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Long Loans Make Sense

John Pearley Huffman
Photo credit: Nissan

From Car and Driver

It’s easy to write off a lot of this as nutso cuckoo-cloud financial irresponsibility. But according to the Federal Consumer Finance Protection Bureau, the average new-car loan in the United States stretches out over 69 months. That’s three months shy of six years. A kid at that age might be through pre-school and kindergarten and entering the first grade. Most medical schools only take 48 months. World War II raged in Europe for almost exactly that amount of time. It’s a long damn time.

Insanity may explain some of this, but let’s assume for the moment that the vast majority of new car buyers—even those throwing the financial long ball—are rational adults. They looked at their assets and debts, considered them in the context of their future income, and decided to take out looooooong loans. So, why?

Truly expensive cars often don’t need to carry any financing at all. For high-earners paying more than $200,000 for a Lamborghini Urus can mean nothing more putting it on their mysteriously colored American Express card. Or their firm is just rolling over the lease on yet another Mercedes S-class. Meanwhile, down at the bottom of the market, there are plenty of buyers stretching themselves to afford a new Toyota Yaris, Nissan Versa, or Ford EcoSport.

That’s because it’s really nice to have a new car. Even if it is a Yaris, a Versa, or an EcoSport. And having one sends out good vibes about your standing in America.

Every new car comes with new tires, unstained upholstery, and unmolested sheetmetal covered in glossy paint. Right now I’m driving a 2020 Nissan Versa SV, as ordinary a car that there is. It’s pretty nice. The engine is no great shakes, but it doesn’t shake much either. I’m not a fan of continuously variable transmissions, but Nissan has is getting good at building the things. The interior design is pleasant, there’s a full load of electro-tricks aboard, and nothing about it smells weird. It’s a completely unsurprising and perfectly good new car.

Now, if you’re a thoracic surgeon with 20 years of experience and a regularly scheduled golf game on Wednesdays, the Versa is not the car to impress the country club valets. But if you’re in your 20s and starting a long career in office-drone cubism, it can be one of the first charms dangling from the bracelet of success. Acquiring a new car is still an achievement. One that can’t be matched by a fully loaded Metro Card or a nickname relationship with Uber drivers.

We’re in a weird age. The signals of success in society are changing. A friend of mine was impressed when I whipped out the charging cord for my iPhone the other day. “Oh, the ten-footer,” he said enviously. “I didn’t realize you were making that kind of money.”

But when it comes to showing off one’s prosperity, even in the 21st century, nothing beats a shiny new car. It’s so emotionally satisfying when someone comes up to you, lovingly scans your new ride, nods, and says something like “Good buy.” Or, even better, “I’m jealous.”

After all, you can’t drive your four-bedroom colonial to the office, and parking for your Gulfstream is limited at IHOP. But you can take your new car almost anywhere and impress friends and strangers alike. The Versa may say limited things about your social status, but it does say something.

So powerful is that need for an emblem of success that people will take out a seven-year loan to have it. It doesn’t matter that they can’t predict where they’ll be or what they’ll be doing in 2026; what matters is having a taste of the good life right now. It may be rational to buy used, but it’s nowhere near as emotionally satisfying.

And fulfilling that need for a new car is rational, in the sense that there’s no point in going to work if you can’t buy some nice things. But that in mind, long loans are perilous.

According to The Wall Street Journal, only 18 percent of American households in 2016 had adequate liquidity to afford a new car. So plenty of these long loans are going out on a financial limb to swing the payments. And when a loan runs 84 months, the new is going to wear off long before the money is paid back. That means many owners will trade in a car they still owe on and sometimes recklessly roll over the unpaid balance into a new loan. Do that a couple of times and your next Versa loan runs $600 a month for seven years. Not surprisingly, defaults are on the rise.

These long loans are practically a necessity to keep the metal moving at dealerships. And for the dealers, they can be (and usually are) more profitable than the car sales themselves. According to J.D. Power, dealerships make an average of $381 on moving a new car out of inventory and $982 on the financing behind the transaction.

It’s all possible because financial institutions bundle these loans as bonds and sell them to investors. That’s spookily similar to how mortgages were bundled to create the securities that nearly crushed the economy when they began falling apart in 2008. The car market is fundamentally different and smaller than housing, so it’s unlikely to threaten the entire economy.

I’m looking at that Versa outside the window as I’m writing this. Even the cheapest $15,625 five-speed manual transmission “S” version of this car includes stuff like automatic emergency braking and lane-departure warning. The $18,535 SV I’ve borrowed has 16-inch aluminum wheels, a seven-inch touchscreen, Apple CarPlay compatibility, and LED lights. More than looking new, it feels up to date. It’s much better equipped than more-expensive cars of just a few years ago. And that price is well below the $32,119 average new car loan.

It’s a good deal if you want to feel good about yourself by driving a new car. Because owning a new car still matters to many of us in this culture. A lot.

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