I’m looking and got approved for the new 2018 Kia Stinger. Originally I applied for the 84-month financing term at a 3.49-per-cent interest rate. Now, the financial rep is advising that the bank has approved me instead for the 96-month term at 5.99 per cent. Is it worth it? Or too much? – Ayanna
Richardson: Noooooo! Never! Stop right now!
Lightstone: Tell us what you really think, Mark.
Richardson: People like the longer payment term because it makes everything a bit cheaper every month. But it’s considerably more expensive overall, and you’ll have negative equity for probably longer than you’ll want to own the car.
Lightstone: I have trouble thinking about where I’m going to be next Friday, let alone where I’ll be in life 96 months from now.
Richardson: Just do the math with any online loan calculator. If you finance a $50,000 Stinger at 3.49 per cent over 84 months, or seven years, it’ll cost you about $6,400 to borrow the money, with monthly payments of about $670. If you finance it for an extra year at 5.99 per cent, it’ll cost about $13,000 in interest, with monthly payments of about $650.
Lightstone: When you put it like that …
Richardson: The point is, you’ll save around $20 a month, but it’ll cost you almost that entire last year of payments to make up for it. And in eight years, the Stinger will be an old car, perhaps in its third generation. And you’ll still be paying $650 a month for it.
Lightstone: I agree with Mark on this one. Long leases can often be hard to break midway through, should you find the Stinger no longer suits your lifestyle or something else unforeseeable comes up.
Richardson: Well, we’ve shut down Ayanna’s plan pretty quickly. So, now what?
Lightstone: If budget is her concern but she still really wants the Stinger, Ayanna needs to listen to what her brain and heart say she can afford, and not what her financial rep is saying about a long, long, long loan.
Richardson: The biggest danger is that longer-term loans create negative equity. That’s when the value of the car drops quickly in its first few years, but the value of the loan is still high. In other words, Ayanna’s Stinger might be worth $35,000 after its first year, but on the books, she’s only paid $8,000 on a $56,400 loan. If she has to sell it, she’ll get $35,000 but still be on the hook to the bank for $48,400.
Lightstone: This all sounds like a really bad deal.
Richardson: It is. Can I stress that enough? If she wants to trade in her fun performance car after a year because now she wants to start a family, for example, then her next car will cost an extra $13,000, for nothing. And if she just needs the money, she won’t get it. She doesn’t have equity in her car. She has negative equity.
Lightstone: How long before she does get equity?
Richardson: Every loan is different, but it usually takes just over half the term of any auto loan. The shorter the loan, the better, and obviously, the lower the interest rate, the better. These days, it’s still possible to find no-interest loans, but not on high-desirability vehicles like the Stinger.
Lightstone: So should she forget about financing it?
Richardson: Not at all. Borrowing will help her afford it, but there’s an extra cost to it. If Ayanna’s okay with that cost and can afford it, then she can drive a great new car. But keep the payments low by making them weekly, not monthly, and don’t make the loan outlast the car. Four or five years at most.
What car should you buy? Write to Mark and Miranda at email@example.com.