Whoa! A 25% Car Loan?

Jan 10, 2014 by

pontificate

May I pontificate for one post?

I’m going to stick my neck out a bit here and offer a lot of opinions about a real life situation though I’m admittedly lacking considerable relevant information. Some might say that makes me well suited for American politics. I won’t argue that point, but as George W. Bush once said (well okay, I’m making this up but it sounds like something George W. Bush could have said): “Please don’t confuse me with the facts.

Couple Complains About 25% Car Loan

A couple from Kelowna, British Columbia have gotten a lot of news coverage in my area the past couple of days. They went to a CBC (that’s Canadian Broadcasting Corporation for you Yanks) consumer protection-type show called “Go Public” with their complaints about a car loan. Seems they financed their vehicle purchase in 2011 through a 25% loan extended by TD Bank, and now they’re unhappy about paying $23,000 in interest (ultimately) when the Dodge Avenger they purchased cost only $21,000.

The reason for the very high loan rate: the couple declared bankruptcy in 2010 due to credit card debt.

Angie Hauser—one half of the couple—is quoted in the CBC story: “They’re making money off of people who have no money.” The other half of the couple—Mr. Enzo Gamarra offers his assessment: “We’ve been robbed by a bank with the help of a car dealer. I mean, that’s the only way I see it.” Mr. Gamarra goes on to say “Why would I want to pay $44,000 for a car that’s now only worth $15,000?”

Excellent question Enzo. Why did you sign a loan document that would commit you to such a financially punishing arrangement? Answer: the couple says they were told—by the car dealer salesperson—that if they made all their payments on time that they could refinance at a much lower rate a year later.

And Now for the Gratuitous Opinionating

When I read this account on the CBC’s website, here are the somewhat sanitized thoughts that went through my mind:

  • Ms. Hauser says she and Enzo are “people who have no money.” She goes on to characterize the loan as “like rich people getting rich off the poor.” I would say that folks who self-describe as poor people who have no money should not be buying $21,000 cars, especially $21,000 cars rated at only 24 mpg fuel efficiency. (Gasoline costs about $5 per gallon in Kelowna.)
  • Every grade 3 student knows that car salespeople speak a dialect commonly known as bullshit. If it’s not on paper when you’re buying a car and taking out a loan for said car, it never happened.
  • I’m stunned that a couple one year out from bankruptcy could get any car loan at any rate. Clearly this couple would have been better off if financing had been denied. Then they would have been forced to make a financially smarter choice.
  • The couple says they needed wheels to get to work. Here’s the thing: when you file for bankruptcy, bad stuff is going to happen to you, for quite a while. (In the U.S., bankruptcy is on your credit report for up to 10 years.) You may experience serious hardships and hurdles in getting back on your feet because, right or wrong, a lot of companies, employers, landlords, etc. shy away from doing business with people who have a history of having their financial obligations discharged by a bankruptcy judge. If the reason for your bankruptcy is that you dedicated years to spending more than you earned (and I don’t know if that’s the case for this couple), look no further than the mirror when doling out blame for the post-bankruptcy hurdles you’ve got to overcome. Yep, people with bad credit can’t borrow money except at outrageous rates which may mean they’ve got to deal with the hardship of being limited to finding work in a location they can walk, bike, bus, carpool, hitch, or otherwise get to without benefit of a personally owned vehicle. That, my friends, is just one ugly part of harsh post-bankruptcy reality.
  • I happen to know that Kelowna is served by a carsharing organization called the Okanagan CarSharing Co-op, or OGO. Before taking on the huge fixed expense of a new car, especially so soon after bankruptcy, this couple would have been well served to investigate OGO. Carsharing, combined with transit, walking, cycling, taxis, carpooling, and conventional rental car can offer good mobility at a far lower cost than owning a car. Yeah, owning a car is convenient. But when you file bankruptcy, you should expect to be compelled to sacrifice a few conveniences.

Take Me to Task

Okay, am I being too tough on these people? Is there really a scandal here to uncover, or does the 25% car loan merely illustrate that bankruptcy did nothing to improve this couple’s bad financial judgement?

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  • http://www.makingsenseofcents.com/ Michelle

    Wes used to work in car sales and he constantly saw interest rates on car loans at around 24%. It always amazed me! And a lot of the time, the people were buying cars that were SUPER expensive, so it made no sense.

    • http://mymoneycounselor.com/ Kurt @ Money Counselor

      I can only shake my head and feel a little discouraged when I hear about people willingly borrowing thousands of dollars at 20+% to buy a rapidly depreciating asset. Clearly our educational system needs desperately to make personal finance coursework a requirement.

      • jim

        Kurt,
        You are exactly right – when I retire I am volunteering my time in high schools (maybe grade schools) to teach basic personal financial responsibility. Just shaking my head so much I’m going to have to go see my chiro tomorrow.

  • http://moremoneythanmonth.com/ Bob

    Sadly, we have a culture that too often finds it much easier to just blame everyone else as opposed to taking responsibilities for our own very dumb decisions. Much easier to blame the rich and expect someone to come along and rescue them from their stupidity.

    • http://mymoneycounselor.com/ Kurt @ Money Counselor

      I haven’t observed a relationship between net worth and willingness to take responsibility for one’s screw-ups. In other words, the rich are just as apt to blame others for their mistakes as are the poor, imo. For example, I don’t believe 2008’s financial meltdown was caused by the poor, but I don’t recollect anyone taking any responsibility for it. Or perhaps that was an ‘act of God’?

  • http://www.saveandconquer.com/ Bryce@saveandconquer.com

    I think you are spot on. Granted we don’t know much about these people, but “poor” people should not be buying expensive cars, and should not be buying much of anything on credit. Whatever happened to save money before spending it?

    • http://mymoneycounselor.com/ Kurt @ Money Counselor

      I think the purveyors of credit have succeeded in thoroughly extinguishing the now quaint practice of saving up for something. That and the highly refined science of marketing.

  • http://streetsaheadliving.com/ Tara Zee

    if anything, they should have opted for a $7,000 used car or even cheaper if they can find. At least if they financed at 25%, they’d have a lot less interest to pay over the longterm!

    • http://mymoneycounselor.com/ Kurt @ Money Counselor

      Yeah–as I said, I’m sure the CBC report didn’t include every morsel of information, but buying a $21k car seems awfully hard to justify based on what we know. I wouldn’t do it for myself!

  • http://suburbanfinance.com/ Suburban Finance

    I don’t think it’s fair to blame a company who, obviously, are in it to make money for something that you got yourself into.. and WOW. 25%!!!

    • http://mymoneycounselor.com/ Kurt @ Money Counselor

      Yes–borrowing money at 25%, regardless of the circumstances, is awfully tough to defend, financially speaking.

  • Just Saying

    Some of the car sales people try to get you to believe that you would be better getting a newer car in order for the banks to agree to the loan. What they don’t tell you is that they get paid more when you interest rate is higher.
    From the time you step in the door, the lies start. Every person that puts their hand in the deal gets paid. My parents credit score was 850 in 1996 and they went to a dealership and they were going to be charged 18% interest on a car. Needless to say we took our business to my parents bank and got 3%.
    The best thing to do is join a credit union and be a good customer and they will work with not so perfect credit.

    • http://mymoneycounselor.com/ Kurt @ Money Counselor

      Good advice about the credit union, thanks.

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