.   Extremism sells.

So putting up an article online saying, "Average student loan debt is $25,000 and is perfectly affordable and easy to pay off" doesn't generate a lot of clicks.   But this reflects the truth.

Instead, the media loves "Student has $200,000 in loan debt and minimum wage job!" which can happen, if you are particularly dense, major in bullshit, and keep going back to school for one worthless degree after another.   Or worse, to a for-profit school.

Or worse yet, the media loves, "Family has to pay student loan debt, even though child is dead!" which is indeed what happens when you co-sign loansCo-signing loans is evil.  Private student loans are evil.  For-profit schools are evil.   Avoid all three and be happy in life.

Fortunately, most student loans have a 10 year payback schedule, so it is not a lifelong commitment.  But the student loan companies love to offer you "relief" in the form of a 30-year amortization, and when you are young and broke (and want a new jet ski) it is temping to "lower your monthly cash-flow" by extending the payments until retirement and tripling the amount of interest paid (at the very least).   I paid mine off in ten years, and it wasn't easy, but it wasn't hard.   But it was worthwhile as I got worthwhile degrees.

And that is a funny thing.  An Engineering degree and a Law degree cost the same as degree in "communications" or "queer studies".   Imagine going to the car dealer and all the cars were priced the same.  "I can sell you this Chevy Sonic or a Cadillac Escalade, both are $20,000" - which do you pick?   If people were as astute in shopping for college degrees, maybe things would change.

But people of all ages can play this game - signing documents that commit them to payments for 10 or 20 years or even for life.

RV's are another example.  As I noted in my posting on RV quality, the industry offers loans as long as 20 years in length, while the rigs hardly last that long.  Even if they survive 20 years, the owner is "upside-down" on the loan for most of the term, and cannot sell the rig to get out from under the burden of payments.   And that is why a lot of these things are rotting in people's back yards - people still make payments on things they lost interest in, broke down, or wore out.

Take this ad in this month's Camping World advertising brochure:

Sounds like a sweet deal, but is it?

Yes, for about what you are paying per month for a car, you could drive this sweet motorhome!   Oh, yea, it is on the old Ford chassis and is a box-type construction guaranteed never to leak.  But taking that all aside, what are the numbers like?   

First notice that the actual price is missing.  But the monthly payment at $428 ("for qualified buyers" - not you) is for a whopping 240 months.  Yes, folks, that's 20 freaking years.  Think this motorhome will last that long?   Maybe if you garaged it and took meticulous care of it.  Most folks don't.

At the advertised rate of 4.99% APR, we can reverse-engineer the price on this thing, using an amortization program.   I come up with an even $65,000 financed, which with 10% down, yields a sales price of about $72,000.  Bear in mind the fine print doesn't include taxes, title, and "other charges" so I doubt you'd get this actual price.  In Georgia, the title fee (tax) would be 7% of the sales price, or $5250, which is why you see a lot of higher-end motorhomes registered in tax-free Montana.

The moment you buy the rig, it depreciates 10% in value.  So right off the bat, at best, you could sell it for exactly what you owe on it, and just lose your 10% down payment.  In reality, since you paid sales taxes, tags, and other fees, you end up losing money in the deal.  But at least theoretically, you can sell it the day you buy it, for what you owe on it.  In theory at least.

But it goes downhill from there.  As a motorized vehicle, it will depreciate about 50% every five years.  And this is pretty inflexible, too.   Sure, the industry will say the depreciation is less, but they are (a) blowing smoke up your ass, (b) making self-serving statements, and (c) have no numbers to back this up.

And once again, we play the "name game" making it hard to compare today's coaches to those in the past.  Thor makes the "Freedom Elite" Class-C coaches which look like rental models (no step, low door, huge rear compartment for German's luggage).   A 2012 model M28U sold new for $92,697 and retails for about $58,850 according to NADA blue book.  So you see, the 50% every 5 years formula is not too far off the mark.   But of course, few people pay retail prices for these things (and you, as a seller can't get retail for it), but let's be generous and assume 40% depreciation every five years.

At year five, the balance owed on the camper is  $54,032 and the resale value, at 40% depreciation, is $43,200.  You are upside-down for the first five years of ownership.  If you have to sell, you have to come up with ten grand to make up the difference.   Few Johnny Paychecks have ten grand laying around.  If they did, they'd buy a used travel trailer and pay cash for it.

At year ten, the balanced owed is $40,168 and the resale value at 40% depreciation (every five years) is $25,920.  Not only are you under water, you are sinking even faster, needing $15,000 cash to get out of this deal.

At year fifteen, the balanced owed is $22,383 and the resale value at 40% depreciation (every five years) is $15,5552, dropping your "underwater" amount to about eight grand.   Things are starting to look up in the year 2032!

A year twenty, the balance owed is zero, and the resale value at 40% depreciation (every five years) is $9331.20, which is enough, hopefully, for a new down payment on a new rig.   But by then, I suspect you may be tired of RVing, or the rig has long ago broken down, leaked, and delaminated.   You are approaching retirement, the kids have gone off to college, graduated, and now have kids of their own.  Twenty years is a long freaking time, ain't it?

Does this mean RVing is bad?  No, only that dealers love to sell bad deals to "get people in" to a coach, no matter how flimsy the financing is, and how it will utterly screw the owner down the road.   And many owners "double down" their bet by trading in the "upside-down" RV after several years, on a brand-spanking new one, and fold the negative equity into the loan, meaning they are upside-down for another 20 years.

And if all goes horribly wrong (which it likely will) you cannot blame the dealer, the finance company, or the RV manufacturer, because you are an ADULT and signed the papers and should know better.

A better deal is to buy less RV, either by purchasing used, or by purchasing a trailer (if you already own a pickup truck or large SUV, why buy another internal combustion engine?) and putting more down as a down payment, or better yet, paying cash.  Can't pay cash?  They maybe you can't afford it, in reality-land.

Timeshares are an example of a perpetual debt you take on for a lifetime - and the life of your spouse!  People who have bought these have tried to tell me they aren't so bad - sort of like that Monty Python bit in Life of Brian, when after they are nailed to the cross, one cheerful fellow exclaims, "Hey, it's not so bad, once you're up!"

The problem with timeshares, other than they are basically a horrific bargain that is sold using high-pressures sales techniques (which tells you right there they are horrific bargains) is that you cannot get out from under them for the rest of your life, period.

There is no resale market for timeshares, no matter what the fellow at the "sales presentation" said.   People offer these for sale, all day long, for a dollar each, with no takers.  You see, the cost of the timeshare isn't the issue, it is the yearly "maintenance fee" which is an open-ended lifelong committment.

Suppose I offered you the following deal:  You can rent a room in my house every year for one week, for a sum that I will determine based on my "costs".   You have to pay this sum every year, whether you come visit me or not.   If you come visit me and I am mean to you and the toilet doesn't work, too bad.  You still have to pay.   I can double, triple, quadruple this sum, and you still have to pay. You cannot avoid paying this sum, other than to declare bankruptcy or DIE.  If you die, I will come after your children and ask them to pay as well.

Now, if you are dumb, please send me all your money.  But if you have half a brain, you'd say, "That is the most asinine thing I have ever heard of!"

But I just described how timeshares work, only with a timeshare, they also sell you this idea for $20,000 to $50,000 on top of the annual sum, so you are doubly stuck with something you cannot get rid of.

Now, timeshare fans will say, "Well, you can swap weeks with other resorts" and sometimes that is true, but there are swapping fees involved.  Plus, you are limited to vacationing at the resorts in the chain, if any.  If you decide one year you want to go to France, and there is no timeshare there to swap to, well, you are stuck. 

What the timeshare faithful never bother to explain is why a timeshare should be cheaper to run that a regular resort and where the actual "savings" are.   If you add up the cost of the timeshare, plus the yearly "maintenance fee" you end up with a pile of money over time - a pile that could be used to vacation at a place and time of your choosing rather than the same place and time every year.

And if your financial circumstances change, well, you can decide not to vacation at all, or just drive to the beach or something cheap.   The timeshare locks you in - for life.   You can never, ever get out from under it, which is why you should think very, very carefully before signing documents that commit you for life.

Even marriage isn't that final.  Child-rearing expenses largely evaporate after 18 years.  A timeshare is for life.

And again, like student loans or 20-year RV loans, if you sign these deals, whose fault is it?   Yours and yours alone.

So just don't sign shitty deals.

But what about mortgages? you say.   Well, what about them?   They are a 30-year commitment as well, and if you buy an overpriced house in an overheated market, you are stuck with that commitment, even after you no longer want the house.

In the condo development I own in, there are folks who paid $250,000 for condos at the height of the market. They are now worth $160,000.  They can either declare bankruptcy and walk away, or "hang in there" for 30 years and pay off the debt. Some bailed out, others are grimly hanging on, wondering what the heck happened to them.  They bought at the peak of a bubble by listening to Real Estate agents telling them to "buy now or be priced out of the market forever!"

People in Canada were being told the same thing - and are still being told it.

The average homeowner moves about every 8-10 years, so if you get into a situation like that, you either have to walk away from a mortgage and screw your credit (and declare bankruptcy) or rent the property out at a negative cash-flow until you pay down the debt or the market recovers.   It is a shitty situation to be in, and many of my friends have had to confront this.

If you are smart about home-buying, it is less of a problem.  All the houses I have bought over the years (about nine, as I recall) either they cost less to own than rent, or I had put down enough (or paid cash) so that being "upside down" was not an issue.   I chose to walk away from squirrely deals that made no sense and cost more to own than to rent or had funny mortgages.

Again, this is a long-term commitment and you have to treat is as seriously as a heart attack.  Back during the bubble years, I remember people signing mortgages like it was a lark - like somehow thirty years didn't mean thirty years because they saw someone on television "buy and flip" and that was going to work our for them, too. 

Ahh, television - the source of so much misery!

Long-term financial commitments are something that should not be taken on without serious thought.  The more frivolous the need (RV's, timeshares) the less sense they make.   Limit borrowing in general to important things, and then borrow as little as you can.