Just last week, Kim at Eyes on the Dollar wrote about how her local newspaper was advertising six-year car loans for Honda Civics. Gasp.
For heaven’s sake, my oldest daughter just turned five and learned how to walk, talk, and write during that time. I can’t imagine having to pay a monthly car payment for the duration of her life or longer. That….is…..soooooooooooooooooooo….long. Of course, it doesn’t help that I absolutely hate car payments. But I digress.
Why Are Americans Car Poor?
Shortly after I read the post about six-year car loans, I stumbled upon a Market Watch article on how lower class Americans are being forced to go into debt to afford basic necessities such as food and gas. I felt slightly sympathetic until I got to this part:
Financing, whether in the form of a loan or a lease, is the only way low- and middle-class Americans can afford a new or used car. But please appreciate how stretched non-discretionary car financing has now become. The following is per the Wall Street Journal:
“[The] average automotive loan term [reached] 66 months for the first time. According to Experian Automotive’s latest State of the Automotive Finance Market report, loan terms in the first quarter of 2014 reached the highest level since the company began publicly reporting the data in 2006. The analysis also shows that loans with terms extending out 73–84 months made up 24.9% of all new vehicle loans originated during the quarter, growing 27.6% since Q1 2013.”
Say WHAT? Did I read that right? The average vehicle loan is now at 66 months? And 25 percent of loans extend from 73-84 months?
Oh wait, it gets worse…..
“The average amount financed for a new vehicle loan also reached an all-time high of $27,612 in Q1 2014, up $964 from the previous year. In addition, the average monthly payment for a new vehicle loan reached its highest point on record at $474 in Q1 2014, up from $459 in Q1 2013.”
Now it makes sense.
People are being forced into six and seven years loans because they are borrowing over $27,000 for the privilege.
Thoughts On Being “Car Poor”
Let me go out on a limb here with a few ideas:
- If you have to finance a car for 5, 6, or 7 years, you cannot afford it.
- If the average car payment is really $474, it makes perfect sense why so many American families are struggling to get ahead.
- The fact that the average car loan is 66 months long and over $27,000 deep says a lot. It says that we, as a country, have messed up priorities. Remember, the average 401K balance for individuals ages 22-34 is only $16,500, and the average balance for those ages 35-48 is only $63,600!
How To Avoid Being Car Poor
As someone who is not that interested in cars and does not commute to work, I know it’s easy for me to say that your car doesn’t matter. However, I know that many people actually need a reliable car for work. I get it. Trust me. On the other hand, don’t delude yourself into thinking that only the newest, shiniest model will do. You don’t need heated seats. You don’t need a built-in stereo system. You don’t need a rear camera or a subscription to satellite radio. Want to avoid being “car poor?” These tips can help:
- Remember that cars are a depreciating asset. According to the experts, a new car will lose at least 20 percent of its value within the first year. The new car smell is not worth it.
- Consider buying used. Jacob at IHeartBudgets.net wrote an excellent post for my site about How to Buy a Used Car Like a Boss. Check it out.
- Buy a cheap and efficient new model. If you’re convinced you need a brand new car, there are plenty of lower cost options out there. For example, a new Ford S Sedan can be yours for $16,810. That’s over $10,000 less than the national average!
- Get over yourself. A new car is not worth sacrificing your future financial health. Ask yourself, “How would my life be better if I no longer had a car payment?”
Before you call me a hypocrite, let me end this post with a picture of my 2007 Dodge Caravan. Sure, she’s sporting a little bit of duct tape on the front, but she’s comfortable, reliable, and most importantly– paid off.
I may not look fancy when I roll into Meijer to buy some groceries, but I feel like a genius.
What do you think about the size and length of the average car loan in the United States? What do you think it says about our priorities?