The new car market is dead. According to AutoData Corp in March 2009 auto sales were 36% lower than March 2008. So the manufacturers are trying to find ways to kick-start sales. And, being the marketing wizards they are, they came up with a beauty.
Here’s the latest from General Motors, Ford and Hyundai
In GM’s case, the automaker is offering to make up to nine months of payments of up to $500 each if you lose your job for what it calls “economic reasons.” Ford says it will make up to 12 months of payments totaling $700 per month or less. Naturally, there are additional terms and conditions, starting with the time limit. GM’s offer could be renewed, but for now it applies only to cars purchased before April 30. Ford’s deal applies to cars purchased before June 1.
Wow! What a great offer! Well, actually not. Yes, it would be nice if someone made your car payment for awhile if you got laid off. But, if you go for this deal and do get laid off, you’ll still be in a heap of trouble.
To see how, let’s put together some hypothetical situations. We’ll compare purchasing a new car (in this case a Ford Mustang 2 door coupe), buying a 5 year old used car (also a Mustang) and doing a little fix-up on your current wheels.
A new Ford Mustang lists for $20,430. According to Cars.com invoice is $18,877. So let’s say you negotiated a really good deal and got it for $18,800. And, let’s further suppose that your trade-in or cash deposit was $1,000. So you were financing $17,800 for 60 months (5 years).
A 60 month new car loan rate averages 7.38% according to Bankrate.com and their payment calculator says your monthly payment would be $355.66. So to put those new wheels in your driveway you’ve reduced your savings by $1,000 and committed to a $355.66 payment for five years.
What happens if you bought a 5 year old Mustang? It would cost $8,004 retail according to Edmunds.com. You could expect to find 60 to 70,000 miles on the odometer. Hardly a new car, but still one that should be dependable and provide good transportation.
Let’s suppose that you paid full retail for the used car. And, you put the same $1,000 down. So you’d be financing $7,004. A 36 month used car loan averages 7.74%. Your payment would be $218.64. Those wheels cost you your $1,000 savings and a commitment to a $218.64 payment for 3 years.
So what happens if you buy the new car and get laid off? Let’s assume that six months from now your job disappears. So Ford graciously pays your auto loan.
If it takes a year to find work Ford will have paid $4,267.92 (12 payments of $355.66 each) for you. That’s the good news.
But the bad news is that you still owe another 42 months (3 1/2 years) at $355.66 per month ($14,937.72). And, your new job might not be paying as much as your old job. Plus you accumulated some other bills while you were laid off. That car payment could look pretty steep. Selling the car is probably not going to be an option. You’ll still owe more than it’s worth at this point. Basically you’re stuck making the payments on a car you cannot afford.
On the other hand, you could have bought the 5 year old car. You get laid off in six months just like before. No one is offering to make your car payment, but your Mustang is worth just about what you’ve borrowed on it. So you have the option to sell it and walk away.
An even better option would be to keep the car you have now. Especially if it’s dependable. Even if you have to put a few dollars into it. You’d have no car payment.
In fact, let’s suppose that you spent $1,500 fixing up the old ride. Put the whole thing on your credit card. Didn’t even use the $1,000 that was the down payment when you were car shopping. If you’re paying the national average of 12.35% interest, and you paid off $218.64 (what you would have paid monthly for the used car), you’d have the credit card balance paid off in 8 months. So if you got laid off in six months you’d only have to face two payments.
But, let’s look at a more extreme case. What happens if you don’t find a job for two years. Well, Ford is still going to start looking for your monthly $355.66 payment after 12 months. And, by that time you’re probably going to be squeezed financially. Selling the car still won’t be an option. You’ll be upside down in it. Let’s face it, you’ll be cornered.
So my advice to anyone considering GM or Ford’s offer? Steer clear of it! This is an accident waiting to happen. And even airbags won’t save you in this crash!
This is a guest post from Gary Foreman, the editor of The Dollar Stretcher.com and newsletters. Not only does the site host thousands of articles on various ways to save money, but you’ll also find a vibrant forum where people share their dollar stretching ideas. You can comment on this entry here or follow Gary on Twitter.