Is the car dealer talking out of his hat?

October 2, 2006 6:42 AM

So I finally bought my first car (not counting the 20 year old brown volvo I part owned for 3 months in Canada). During the 'chat' with the finance person at the dealership he was adamant about two things that puzzled me

1) Consolidating your car loan and home loan is a bad idea, it does not help to repay the debt quicker. The only time people should consider cosolidating debt is when they are struggling with repayments.

2) He advises people that it is better not to repay their car loan early because a car is a depreciating asset.

When I asked him he could not really clarify either of these points. It had been a long day for me so I let it go; but now it is niggling at me.

Yes he is biased; he makes his living getting people to take loans through him. Am I missing something though? I can;t see how they can be true (unless the car is bought by a business and the interest is a tax deduction).

If you can put this to rest for me I would be grateful.

posted by Rc to work & money (14 comments total)

There might be some merit to #1. I generally think it's a bad idea to roll "consumer" debt (cars, credit cards) into a home equity loan or a refinanced mortgage. If you were to have trouble making the payment, better to have car repossessed (worst case scenario) than to have it affect your mortgage. You don't want to mess with your mortgage.

But the early repayment thing is a total crock. Why pay more interest than you have to? Ideally, it's best to not have a car loan at all, so it's at least somewhat better to have one for the shortest amount of time possible. The only exception to that is if you have a 0% interest loan.
posted by boomchicka at 6:48 AM on October 2, 2006

He advises people that it is better not to repay their car loan early because a car is a depreciating asset.

Well given that cars (but a few exception) can't but lose value over time, it is better to first make sure you always have money to pay house mortgage, then make sure you can pay car ; that's almost always true as house is less likely to lose value over time, or not so fast as car and unlike car house value can increase. As for the interest, it is certainly better to pay everything immediately if you can afford that (you don't pay interest) so I can't possibily see why one should pay car slowly ..it can only cost more AND the depreciation of the buying power of money may not happen so quickly to make you feel better..for istance if now it is a problem to pay $100 a year, it will take many years and an increasing wage to have these $100 feel "less important" when they leave your wallet.

It may happens, but why risk the uncertainity if one can pay and get rid of debt ?
posted by elpapacito at 7:02 AM on October 2, 2006

Funny that his two points there have opposing 'best practices' isn't it? No point in consolidating since it doesn't help the debt get paid quicker but by the way - don't pay that debt quicker.

In fairness to this fellow, he is likely speaking most of the time to people who are not focused on getting out from under payments or paying the least in total, he's talking to the kind of people who want a monthly payment below a certain amount, even if it goes on longer or ends up costing more.

I concur with boomchicka about non-house expenses in house mortgages, though it's a tossup to me given that I also believe in paying the least amount possible in total. But why would anyone listen to me? I also don't believe in borrowing money for car purchases....

There's also the consolidation issue that often there's costs associated with refinancing or consolidating so it makes no sense to spend $100 in fees to save $75. Otherwise the name of the game is keep the most money in your pocket rather than giving it to the loan provider, so if paying it early accomplishes that then that's the thing to do.
posted by phearlez at 7:02 AM on October 2, 2006

I'm curious about how the dealer gets their cut of the loan. If the bank pays the dealer based on you maintaining your loan until the end of the term, then it's in the dealer's best interest if you don't pay it off early or consolidate it with your mortgage payment. Based on the auto finance guys I've dealt with, I suspect his advice was profit-motivated.
posted by SteveInMaine at 7:10 AM on October 2, 2006

I won't speak to the consolidateion issue, but about the "don't pay it off, it's a depreciating asset"--that's a crock IMO. I mean, if you wait to pay it off, you pay *more*, for an asset worth *less*. Hardly sounds like a killer strategy.

If the loan were 0%, by all means delay. I imagine it wasn't though.
posted by RikiTikiTavi at 7:21 AM on October 2, 2006

The faster you pay down your principal, the less interest you pay. Period. It's just math. Unless you have an early repayment penalty, then his point #2 is precisely the opposite of good advice, just... the opposite.

In general, don't finance at the dealership. There are 2 steps to making profits on an auto sale: the first is to push up the price of the car as high as possible, and the second is to wring out a bit more with a financing deal. The second is accomplished by dickering about what you want your monthly payment to be; they get you to forget the bottom line, which is the total price, and consider cash flow instead.

Instead, get an auto loan at a local credit union if you're qualified to join one (and just about everyone is these days). You'll get a better rate, rather than just a different (i.e., longer) payment structure. I suspect it's too late for the original poster, but for future readers: don't finance at the dealership.
posted by rkent at 7:51 AM on October 2, 2006

YA don't roll your car payment into your mortgage; then you will be paying for that crappy car you don't have anymore for ever!

How long is your loan term? It is possible that, on a long-term loan (72 mos is a long term for cars), the adjusted value of your car payments (ie corrected for inflation) may be lower when you pay out on a fixed rate loan over the course of those 72 mos. or whatever, compared with the "value" of the cash if you pay all at once. More simply: You could buy a lot more for a dollar in 1972 than you can now; and that dollar will likely buy you a lot less in 2026 than it does now.

So it's possible that you could come out on top by paying over time. It is also possible that I could long-jump 29 feet and win the gold at the next olympics.
posted by Mister_A at 7:52 AM on October 2, 2006

Consolidating your car loan with your mortgage basically means that you'll be paying for your car over the length of your home loan - often 30 years. Unless you make your car last that long, I'd say it's a bad idea.
posted by grateful at 7:54 AM on October 2, 2006

I think you already know these guys get paid to lie to you. 1) depends on circumstances and 2) is almost certainly bullshit.

1) Is overly simplistic. First, you need to compare the loans' interest rates, taking into account that mortgage interest is tax-deductible but car interest (on a personal vehicle) isn't. Next, you need to look at the terms of each loan. Finally, what's the cost (application fees, etc.) of getting into each product? He's probably right if you get into a 15-year or 30-year mortgage for the consolidation and don't plan on making any extra payments, but if the interest rates are anywhere close to each other and you're planning on paying down the consolidated loan (or at least that portion corresponding to the car) over a period of time comparable to the car loan he's almost certainly dead wrong. I'm guessing he just offered 1) without delving into all the above stuff, in which case he's bullshitting you.

2) Doesn't make any sense.* I'd call him on it to watch him squirm (loan guys hate me.)

A couple of previous posters bring up the issue of putting your house at risk with a consolidated line. That's true, but if you're in a situation where this is a real concern you need to look at cheaper cars, or wait until you can make a bigger down payment. Loan officers get paid for closing loans, so they're looking for ways to get you money even if you really can't afford it.

*Assuming he isn't selling you some screwed-up kind of car loan that doesn't give you any incentive for early payoff. These used to be legal in many states -- I don't know if that's still the case. In any event, there's no financial benefit to keeping the loan to term vs. early payoff unless: a) you have a way of earning more on the payoff amount than you're paying in loan interest or b) you can't swing the payoff.
posted by Opposite George at 8:07 AM on October 2, 2006

Thanks to inflation, you car payments actually get cheaper, the longer you pay them. If you have a fixed payment of say $350/month, $350 is worth a lot more today than $350 will be worth in 5 years. Every year your payment gets a couple of percent cheap based on the real value of money. Of course, interest rates can cancel out that gain, but perhaps he's refering to something like that?
posted by blue_beetle at 8:27 AM on October 2, 2006

If your interest rates vary greatly between your car and house loan (i.e. you're paying a buttload of interest on the car, but reasonable on the house) then I'd imagine that consolidation is your best bet, even in the long run.

In a recent consolidation, I took a 14% "cement shoes" car loan I had and rolled it into my 6.2% house loan. Along with a bunch of other debt consolidation, my wife and I are now paying 700.00 less a month in bills, she has a new car, and we're paying for our basement refinishing.
posted by thanotopsis at 8:32 AM on October 2, 2006

#1 is wrong because home loans are cheap, you always want cheaper interest on your total debt, and (a few subprime products) aside you can always pay down a home loan balance faster than the minimum if you want to reduce your total interest expense and indebtedness faster. While the dealer is probably suggesting some psychological virtue to paying off your car faster, there's no economic virtue to it.

#2 is a damned lie. The statement itself is incoherent nonsense, and the motivation is strictly to preserve the dealer's profit on the loan: dealers are severely penalized on their loan-origination fee when the loan gets paid off too fast.
posted by MattD at 9:25 AM on October 2, 2006

Each suggestion, if followed, will pay him more. If you consolidate your loan (bad idea for reasons given above), his loan is payed off sonner -- he loses interest money. It's the same effect as the second.

The fact is, you should run from that place and never look back. Buy a 2 year old car, drive it for 4 years, then sell it. It's the 2-4-6 plan: buy at 2, keep it for 4, sell it at 6. You take the least hit on depreciation following this plan.
posted by kc0dxh at 10:39 AM on October 2, 2006 [1 favorite]

The faster you pay down your principal, the less interest you pay. Period.

This is true in theory but in practice it's possible for a loan contract to be written such that prepayment does not reduce total interest. It's a crap loan but it can be done. Enough contracts were written that way that Florida instituted a law some decade+ ago stipulating that a prepayment clause must be added if requested, however the law was written such that you might have to ask for it to get it.

You should always ask about prepayment penalties when taking a loan.
posted by phearlez at 11:47 AM on October 2, 2006