Over the next few issues, we are going to look at several different issues regarding financial dilemmas that affect everyone on a daily basis. The first one we will look at is auto financing, and it’s a very difficult issue for many people. Most people put a small amount down. Some people pay nothing upfront and then pay a nice reasonable amount over a few years until they trade the vehicle in and get something else. However, if your credit has taken a beating, as many people’s credit did during the last economic downturn, you will find that the amount you have to pay to buy a car will be much more than your budget can handle.
Most people with bad credit wind up at a buy-here-pay-here lot, which offers financing of the vehicle on the premises. You show up and look at the vehicles and the payments and find one you like, only to find that you don’t qualify for the payments and you are either put into another vehicle or forced into different terms, including a much higher interest rate. The lenders will try to justify the higher rate by referring to the increased “risk” they’re taking, but the reality is that auto loans are one of the safest loans a lender can ever make.
The interest rate you’re charged will make a huge difference in your ability to get and keep the car you’re trying to buy. To illustrate this, let’s take a purchase of a vehicle at $12,000 for 72 months. If you have bad credit and get a 24 percent interest rate, your payment will be $315.92, which is going to put enormous pressure on your budget, especially if you make the $10 per hour minimum wage in Massachusetts.
On the other hand, look at an individual with a good credit rating and the ability to get a 6 percent interest rate. This individual will have a monthly payment of only $198.87
The ironic thing is that the customer with the lower payment has a much better chance of still owning the car at the end of the 72 months when the loan is in effect. On the other hand, it will be very unlikely that the person with the higher payment will be able to make it without the car being repossessed. The lenders try to make the case that they are performing some service when, in reality, they’re making a huge profit. It’s a safer investment for them to make a car loan at 24 percent interest rate than to lend out the money on a house or via a credit card. With a house, they have to go through a lengthy court battle to foreclose on the loan, and with a credit card, they have to hire collection agents and sue and usually lose the money. Car loans are one of their easiest profit centers.
Even repossessing a car has gotten simpler with technology. In the old days, if a customer was late by a month or two, the lender would contract out a repo man and take back the car. It was sometimes a challenge because people would hide their cars, but now, the new trend is that the dealers of high interest rate auto loans will install a GPS device that immediately tells the lender exactly where the vehicle is at any time. This reduces the risk dramatically. However, it gets worse. The GPS devices now provide the lender with the ability to shut down the automobile, which makes a repo man unnecessary. Immediately, the consumer will have to call in and make the payment to get the vehicle turned back on.
Lenders do have a right to get a return on their investment if they lend you money for their risk, but their risk is next to nothing based on the fact that they can track your car 24/7, take it back, sell it and then come after you for the difference.
In the next issue, we’ll look at banking fees.