The Domino Effect

When most people can’t afford to buy things outright, the cost of money – interest – becomes even more important than the cost of the things themselves.

For the past eight years, interest rates have been held down to 3 or 4 percent (or even less, in some cases) such that it costs almost nothing to borrow money. The private banking cartel that controls interest rates – the (ahem) “Federal” Reserve – did this to “stimulate” the economy – which is built on debt and people’s ability and willingness to assume it – after the cratering of Wall Street (and with it, everything else) back in ’08.

In particular, two areas of the economy: real estate and the car business. Both have “recovered” – somewhat – as a result of this. But it’s a shaky recovery, not based on underlying strength – which would be characterized by people’s increased ability to afford the things they’re buying. Instead, this is a “recovery” based on the fiction of affordability made possible via the Fed’s policy of effectively “free” loans.

In the case of the car business, longer loans have been the key to maintaining the facade of this Potemkin village on wheels.

By spreading out the payment over six or seven years as opposed to four or five (which was the usual not so very long ago) the cost of buying a new car has been made to seemmore manageable. You pay less each month – even though you pay for more months.

But this dodge only works when the cost of the loan – interest – is low.

If it’s high, then the payment is going to be, too.

And with cars – unlike houses – there is a built-in limit to how far out the loan can be stretched as way to tamp down the month-to-month costs down. Eight or nine years is probably the absolute maximum, because cars – unlike houses – always decrease in value over time and because unlike houses, cars are fundamentally throw-aways. Probably 95 percent of all cars made during the 1980s are in junkyards now.

Axiom: The longer you own a car, the less it is worth  The mileage goes up – the value goes down. A car’s value lies chiefly in its newness, which inevitably wanes no matter how little it’s driven or how well cared-for it may be (there are some exceptions, such as exotic and collectible cars; but these are just that – exceptions.)

Let’s run some numbers.

A car you purchased for $30,000 (the average priced paid last year for a new car) will cost you about $416 each month on a 72-month loan, assuming zero percent financing.

But what happens when you’re paying 6 percent interest on the $30k loan? Your payment swells to almost $500 a month. In addition to the $30,000 principle, you’re also paying another $5,797 in interest (see here for actual calculator).

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