Waiting for the Bubble to Bust Again


Time for another non-computer related post. Yesterday, my wife and I were at the bank to get pre-approved for a car loan. Her car isn’t in great shape and with the check engine light coming on for unknown reasons, we figured it was time for a replacement (past time if you ask me).

At the bank we sat and chatted with the loan officer. He got our information and asked how much we made and ran our credit and asked what kind of cars we were looking at. We are actually looking for a small, economical car for my wife to drive. Her needs are fairly limited. She works from home so her car use is pretty much restricted to an occassional lunch or dinner out or trips to her boss’s house for work. That’s it. We are looking at cars like the Honda Fit, Nissan Versa, or Honda Civic. Something small that can get her around reliably, doesn’t cost a lot to work on, and gets decent gas mileage.

After all the paperwork was done, the loan officer had a problem. Based on our debt to income ratio, the computer wanted to give us a $70,000 car loan. We were a bit shocked at this. We are solidly middle class and doing fairly well right now, but we also still have student loans and a mortgage to get paid off and after our monthly bills we have room for a modest car payment. There is no way we could afford a $70,000 car. Assuming no down payment and a 60 month term, that’s $1100 a month!

The loan officer told us he could get the approval lowered, but would need to call the home office and do some wrangling to get it down. This morning he sent us the final approval. It was still for $45,000, but really this is just so we can easily get the loan taken care of once we pick a car. The value didn’t really matter to us as long as it was enough to buy a car that will probably cost around $15,000.

As I sat this morning and contemplated how I am going to move money around in the budget to make room for the car payment we are about to have, it really made me think about how the economic downturn happened in 2007-2009 and how easily it could happen again. How many people go to the bank for a pre-approval on a car loan and find out they can qualify for a $70,000 car and then decide to go out and buy it? It would certainly explain all the BMWs, Merecedes, giant 4-wheel drive trucks, and other expensive cars I see everyone driving these days. I have been prepping for this car purchase for a while now and already knew we had the money to make it, but how many people are out there that don’t watch their finances so closely just take their $70,000 approval and get their $70,000 car and then realize when the first payment comes due that they just screwed themselves?

And this doesn’t just happen with cars. I related this story to my boss at work and he told me that when he bought his house they qualified him for a $750,000 house which to him was absolutely insane.

The moral of this story is simple, the banks and other financial institutions learned nothing from the last economic downturn. It’s up to us, the American people, educate ourselves on finances and make smart decisions about the purchases we make and not rely on the car dealers, banks, and other places of finance for good advice. Just because you qualify for a $70,000 car doesn’t mean you can afford it or even come close!