Chuck Bentley on When Should I Buy a New Car?

Dear Chuck,

I want to replace my mother’s clunker and am considering financing a new one. My father died unexpectedly and I want her to hold onto what little savings she has. What would you do?

Taking Care of Mom

Dear Taking Care of Mom,

It is wonderful that you are helping your mom. Many widows feel vulnerable and alone. Unfortunately, they are often targets of scams or get ripped off when navigating unfamiliar financial choices, such as buying a car.

I understand your desire to see your mother in a safe vehicle. It would be helpful to know her age, but apart from that, answer a few questions before you decide that another vehicle is necessary. Is the clunker reliable? If so, is it safe? Does it have airbags, good tires, etc? How often does she drive? How much longer will she be driving? Are there better options for transportation available to her?

Our emotions can overrule logic. My dad bought my mom a new car in her later years. They always kept two new cars throughout their lives. Mom hardly ever drove but felt safer in a new model. When she passed earlier this year, she owned the car for two years and it had only 9,000 miles on the odometer. Dad ended up selling it to a family member at about an $8,000 loss.

Logic Overcomes the New Car Smell

As much as you want to help your mom, especially after a sudden loss, I would discourage buying a new vehicle.

I know how strong those emotions can be! When I open the door to a new car and breathe that new leather smell, my “want factor” jumps off the chart. The auto industry is extending loans to 72 or 84 months. The down payment may remain the same, but monthly payments drop and are a temptation for the most sober-minded buyer.

But, Oren Weintraub, president of AuthorityAuto.com, sees long car loan terms as a set up for a “vicious cycle of negative equity.” Dealers focus on selling you the monthly payment but the overall cost is ignored. Just because people qualify for a long-term loan doesn’t mean they should get one. In fact, the shorter the loan, the more quickly one can build equity in a car. Equity means someone could sell the car and have cash rather than owing money on it. Negative equity means if you sold the car it would not pay off the balance of the original note.

Facts About America’s Auto Loan Debt

  • GenXers carry the highest loan balances (median close to $19,000) and are the most likely age group to have a car loan.
  • 4.7% of auto debt is seriously delinquent (90 days or more).
  • The average new car loan for Q1 was $32,187. The average monthly payment was $554, more than half the average U.S. mortgage payment.
  • The average used car loan for Q1 was $20,137. The average monthly payment was $391.
  • The average monthly payment on a new car lease was $457.

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SOURCE: Christian Post, Chuck Bentley