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Robert Menard,  Certified Purchasing Professional, Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager

Robert Menard
Certified Purchasing Professional,
Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager

In 2012, I wrote the online course, “How to Buy a New or Used Car and Save Thousands”,  . In researching the course, I was surprised to learn about the average age of cars on the road in the US.

In the midst of one of, arguably the greatest economic downturn the our country’s history, USA Today reported in March 2010, that “The average age of cars and trucks in the U.S. is now at its highest level since at least 1995 (the first year for which records were kept) and more cars were scrapped last year than were registered.” This last datum is a bit misleading because 2009 was the “Cash for Clunkers” failed economic experiment that hand the unintended d(but predictable) consequence of driving up used car prices by making them more scarce. 

R L Polk reported that in July 2011, “the average age of the cars and trucks on U.S. roads hit a record 10.8 years as worries about job security the economy kept many people from making big-ticket purchases”. The relationship between new car purchase and used car sale (mostly in the form of trade-in) is nearly one to one so with fewer new car buyers came fewer trade-ins. The scarcity of the used cars and the 30-year low for new car sales in 2009 created market dynamics which raised used car prices to a premium.

The Associated Press reported this week that the average age for automobiles on the road in the US is now a record of 11.5 years old, according to IHS Automotive.  Factors cited were increased reliability of today’s vehicles and the sharp drop of new vehicles sales during the prolonged recession of the Obama years.

While older vehicles lack technological features that “effectively turn cars into cell phones on wheels”, hackers cannot disable the older cars via cassette or CD players! The story goes on to state that the average length of ownership for new vehicles is now nearly 6.5 years and 5 years for used vehicles.

How long should you keep your car?

There is no one correct answer that fits everyone. The technological upgrades and higher quality of manufacturing make for a longer lasting vehicle, up to 200,000 miles according to Doug Love, spokesman for Consumer Reports.

One important consideration for financed vehicle purchases is the length of the loan. Four years should be the maximum term. If you cannot afford the payments on a four year car loan, you are buying too much car! Nevertheless, it is no coincidence that the average length of ownership for new vehicles of 6.5 years is about equal to the length of many car loans.

Here are some questions to answer in order to determine how long you should keep your car.

  • How important is a new vehicle to you?
  • Do you enjoy cars or trucks in the way some folks prize high technology gadgets? If so, treat yourself to this guilty pleasure.
  • Is driving the newest models an imperative or is a car merely a mode of transportation that gets you from point A to point B in (presumably) a reliable fashion?
  • Is vehicle expense a major or minor line item in your budget?
  • Can you afford indulgence in an automobile and still manage all your other expenses?

As to the last question, the ability to afford a new car every few years should never be a consideration. Just because you can afford it is not a good enough reason. If you can afford it, but value savings and opportunity cash, then manage the vehicle purchase as a necessary expense to be minimized.

Robert Menard,  Certified Purchasing Professional, Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager

Robert Menard
Certified Purchasing Professional,
Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager

Editor’s Note: this is the second of a two part series on a new way to buy used cars. Part 1 explains the business model and Part 2 proves how the essential business practices still apply. For a step by step guide on “How to Buy a New or Used Car and Save Thousands”, click on this link.

Last week, we cited the appeal to some of buying used cars online through E-tailers like CarvanaDriveTime,  and Vroom.com. A perceived major advantage to the dealership-o-phobic crowd who detest the traditional car buy/sell torture-tango is that one needs never to set foot in a dealership or talk to a salesperson – AND, the transaction is all haggle free!

This sigh of relief at short circuiting the process may come with a hidden cost if you also obtain financing with the E-tailer. Resist the urge to surrender to the tacit promise of haggle free financing for reasons we discussed in previous posts such as this one.

Auto loans 

Most car buyers do not pay cash and therefore must finance their purchase with a loan. The auto dealers who offer loans do not finance vehicles from their own operating cash. Instead, they refer that service to financial institutions such as commercial banks, credit unions, and financial subsidiaries of the auto maker like Ford Motor Credit Company (FoMoCo) and General Motors Acceptance Company (GMAC). Every major auto manufacturer has a finance unit, many of which earn greater profits from financing than from selling cars!

In return, the lenders pay a commission or fee to the dealership for successful referrals. That fee is usually a percentage added onto the loan interest rate. The Finance and Insurance (F&I) specialist at the dealership is in fact another commission salesman. You are much better served to obtain your own bank financing, especially if you have good credit.

For buyers with poor credit histories and low FICO scores, that percentage is added to the loan rate. For buyers of excellent credit scores, the dealership will often quote the same lowest percentage interest rate as the bank or credit union. When that happens, ask the bank or credit union for a further discount to eliminate the “referral fee” they pay to the dealership. If you have a high enough credit score, the rate will be reduced.

Personal credit

The value of your personal credit score cannot be under stated. This recent story from the Dallas Morning News shows how a poor credit score can cost consumers twice as much for auto and home insurance rates as those with high credit scores. Poor credit scores also affect the rate lenders will offer. The importance of your credit score cannot be overstated.

For an independent look at how much it can cost to borrow money for a car purchase, visit this Loan Calculator site.  For a $20,000 loan at 5% for five years, the total interest paid is $2,645.58. The same principal at 10% for five years equates to $5,496.47.

You can read more about car buying credit here.

Negotiation

A “no haggle” experience does not mean a “negotiation free” experience. The dealers may not deviate from the published price but it is up to the buyer to research the price. Good sources for this are sites such as EdmundsKelly Blue Book ,  and National Automobile Dealers Association , which are strongly recommended for all vehicle acquisition purposes.

You may negotiate for other terms such as warranty, upgrades, and special equipment and/or services. For help with negotiation skills, try this online course on the Science and Art of Negotiation.

Robert Menard,  Certified Purchasing Professional, Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager

Robert Menard,
Certified Purchasing Professional,
Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager

Editor’s Note: this is the first of a two part series on a new way to buy used cars. Part 1 explains the business model and Part 2 proves how the essential business practices still apply.

Have you heard of Carvana?  Neither had I until a recent story about a three year old startup company from Arizona that maintains a facility in Blue Mound, TX, a small town of the periphery of the Dallas/Ft. Worth metroplex caught my eye. Carvana sells only used cars (all states require that new cars be sold through dealership networks although Tesla is challenging these laws). Carvana is partially owned by DriveTime, a company also engaged in selling used cars online.

Carvana’s business model is a twist on internet marketing and sales. They acquire used cars, usually at auctions, but also via trade-ins. This piqued my interest so I dug further to find Vroom.com , a competitor in which legendary NFL Quarterback John Elway is an investor. Both businesses proclaim a “haggle free” experience, a prospect that appeals to many used car buyers. In Carvana’s debut year of 2013, sales totaled $15 million. In 2014, sales jumped to $45 million. They are expecting a doubling of revenues in 2015.

How does the process work? 

For most customers, buying used cars is an unpleasant experience. It is safe to say that used car dealerships in general and used car salesmen in particular suffer from an image and trust problem. Carvana and Vroom business models aim squarely at easing these discomforts and therefore appeals to the disenchanted dealership buyers. Carvana delivers vehicles to customers, often picking up their cars in trade. Further, a 7-Day “Test Own” guaranty allows buyers to return the car if they are not satisfied.

Carvana concentrates on late model used vehicles, 2006 at the oldest, with most stock being 2010 vintage or newer. Prospective customers search online, similar to other online auto sellers. It claims a 150 point process in preparing its used cars, not much different from almost all other existing used car dealer programs. They will also finance your purchase – more on that in Part 2.

What is different?

Carvana claims that all known flaws are disclosed, and that no vehicles involved in accidents are bought or sold by them. One distinguishing difference is the multiple photographs of the reconditioned vehicle which allows prospects to click on the car parts to open doors, for instance.

The seven day money-back guarantee feature is also a distinction. Carvana also delivers the vehicle to the buyer and calls on the sixth day to ensure customer satisfaction.

Carvana says that its online presence saves “15-20 hours of labor at a dealership… or about $1,200 to $1,700 in labor and another $250 to $650 in building associated costs.”   Who has no doubts as to the integrity of these cost claims? However, it is indisputable that today’s car buyers research the internet before visiting the dealership for the test drive.

What is not different? 

A few years back, I wrote an online course about How to Buy a New or Used Car and Save Thousands”. Three underlying principles still apply: auto loans, personal credit, and negotiation skill.

More on these essentials next week.

Robert Menard,  Certified Purchasing Professional, Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager

Robert Menard
Certified Purchasing Professional,
Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager

The previous post concerned Purchasing Managers with Warehousing Responsibility.  This deals with the related topic of inventory.  As noted in the case of warehousing responsibility, we are often thrust into the inventory world with zero knowledge of how to manage this important responsibility.  ABC  In terms of inventory management, the most commonly used system is the ABC classification, an inventory categorization method which consists in dividing items into three categories.  Typically:

  • ‘A’ items constitute 20% of the items but accounts for 70% of the annual consumption value of all items.
  • ‘B’ items – 30% of the items accounts for 25% of the annual consumption value of the items.
  • ‘C’ items – 50% of the items accounts for 5% of the annual consumption value of the items.These classifications and amounts are somewhat arbitrary and can be adjusted.  Many enterprise software systems have an inventory module.  Often, Inventory, like Purchasing, is a “bolt-on” upsell.  Such an addition is almost surely worth the price if used and managed.

ABCSecured “A” storage can be created by fencing off and locking sufficient space for high value items, including production parts and equipment delivered to central stores but destined for a other locations.  “A” items need to be carefully controlled to make sure that sufficient material is on hand and replenishing stock is ordered in sufficient time to get delivery when needed. “B” items are next in order of control with “C” items requiring the least attention.  Higher value assets should be more tightly controlled and definitely signed in and out for control as well as costing purposes. Inventory on the shelf is money on the shelf.  Current assets are defined as “convertible to cash” within 30 days.  If not, the inventory item must be moved to Long Term Asset and discounted to lower of cost or market.    If purchased assets cannot be used or sold, money has been wasted and is a loss. It drags on working capital and becomes a source of “phantom” loss or other forms of inventory shrinkage, the term used to describe the loss of inventory due to theft, damage, obsolescence, spoilage, etc. Security Secured ‘A’ storage can be created by various means.  Chain link fencing is common.   The ‘B’ and ‘C’ items do not need as much security but must be stored orderly and in a fashion that demonstrates control.  Big contributors to this system’s success are neatness and cleanliness.  Disorganization encourages disrespect, neglect, and theft. In conjunction with a warehouse system, an organization can engage in meaningful inventory practices, including periodic cycle counts.  Cycle counts can be augmented using barcodes.  There are other inventory techniques such as Perpetual versus Physical, Sampling, etc, but these can be explored once the warehouse and inventory management is under control. Not every item must be centrally stored Explicit in the model of warehouse and inventory management is that not every asset and delivery needs to be stored in one central location and then distributed to other locations.  It is unnecessary for many common goods like office and janitorial supplies, bottled water, and PPE, to cite just a few to be centrally stored. Companywide pre-negotiated agreements with partner suppliers leads to of Vendor Managed Inventory (VMI).  Not only would this free up warehouse space but streamline processes, improve efficiency, and reduce costs.

 

Robert Menard,  Certified Purchasing Professional, Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager

Robert Menard
Certified Purchasing Professional,
Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager

Many of us in purchasing, particularly those in smaller companies, often have responsibility for warehouse operations.  In that we in the purchasing world tend to have little training, we are often thrust into the warehouse with zero knowledge of how to manage this important responsibility. 

Let me cite the case of a good client.  It had two warehouses, referred to as “the larger and the smaller”.  My client representative, the new Purchasing Manager, also had warehouse and inventory responsibility so we devoted ample time to unraveling the mess. He did not know why they had two warehouses.  Both were disorganized, messy, and unsecured.  Expensive portable (easily stolen) assets were strewn amongst copy paper, toilet paper, bottled water, and trash.  Nothing was labeled by name and no bar codes existed.  Many items were apparently dumped on the floor.  Upon closer examination, much of the stock in this “Tomb of the Unknowns” was unusable, obsolete, or unidentifiable by current employees.  Shelving was poorly organized.  Worse yet, although the walk doors were controlled by key pad access, the overhead doors beside them were unlocked and easily opened.   

 

messy warehouse example

messy warehouse example

Some parts were apparently bought and either not needed or not used.  One carton bore a shipping date of nine months earlier and was shipped via 1 (next) day delivery.  The box had never been opened. 

Much smaller equipment was stored or perhaps abandoned outside a shop door.  The shop manager identified them as junk that is scavenged for parts.  These small assets ($1,000 or less) are generally not worth repairing as replacement is usually cheaper.  

Larger walk behind and other machinery ($15,000 to $20,000) was slated for repair as time allowed and rotated in as time and personnel permit.  However, the lack of identification, prioritization, and general informality portrays a system with little to no control. 

No tags to identify specific problems needing attention were in evidence.  Since there are so many units, an obvious question is “Who knows what needs to be done?”  

Recommendations 

  1. An ambitious campaign involving separate but related elements of management, inventory, security, technology, purchasing, accounting, and business controls must be implemented.  Barcoding, appropriate software, upgraded technology, etc, are co-requisites.  All stored assets must be labeled, tagged, and purged periodically.
  2. Without Item Numbers, there is no way to track how much money is being spent on individual units.  It is possible that some units are repaired at costs in excess of replacement.
  3. Consolidate warehousing operations in the larger warehouse.  Doing so would open up the space in the smaller warehouse to other purposes.
  4. Appoint a new receiver who should be located within the warehouse.  Provide a modular office with climate control.  These are routinely fitted with heavy weight bearing roofs for mezzanine storage.
  5. Store high value assets in a secured area as well as lower value items that would be subject to pilferage otherwise.
  6. All the tools of technology must be available.  Some training may be required.  Some of the main features of the new inventory system are:
  • All incoming deliveries should be bar coded and bear PO Number and Part (Item) Number
  • When swept by the reader wand, it should automatically be uploaded into inventory, the PO closed and payment scheduled
  • Upon receipt of major purchases for jobs, received deliveries should be automatically credited to inventory and then debited to the job cost when it its barcode is swiped as it leaves the warehouse for delivery to the job.

       7.      An elevated loading dock may become necessary as suppliers change their delivery habits due to new negotiated agreements.  Some delivery vehicles may not have lift gates and  some  may require (certainly, a 45 foot trailer forklift availability to unload.  Hoisting equipment is needed in the warehouse in any event so this should not be a problem.

8.    Some of existing shelving and racks are adequate for the moment but as material is increasingly relocated to the warehouse, new racks and shelving may be needed.  To maximize the storage, this will mean that some material is stored out of visual and hand-accessible range.

9.    A long established Warehouse Management System technique is to deploy a Radio Frequency Identification (RFID), sometimes called “proximity” system.  A barcode request is input into the system and the retrieval vehicle (high-bay lift) is guided to the location.  In large systems, the vehicle is guided automatically, but in small systems, an audible signal grows in intensity as the operator reaches the desired bin/pallet location is neared.  Apropos, larger pallet size racks and shelving may be needed for pallet deliveries.

10.   Essential elements of this system are orderliness, labels & signage, barcodes, and software.  Also, parts storage bins should arrayed in an organized fashion on shelves.  Each should bear the name and Item Number, manufacturer, and sometimes project number, either a jobsite or capital expenditure project.  In many cases, voice recognition software allows items to be accessed using verbal commands.

Click here for a companion post, Purchasing Managers with Inventory Responsibility.

Robert Menard,  Certified Purchasing Professional, Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager

Robert Menard
Certified Purchasing Professional,
Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager

During a recent consulting engagement, the issues of warehouse and inventory management arose.  The client was eager to organize its operations and address centralized and decentralized purchasing and warehousing functions.

My consulting practice usually finds trouble with these supply chain practices. 

Four significant issues affecting warehouse and inventory operations were noted: Receipt of Goods, Inspection of Goods, Delivery, and Freight.  Each of these is the subject of Uniform Commercial Code(UCC), the controlling authority in the US in the matter of the purchase and sale of goods.    

Receipt of Goods

Under the UCC, Receipt of Goods occurs when buyer takes physical possession of the goods.  In most cases, receipt takes place when customer unloads the delivery vehicle.  Receipt could also take place at the supplier’s facility when a customer vehicle picks up the goods. 

The UCC imposes some duties of due diligence on the receiving party.  The receiver must immediately observe the physical condition of the crates, packaging, pallets, etc., before signing a written receipt for the delivery agent, either supplier’s driver or third party transportation supplier  A “clean receipt” with no comments about condition make it difficult to file damage claims later.  

Any apparent damage should be noted on the receipt and co-signed by the driver of the delivery vehicle.  Multiple photographs should be taken immediately on the receipt site of and emailed to the supplier with a copy to CI Purchasing.  Include a photo of the label which should bear the P.O. number, item or part number, bar codes, and other relevant data.  The P.O. time stamp memorializes the day, date, and time of receipt.

Returning to Terms and Conditions (T’s & C’s), the phrase of “Receipt of goods is subject to final inspection.” should be made part of the boiler plate that should apply to purchase of all goods.  For paper bound suppliers, the receiver should have an inked stamp for paper receipts issued by the shipper or third party transportation firm stating, “Receipt of goods is subject to final inspection.   

Inspection of Goods

Once the apparent undamaged condition of packaging is determined, the next step is Inspection of Goods.  In addition to a detailed assessment of physical condition, questions to address are:

  • Did the supplier fulfill all of its commitments
  • Were the specifications met
  • Are the quantities correct
  • Is the entire shipment of uniform quality
  • Was the order over or under shipped

 The right of the buyer to inspect goods is virtually inalienable.  Sometime before the buyer is required to legally accept the goods, there must be an opportunity to inspect, according to Section 2-513(1) of the UCC.  

In most businesses, it is usually impossible to suspend other operations in order to immediately inspect the goods.  Moreover, the supplier or third party driver must depart to make other deliveries.  Without wandering off into the tall grass, it is best to require inspection before and as a condition of payment.  This requirement should be made explicit in your T’s & C’s.

Should you buy goods subject to rejection due to temperature variations, impact energy, or positional changes, Temperature Watch, Shock Watch, and Tilt Watch are options to explore. 

 

Robert Menard,  Certified Purchasing Professional, Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager

Robert Menard
Certified Purchasing Professional,
Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager

One of the most common tags and keywords in this blog is Total Cost of OwnershipIt is usually applied to private sector businesses as the underpinning principal of professional procurement.  However, governmental units, including the Pentagon and most recently, the State of Nevada have used TCO as the basis of awarding publicly bid construction projects.  This win of TCO is likely to herald many more victories of concrete over asphalt pavements.

According to a story published 23 February, 2015 in ENR  , the leading periodical in the construction industry, Nevada awarded a major paving contract to a higher bidder because it offered a lower TCO.  “Citing long-term life-cycle costs”, Nevada DOT chose a contractor whose $83 million price was $3 million (3.5%) higher than the lowest bidder.  Concrete pavement is superior to asphalt in reducing rutting and potholes. 

TCO, Concrete, and Asphalt Pavements 

Mary Martini, NDOT District 1 engineer is quoted in another press report as saying, “We opted to use concrete, which federally funded studies show costs 13% to 28% less in the long run than using asphalt.” The concept of life-cycle costs has long been known to state governments but they have been slow to adopt it.  

The cement industry  and concrete industry  have long maintained that concrete roads and highways are less expensive in term so TCO.  Some folks confuse cement with concrete.  Cement is the ingredient (about 15%) that binds together and, aggregate, water, and additive to form concrete.  concrete does not exist without cement.  Understandably, the asphalt pavement industry has an opposite view.  Based on the federal studies, it is fair to assume that concrete pavement will continue to make gains at the expense of asphalt. 

There is also an argument raging over which material is more sustainable.  Both sides mount formidable arguments but the concrete position is more persuasive.

 

Robert Menard,  Certified Purchasing Professional, Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager

Robert Menard
Certified Purchasing Professional,
Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager

Pamela Yip is the MONEY TALK writer for the Dallas Morning News.  Her 09 February 2015 story  introduced a man with a high (above 760) credit score who was driven to overtop the 800 plateau.  Yip wisely pointed out that since he had already attained the 760 “gold standard” rating, it was not worth hiring a consultant to drive him over 800.  

I could not agree more.  We have often discussed credit rating as it applies to the purchase of automobiles.  My online course, “How to Buy a New or Used Car”  stresses the importance of good credit.  The higher your credit score, the lower your interest rate and the more favorable the terms are.

So how do you increase your score?

The story point outs the most obvious path, that of paying your bills on time, better yet, early.   Here are some others that may or may not be common sense.

Credit Cards          

  •  Pay off the balance in full every month

The interest rates charged are the highest allowed by law and the card companies move their offices that allow the highest rates.  If you cannot pay the balance off every month, you have a spending discipline problem, not an income problem. Borrowing money on your credit card is a bad idea and an expensive practice.

  •  Do not obtain multiple card accounts

You are not increasing your credit availability so much as depressing your credit score.  The ratings companies look at the total credit available to you and will penalize your score if you have too much debt available that can be serviced by your income.

Further, each card introduces the chance for late payment and default.  If you only have one (two max) card, you are far more likely to pay the balance off every month on time.  Besides, doing so will convince the credit card company to grant our request for credit line increases.

Home mortgages            

  •  Do not buy more house than you can afford.

Bankrate.com states, “As a general guideline, your monthly mortgage payment, including principal, interest, real estate taxes and homeowners insurance, should not exceed 28 percent of your gross monthly income.

  • Pay half of your monthly mortgage every two weeks

This will amount to making 13 months’ worth of payments per year.  For instance, assume your monthly payment is $1,000 and is due on the last day of the month.  Pay $500 on the 15th day and another $500 on the last day of the month.  Since there are 26 two-week periods, you are effectively paying.                      

  •   Apply the excess to principal

Talk to the mortgagee about your plan to pay every two weeks and specify that you want the excess to be applied to principal, not prepaying the mortgage.  According to interest rate.com,  “A $200,000 30-year home loan with an interest rate of 5% would cost $186,512 in interest with the traditional 12 payments a year. Make the equivalent of 13 monthly payments every year, and the loan will be retired in 26 years and you pay only $153,813 in interest — a savings of $32,699.”

Auto loans                Bankrate.com  claims that , “Not more than 20 percent of monthly income, say experts. And that should include payments on all the cars you own, whether you have one vehicle or six. And we’re talking about your take-home pay, not your gross income.”

Following this advice will drive your credit score very high.

 

 

Robert Menard,  Certified Purchasing Professional, Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager

Robert Menard
Certified Purchasing Professional,
Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager

Readers may recall a blog post in August 2014 that referred to the dangers and borderline illegal practices of subprime auto loans by Jessica Silver-Greenberg and Michael Corkery of the New Your Times.  They are at it again, shedding light on the sleazy title loan world in their collaborative story “The title loan conundrum”.   

These title loans usually come with usurious interest rates, so high in many cases, that the borrower never gets out of quicksand of debt.  The story mentions a woman who needed $1,000 to cover debts so took an auto title loan.  Two years later, she was $992.78 in debt and her vehicle was repossessed for non-payment.  Due to the 171% annual interest rate, she still owed virtually the entire amount and had lost her car.   

A NY Times investigative study found that interest rates ranged between 80% and 500% including fees.  When customers are unable to pay off the debt on time, a new round of fees is triggered as the debt is refinanced.  Another study reported in the story was done by the Center for Responsible Lending in Durham, NC.  It found that 1 of every 6 title loan borrowers will have their vehicles repossessed.    

The moral of the story 

The sad tales related in this story testify the sinister underbelly of commerce, organizations preying on the vulnerable and under educated.  What is worse, the victims are almost exclusively economically disadvantaged.  While some states are cracking down on title loans (and pay day loans as well) we all have an obligation to protect ourselves. 

Learn about your personal credit and how to buy and finance carsBe a responsible buyer so you do not depend on feckless well-meaning but generally incompetent bureaucrats to protect us.

 

Robert Menard,  Certified Purchasing Professional, Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager

Robert Menard
Certified Purchasing Professional,
Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager

The subject of subprime loans for automobile purchases continues to be troublesome.  A recent press account sounds the alarm.  Susan Tompor of the Detroit Free Press authored “Miles to go on car loanswarned against expensive six to seven year car loans The Tompor story cites a 28 year old auto worker trying to buy a $33,000 Dodge Charger using $10,000 down and no more than a 5 year loan.  She writes that Experian the credit bureau, that 40.3% of new car loans ranged from 61 to 72 months and that another 25.7% range between 73 and 84 months.  The average term for all new car loans was 66 months or 5.5 years.   

According to the story, a three year car loan for $28,000 at 4.5% accrues about $2,000 in interest but the same loan at six years rings in at about $4,000.  Car loans are available around 3%, lower for high credit scores, on short term loans of three years.  Since the risk of default is inherently higher on loans of five years or more, the interest rate is likely to be higher.   

That same $28,000 loan at three years carries a $832.91 monthly payment but the six year loan falls by almost half to $444.47.  So you pay half the monthly rate but rack up twice the total interest.  That would not seem to be much of a bargain and probably would not be done if more car buyers recognized the financial impact of poor decisions.   

What is the allure of the long term loan? 

The long term loan depresses the monthly payment so an unwitting buyer can be persuaded that the lower payment “buys more car.”  This is utter hogwash but many buyers proudly proclaim this mantra as justification for their ill-advised purchase.   

What is worse, no matter if the interest is simple, compound, pre-computed, or almost any other form, the interest curve is steeper in the early years when most of the monthly payment applies to interest.  It is generally about half way through the term of the loan when most of the payment applies to principal. 

In the online course, How to Buy a New or Used Car,we speak of “being upside down” on a car loan.  This happens when a borrower owes more on the loan than the car is worth.  We also cite the average statistic that a new car loses half of its value to depreciation in the first three years. This means that if you finance a purchase for six years, not only will you be upside down, but you will be much worse off because the steep interest curve in the early years keeps the loan value much higher than would the three year loan.  

Is the rising price tag on vehicles forcing buyers to seek longer term loans?

Of course not.  No one is forcing anyone to buy a car they cannot afford.  If you cannot pay off a car loan in three years, do not buy the car because you cannot afford it and you are putting yourself at financial risk.   Buy a different vehicle, including a used car, which is more in line with your budget, cash flow, and ability to service the debt.