General Motors Corp.'s employee discount plan, initiated June 1 and now extended through July, has been a roaring success. Consumers clearly like the idea of buying new cars and trucks at the same prices car manufacturers offer their workers.
Or, maybe it's just the peace of mind of knowing that you paid the same price as everyone else. There is no surer road to buyer's remorse than driving home on a sterling silver set of wheels only to discover that your next-door neighbor paid substantially less for the gold-plated version.
According to industry reports, GM's stroke of marketing genius boosted its June 2005 sales 41 percent, the company's highest monthly sales total in 19 years. Naturally, Ford Motor Co. followed with an employee discount program of its own, welcoming would-be buyers to the "Ford family," where everyone would be treated equally in the new-car showroom. The Chrysler Group of DaimlerChrysler Corp. has launched a similar effort. Nothing succeeds like success.
But today's hot new car deal could be tomorrow's financial undoing for consumers who are buying more with hearts than heads. For example, two leading automotive market research services -- Edmunds.com and KBB.com (Kelley Blue Book) -- have discovered a disturbing trend. Many people financing new cars and trucks in America are "upside-down" in their purchases, the research services say.
Upside-down means you owe more on your vehicle than it's actually worth. To wit: You still owe $20,000 on a car that's now worth $10,000, which means you are $10,000 upside-down on your loan. Not much residual value resides in your ride. It has fled the driveway for a variety of reasons, many of which have nothing to do with the intrinsic quality or reliability of the car or truck parked there.
In part, that is because new cars and trucks are fashion, in much the same way that clothes, shoes and jewelry are. Today's galumphing Ford Excursion sport-utility vehicle could be tomorrow's lost cause. Yesterday's forgotten station wagon could be today's hero. Vehicles, like clothes, change mostly because people do.
It does not matter how good your used vehicle is if it no longer has sex or psychic appeal. Thus, it makes little fiscal sense to buy a new car or truck simply because a car manufacturer is offering an employee discount program or another incentive primarily to clear out vehicle inventories -- which is the case with the GM and Ford programs.
It certainly makes little financial sense to take on another car loan when you already owe more on your present vehicle than it is worth. The outstanding loan is not going to magically disappear, never to bother your pocketbook again. It is going to be rolled into a new and bigger loan, perhaps at a higher annual percentage rate, or maybe over a longer pay period -- both of which have the cumulative effect of draining financial resources.
Yet, according to the Edmunds survey, of 1,486 car buyers responding, 26 percent said they saw nothing wrong with trading in used cars and trucks with negative equity. They cited it as being "just part of buying a car."
But it is interesting to note that 19 percent of the people who actually bought a car or truck by "trading" negative equity said that they would never drive into that kind of financial trap again. Fifty-five percent of the people in the Edmunds survey said they always pay off their existing vehicle loans before taking on a new one.
The New Vehicle Buyer Attitude Study on Financing by Kelley Blue Book Marketing research showed a similar trend.Kelley reported that 30 percent of its surveyed consumers found it acceptable to trade in old vehicles with negative equity in pursuit of new wheels.
Many upside-downers are the same people pushing a trend toward longer payback periods on new-car loans, the Kelley study said. The average term for a new-car loan in the United States grew from 48 months in 2000 to 63 months in 2004, the Kelley study said.
That brings us back to this business of the hot new-vehicle discount sales plans. They are worth every penny if you are using your head. They could be your undoing if you aren't.
Think: If I sell you a new car at a discounted price today, why should I or anyone else buy it from you used at a high residual value tomorrow, especially if the reason I discounted the car was that I was having a hard time selling it in the first place? Does today's discount increase or decrease residual value? If it decreases residual value, which it does, why should you incur higher initial financing costs by loading your new vehicle with options you otherwise would not have been able to afford, or by buying a Cadillac with a Chevrolet bank account?
Think: If you owe $20,000 on a car that is worth half that much, do you really believe that any dealer, bank, credit union or good friend is going to be willing to swallow that $10,000 overage on your behalf? Do you want to get yourself into a bigger loan simply because you've fallen out of love with your current car? How are you on the issue of commitment? Taking out a long-term car loan is a lot like getting married. You either stick with it and treat it right, or file for divorce. And divorce, in this case, is going to cost you plenty.
Think before you buy.