atomic_fungus (atomic_fungus) wrote,
atomic_fungus
atomic_fungus

#5046: I keep wondering about this myself.

If auto prices have kept pace with inflation, why are 72-, 84-, and 96-month loans necessary? The answer is that those loans exist because auto prices haven't kept pace with inflation.

When I bought my first new car, in 1991, I bought it on a 48-month loan. My payment was $206 a month. At the time, a 60-month loan was the absolute outside, and at that it was seen as excessively long; financing was incentivized to get people into 4-year (and, preferably, 3-year) loans. My car was financed at 0.9%; I was lucky and got exactly the car I wanted for a fantastic price with excellent loan terms, hence the low payment.

These days you can get the low interest rate, and on much longer loans, and the reason that's so is because otherwise average people can't afford to buy new cars.

There's a bit of chicken-and-egg in the reason. Cheap money--low interest rates--have fueled the expansion in car prices, but rising car prices have similarly necessitated cheap money. If I have to pick, I'd say "cheap money" is ultimately the root cause, because our economic growth since about 1985 has been made possible almost entirely by credit expansion. Absent cheap money, the rise in car prices is impossible; if people can't afford to spend $35,000 on a new car, new cars won't cost that much. (Well...they will, briefly, until the manufacturer goes out of business or lowers his prices.)

Just as an example, let's compare my 1991 Escort purchase to a mythical average car in 2016. Average new car price is roughly $35,000; if you get a 4-year loan at 0.9% and put down 10% of the price of the car, you're paying $668 a month.

But let's say that's apples and oranges, and instead figure against a 2016 econobox. A Ford Focus runs just under $20,000; and for four years you're paying $382 per month with 10% down and 0.9% financing.

For an economy car.

Incidentally, while doing the research for those numbers, I discovered that econoboxes of recent vintage get shitty fuel economy. The highest I saw for a non-hybrid was 33 MPG. My Escort got 36 all day long and was reasonably zippy to boot. Main reason: besides adding to the price, the gewgaws add weight to the car. Of course to have all the gizmos and get the fuel economy, you're spending $35,000 on a hybrid econobox, and then you're paying $668 a month if you want to pay it off in only four years.

The prices of cars will have to drop. It can't be otherwise; a bubble always bursts and the automobile market is currently a classic bubble. Cheap money, rising prices, etcetera--and when it comes crashing down as it must it's going to be a hard time to be an automaker.

That's what has me worried about Elio. I think Elio is the model for what's coming--inexpensive, feature-light cars, nontraditional manufacturing, low prices. I want to buy one; I want to buy one now, but they're not going on sale until September or October, and the list price of $6,800 is screamingly low, lower even than a new motorcycle--for something with a roof and windows and AC and heat.

But with gas costing under $2 a gallon, will there be a reason for people to buy them? Besides cheapskates like me who don't want to buy five gallons of gas per day?

I think the low list price is going to help a lot. Median income in the US is about $50k a year, but "median" means half the population earns less than that and poor people like to have new, reliable transportation, too, you know? Even if I found a job tomorrow that paid 2x my current salary I wouldn't be able to justify buying a brand new car; they're too expensive--but a new Elio is well within my current budget. Having that car would save me about $40 a week on gasoline--that's with gas costing $2 a gallon, by the way!--money which could go towards a car payment for something that didn't cost $20,000.

An Elio, financed over four years, with ten percent down and an interest rate of 9%--ten times higher than the Escort in 1991--is $153 per month. And Paul Elio is planning to make money hand over fist selling his cars at that price; he's not doing all this because he has nothing better to do and needs a hobby.

Sounds good to me.
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