Champagne taste, beer budget.

Monday, April 30th, 2007 @ 12:09 pm | Uncategorized

The answer?  Miller High Life, the self described champagne of beers.

But seriously, this article about folks who buy cars that they can’t possibly afford hits close to home for me.  The author discusses the often delusional rationale that goes into many new car purchases.  The most perplexing of which is the justification of taking on higher debt because the more expensive purchase will depreciate more slowly.  

Car valuations matter because an increasing number of consumers are “upside down” on their auto loans, meaning they owe more than the car is worth. In the first quarter of 2007, 29 percent of consumers were upside down on their vehicles, Kelley Blue Book reports. Additionally, on average, people traded in cars on which they still owed more than $3,600. And what do many of these buyers do with that loan balance when they want another car?

They roll that negative equity — the $3,600 and often much more — into yet another vehicle loan.

“It is a pandemic,” says Jack Nerad, executive market analyst for Kelley Blue Book.

It is also financial lunacy. And making matters worse are risky lending practices similar to what we’ve been seeing in the mortgage industry. 

Aside from the fact that when you factor in the total cost of the loan the slower depreciation rationalization is completely untrue I think it should be pointed out that buyers do this for more than just cars.  An example I can think of that is even more baffling is the purchase of personal computers with a high interest loan.  In two years you’re still making payments on an item that’s worth less than a tank of gas and that you’re going to have to dump off at the Goodwill store to get rid of.  How smart is that?  Intelligent or not it’s typical of a culture that is locked into a “something for nothing” mindset.  The ultimate embodiment being Las Vegas.  America’s favorite place to go and pretend to be rich.

-mg 

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