Wednesday, October 2, 2019

You Can Say No.

Just because there are rotten deals out there, doesn't mean you're obligated to accept them.

A recent article in the Wall Street Journal, of all places, opines that seven-year car loans are making cars "unaffordable" for middle-class Americans.  Oddly, enough, middle-class Americans still seem to be driving these "unaffordable" cars and living in "unaffordable" housing.  Language is important, and if something is truly "unaffordable" than no one is buying it.   What the article means to say, is that Americans have a huge appetite for expensive cars with all the gadgets, and will go into hock to get one.   We saw the same thing in 2007, when people bought huge SUVs.  In 2009, they were buying a Ford Focus.   In 1958, people bought gaudy cars with swivel bucket seats, huge engines, and tail fins.  In 1960, they bought Ford Falcons. There is a cyclical pattern to the car business - and most people in the business are aware of this, which is why GM is trimming its sails for the inevitable, and why they are "losing" less money than pundits report, because of the strike.

Cars last longer today, are more sophisticated, and more complex.   When I was at GMI, our professors told us that some day, cars would cost the princely sum of $20,000 and you'd have to keep your car for ten years, just to justify the cost!   Well, someday has come.

Seven year loans might be a bit alarming, but cars last a lot longer than they used to.   Of course, it depends on who you ask.  Consumer reports - pulling numbers out of its ass, claims cars last only eight years and 150,000 miles.  But actual data indicates that the average car on the road is over eleven years old - although the average car owner keeps their car only a little more than six years.  Of course, six years is not as long as a seven-year car loan, which is the start of the problem.   People trade in, and fold over the "negative equity" of their trade-in, into a new car loan, which is a really, really bad idea.   But on the whole, longer car loans are not too alarming (although the shorter the term, the better off you are - buy less car!) given that cars last a lot longer than they did in 1965 or indeed even 1985.

I wrote about this many years ago when Bill Ford, who runs a small car company in Detroit, sounded the alarm about seven-year car loans. The problem with these loans is that people end up upside down on their loans and unable to trade-in their cars, which means fewer sales for the car manufacturers.  More of a problem for Bill Ford than for the car owners.  If they do trade-in, again, they fold negative equity on their previous loan into a new one.  You can only do this so many times before you end up bankrupt.  It is, in a way, like payday loans - only a much slower process.

And this is nothing new.  I recounted before about a foolish friend of mine who was given a brand-new car by her Dad after she graduated from high school.  She never changed the oil, and the car engine seized.  She bought a new car - paying top dollar as a novice buyer - and did the same thing.   This time, she had a balance on the loan, so she folded over the negative equity into a new loan.   Pretty soon, she owed nearly $20,000 on a $15,000 car, which was about ready to give up the ghost as well.   Last I heard, she married an Arab man, who apparently appreciate Rubenesque girls like her, and she is somewhere in the middle east, under a burka.  That's one way to get out of a toxic car loan, I guess.

The poster children they profile in the article are almost laughable.  One fellow buys a Honda for $27,000 which is about average for a medium loaded Honda with leather seats.  But he borrows $36,000 on 84-month loan at 1.9% to pay off debt from cars he bought as a teenager. This was hard to parse as they say he bought the car three years ago and he's now 22.  That would mean that he was 19 when he bought the Honda.  I'm not sure how he incurred debts on "cars he bought as a teenager" as you can renounce any kind of debt when you turn 18.  Of course, if you are really dumb, you might affirm the debt after age 18, either in writing, or by making payments on it.  Because minors can renounce debts, it is highly unlikely that he incurred the debt before age 18, as no one loans money to minors - unless his parents did something stupid like co-signing a loan.

Regardless, this would mean that he already went through three cars before he was 19, which means he's not being very careful with his money to begin with.  There is another side to this story the WSJ isn't telling us about!

But assuming he incurred the debt after age 18, he has to either pay those debts back or declare bankruptcy.  The fact that he was able to roll up that debt into a jumbo loan at 1.9% is pretty decent. For consumer debt, 1.9% is an amazing interest rate - lower than most people's mortgage rates. If anything, he should be congratulated for consolidating all of it at such a low interest rate.  He just needs to work on paying the debt off, and making the car last the length of the loan.  I am just guessing here, but he decided instead to rent a set of bling rims for it.   Just a guess.

Those previous debts didn't occur all by themselves.  He apparently signed some bad loan deals earlier in his life and didn't take care of his cars.  I'm not sure how he's gone through three cars before age 22, but you can do it, if you really put your mind to it.   The main point is, you don't have to do it.

The next person profiled fell for the extended warranty gag, as well as other add-ons they pitched in the "box" as they call it.   He ended up adding $100 a month to his car payment for bunch of junk coverage that he really didn't need.   The article makes it sound like there's no way to avoid this, but I bought a number of cars in my lifetime and it managed to somehow eluded the perils of "the box" at  more than once - once I learned, the hard way, that it is OK to say "No." But more about that later.

We bought our first F150 back in 1995, I brought a cashier's check from the credit union for the exact amount of the sale.  They brought me into the box and try to sell me things like the floor mats that came with the truck, and undercoating, and sealant protector. I explained that I had a cashier's check for the exact amount of the sales price, and if we didn't wrap this up in the next 20 minutes I would go back to the credit union and hand them back to check and buy my truck from someone else. Nineteen minutes later, they handed me the keys to the truck.

Without trucoat, you'll get oxidation!

When we bought the hamster we went through a similar thing. They tried to put us in the box and sell us add-on things and I explained to them we didn't want any of that, and we would leave if we didn't get the car at the price we agreed to on the phone before we got there.  They had held us there for nearly two hours, and I was already losing patience with them.  They want to keep you there as long as possible - five hours in the example illustrated in the article.  Once you stay that long, your blood sugar goes low and you'll go along with anything.  I ended up leaving the dealer with the hamster with the price we agreed to over the phone., sans the extended warranty, floor mats, or any other add-on junk.

The funny thing was, when I told the young man we weren't falling for any of "the box" nonsense, he said, "I'm just doing my job here!  I have to sell you these things!" and he gave up in frustration and handed us off to another "closer" who sealed the deal in a matter of minutes. I guess they are on a quota.  Actually, I am not guessing here - they are.

They will try to sell you this stuff, but you don't have to say yes to it.  You're entitled to say "No."  You just have to say "No" and say it firmly.  For some reason people think that just because someone's a pushy salesman you have to cave in to them.  And some people think that because you caved-in to a pushy salesman it's their fault - and not yours - for caving in.

When we bought our most recent (used) F-150, we negotiated the price via text message with the salesperson.  We got to the dealership and we spent about a half an hour there, filling out papers and I wrote them a personal check for the purchase price.  They tried to put us in "the box" and sell us the usual add-ons, and I explained to them that we were not babes in the woods, and understood the entire process and we're not interested in any add-ons or other bullshit. No extended warranties, no undercoating,no paint sealant, no nothing.

Again, you can't blame him for trying to sell you things, but you can only blame yourself for saying yes to these things. You have to say "No" and be firm about it.  And you should also expect them to do this. It's well-documented how car dealers work and how they try to sell these add-ons - I've mentioned it here in this blog many times before. One must have to be willfully ignorant not to be aware of how the system works.

The very first new car I bought was a Chevy Van.  Yea, I was 19 and clueless, and bought a gas hog vehicle in the middle of a gas crises.  But I was working for GM, and the process was painless.  A few years later, I traded it in (far too early) for a more economical car - scared by the spikes in gas prices at the time (and even and odd gas days).  I paid too much for the car, and because I borrowed money to buy it, I paid too much for insurance, too (which was made worse by my shitty driving).   I had a "paid-for" car with many years of life left on it, but signed up for onerous loan terms, because I was young and stupid.  It took the better part of a decade to get my insurance rates down and pay down that loan. I learned a painful lesson - but often those are the best kind.

Of course, one way to avoid all this is to buy a car from an individual owner.  It isn't easy to do, as they're making it harder and harder for people to dispose of their personal chattel in our society.  And the people making this harder are often car dealers.  But if you find someone who has a car for sale that's fairly late model and low mileage, and in good shape, you can have it inspected by local mechanic.  And if it looks good, you can contact your credit union get a loan.  Maybe the loan rate isn't as attractive as the come-on rates offered by the dealer, but then again the rates offered by the dealer are often subsidized or padded by the price of the car being sold.

Once you and the other party agreed on a price, you can go right to the credit union and have them print out the cashier's check and hand it to him will he signs over the title. Often, your credit union might require that the title be handed to them, if you live in a lien title state where the bank requires that they hold the title until the loan is paid off.   I bought a number of cars this way from individuals and it's been a very pleasant and stress-free experience.  Your neighbor across the street isn't going to try to sell you floor mats or undercoating or paint sealant - or any  kind of add-ons or extended warranty. He's just a schmuck like you and you're dealing on a peer-to-peer basis.

Of course, those deals are harder to find, and it may be necessary to go to a dealer to find the product you're looking for. But just because you're going to dealer doesn't mean you have to sign up for all the crap they try to sell you.  You can say no.  You're allowed to say no.  They'll still sell you the car. They might not make as much money, they might not be happy about it, but in the end they will sell you the car, and I can say this from experience because I've done this before.

What you can't do, however, is go to a dealer with no idea about pricing and no idea how the procedure works and then end up in "the box" and sign up for onerous payments and pay way too much for the car and buy a junk such as extended warranties and dent protection and paint sealant, undercoating, and all the other crapola they try to add-on to a sale - and then claim that you are somehow a victim of the process as the WSJ article tries to paint. Yes dealers are sleazy and underhanded - where have you been for the last 100 years?  My grandfather was a car dealer for Bell Brothers Buick in New Jersey, and he was a total sleaze bag. The car dealer business has always been sort of sleazy and underhanded and probably always will be.

Oh, and by the way, the WSJ slips a huge LIE in on us with this article.  They argue that cars are "unaffordable" for the middle-class, but then use, as exemplars, two people who, at best, could be considered lower-middle-class if not outright poor.  What's more, LIE number two is that the cars in question were not "unaffordable" but in fact quite affordable, but that the people in question made poor financial decisions - folding over negative equity from previous car, or buying useless add-on protection - which made the affordable cars unaffordable.   The title is a lie - a click-bait lie.  And I clicked on it, too.  The Wall Street Journal, brought to you by Rupert Murdoch!  So glad he didn't change the tone and content of the paper when he took over.  The sarcasm light is lit.

Again, the best thing you can do is, first, to try to avoid the experience by buying a late-model second-hand car from an individual owner.  Second, regardless of where you buy your car, the longer you keep it and the better you take care of it, the better off you are, as you'll minimize the unpleasant experiences you'll have in the buying and selling transaction (not to mention how much you'll save on sales tax!). If you minimize the number of opportunities to get ripped off, you'll have less chance of being  ripped off.

Oddly enough, I see most people doing just the opposite, particularly poor people. They drive their cars as though they're on fire - flooring it to every stop light and then slamming on the brakes. When the light turns green, they put their pedal to the floor as if they're in a NASCAR race. They cruise thorough the Walmart parking lot like they're making a pit stop at Talledega, driving 60 miles an hour until they reach the parking space by the door.  They don't take care of the car, they drive poorly, and they wonder why the cost of transportation is so high.

But then again it gets down to the same old thing: poor people are poor because they make very poor decisions. They squander money and then claim they don't have any money.  A lot of money passes through a poor person's hands, but they squander it on shitty deals.  As a result, they end up spending more money driving around some clapped-out used car then you and I would spend that buying a brand new one.

Should we feel sorry for them?  That's up to you to decide.   No one felt sorry for me when I was young, poor, and stupid and made stupid choices in life.  And even today, they still don't.