Straight Talk from Jim Quinn

'Cause we all just wanna be big rockstarsAnd live in hilltop houses driving fifteen cars

Rockstar — Nickleback

Americans love their cars. Americans are their cars. The impression of achievement and elevated social status are conveyed by the car you drive in the minds of many Americans. If you want your neighbors, friends, work colleagues, and perfect strangers to think you are a success, just tool around in a $50,000 Mercedes SUV. This damn economy is forcing these socially conscious auto worshippers from following their normal two year trade up cycle. The result is that auto sales have plummeted from an annual rate of 16 million to a current rate of less than 10 million. These short sighted people have allowed the temporary psychological benefits of driving a car they can’t afford to outweigh their long-term financial future.

Millions have made this choice. Now that the debt bubble has imploded, the government is pouring billions of taxpayer funds into the auto financing companies like GMAC to try and re-inflate the bubble. Only a fool would buy into it. Luckily, this country has no shortage of fools.

The great American consumer has changed their car buying habits over the decades. In the 1970’s they saved up the 20% down payment and then financed the remaining balance over 3 or 4 years. With an average loan of $4,000 to $8,000, the burden was not great. After 4 years, they owned the car free and clear. They would then drive their American built car until it fell apart, usually around 90,000 miles. In 2008, the average new car loan topped out near $30,000. (In comparison, the median home price was $17,000 in 1970.)

The $30,000 average car loan was made manageable by the “creative” auto financing arms of the Big 3 extending loans to 6 or 7 years. This worked fine for the trader uppers in our society. They wouldn’t be caught dead driving a 7 year old car. It was a beautiful deception. Car buyers deluded themselves that the debt didn’t matter and the car companies deluded themselves that the loans would be repaid. A perfect combination to sell 16 million cars per year for all eternity. When the return customer came into the dealership to trade up after two years, the dealers were perfectly willing to roll the unpaid loan balance into the new deal. Presto!!! We’ve got millions driving cars with a Loan-To-Value of 140%. When this Ponzi scheme collapsed, car sales plummeted 40% and GM and Chrysler have been revealed as bankrupt disasters. According to JD Power, there are now 6 million people who are underwater on their car loan.

This brings us to the most irrational financial move anyone can make, leasing a car. Estimates are that 25% to 30% of all car sales have been leases. This is 4 to 5 million per year. The most leased cars in 2008 according to LeaseTrader.com were:

MSRP

1. BMW 3 Series

$40,000

2. Mini Cooper

$25,000

3. Mercedes C Class

$35,000

4. Toyota Camry

$25,000

5. Cadillac CTS

$40,000

6. Mercedes SL Class

$50,000

7. Land Rover LR3

$50,000

8. Lexus IS 250

$35,000

9. BMW X Series

$40,000

10. Mercedes GL Class

$60,000

This list substantiates that most people’s need for appearing more successful outweighs the benefits of living within your means and saving for the future. Personally, I want to be financially secure rather than appear to be financially secure. I’m evidently in the minority. A car loan payment over four years that would normally be $399 a month can be $249 a month with a lease, which is very appealing to those who insist on driving a new car. The difference is that you own the car after four years with a loan. With a lease you become an indentured servant, forever indebted to the car company master.

The financial reasons for not leasing are numerous.

1. A lease starts a trend of perpetually paying a car payment. If you never paid a car payment and the average car payment in America was $350 a month, putting that $350 a month in a mutual fund that made 10% would become $791,171 in 30 years.

2. If you get in an accident and the vehicle is totaled, you’ll still be responsible to pay back the full lease contract amount. Even if the insurance company gives you back less than what you owe to the dealership, you’ll be responsible for the full amount.

3. Many times, the lease agreement will be for 5 years/60,000 miles. So, if you go over that 60,000 and keep it until the 5 years is up, you’ll pay a penalty for every mile over 60,000 miles. Most people use well over 12,000 per year.

4. If you lose a job or experience a heavy time of financial hardship and cannot afford the payment anymore, the dealership will recover the car, sell it an auction, and if they sell it for less than you owe for the lease agreement, you will be legally responsible to pay the difference.

5. The car is not yours, yet you still pay for the maintenance of it. Again, you can’t claim the car as an asset. It is technically still an asset of the dealership that leased it to you.

6. If you decide to take the option to buy the car at the end of the lease term, you’ll have paid much more than the cost of the car even if you had financed it.

In order to get ahead in life you need to invest in assets that appreciate, not depreciate. Does the appearance of wealth and success really outweigh actually being wealthy and successful? Driving a $50,000 car doesn’t guarantee happiness. If it did, we’d be the happiest country on earth. Looking marvelous is a shallow, shortsighted way to go through life. That is fine for those who choose that route, but I’m tired of picking up the pieces of their shattered lives with my tax dollars.