- a wall street journal report says that a third of all new-vehicle loans in the united states are longer than six years and concludes that "america's middle class can't afford its cars."
- the paper also reported that only 18 percent of u.s. households can afford to pay cash for a new car.
- seven million people are at least 90 days behind on their payments, so is the fault with the lenders or people who are living beyond their means—or both?
no one needs to be that first butt in the seat of one of the 17 million new vehicles purchased each year in the united states. but we want to. there's a problem with that: new-car loans are the longest and most expensive they've ever been, and too many people are rolling over their existing loans into new loans when they trade. unchecked, it could be another economic disaster waiting to explode.
according to experian, the average loan for a new car was $32,119 during the second quarter of this year (which, at 16 percent more than during the third quarter in 2014, is normal at standard 3 percent annual inflation rates). for a used car, it was $20,156, or only 9 percent more. while delinquencies remained stable even as some seven million people are 90 days or more behind on payments, the brewing problem relates to loans that last six years or more.
the consumer financial protection bureau estimated that 42 percent of all car loans made in 2017 were 72 months or longer. now, the average loan length for new cars is 69 months, and loans of 85 months or more represented 1.5 percent of all new-car loans, according to the wall street journal. with average interest rates at 6 percent for new cars and 10 percent for used cars—a big uptick in the years after the 2009 recession when credit began flowing following billions in government bailouts to automakers and banks—there's a high likelihood that car owners, like students, won't pay off their loans. a third of car owners roll over their debt into new loans, compared to about a quarter before the recession, according to the wsj story.
extremely long loan terms surfaced in 2014, when new car loans between 73 and 84 months surged by 24 percent over the previous year. before that, no one ever thought car loans would stretch that far. but dealers, automakers, and banks have made a brisk business with this country's $1.2 billion in outstanding auto debt—and more are likely to lock you into a long-term loan that could ensure a perpetuity of debt.
the solution for the consumer is simple. don't look at monthly payments (now at an average of $550 and $392 for new and used loans, respectively). look at the total payment, including interest, for the entirety of the loan, with all applicable taxes and fees, and ask yourself whether you’d be better off spending less on a car and saving or investing the difference. shop around for your loan, and know that dealers can legally tack on a couple of percentage points to inflate the quote without telling you what they'll pocket.
and if you think you need a brand-new car but can't afford one, you probably don't. the glut of late-model used vehicles on the market means that good deals are prevalent in nearly every vehicle segment. most vehicles in the six-to-12-year-old range—what experian calls the sweet spot—are reliable enough without a warranty and significantly cheaper to own than a new car. no matter how great new cars are, they're never worth losing your sleep—or your financial security.