No one intends to dig a financial hole when buying an automobile, but the lifelong impact of auto show decisions can be huge, and the tendency for self-inflicted damages from auto loans seems to be overwhelming. accelerated during the pandemic.
Despite the litany of financial worries plaguing many households, Experian reported that at the end of June – well into the destabilizing coronavirus recession – the average amount borrowed for a new car was $ 4,000 more than one year earlier. Buyers with the best credit scores had an even greater appetite for borrowing, as the average loan size for this group was about $ 4,500 higher.
Even though the average interest rate on a 60-month car loan is almost a percentage point lower than a year ago, the average monthly payment for new car buyers is higher, not lower.
It’s part of a long-term trend. At the end of 2009, the average loan amount for a new car was $ 22,700. If we adjusted this amount for inflation in the intervening years, the amount in 2020 would be around $ 27,500. Not even close. Experian says the average loan amount for a new car is around $ 36,000.
Part of this large increase is due to the fact that many new car buyers are trading in their existing cars and still owe money on the older car loan. The loan amount on the new car includes the carry forward of negative equity that was left over from the previous car loan.
Lenders are happy to organize this. And a little silver lining is that interest rates are lower recently than in recent years, so the new car loan will likely carry a lower interest rate. But before you convince yourself that it is indeed a win, remember that you have just reset the term of your loan. If you traded in a three-year car with a loan for a new car with a 72-month loan term, you have effectively agreed to provide car loans for nine years.
The average payment for a new car is now over $ 550 per month. The sooner you get a car reimbursed, the sooner you can redirect that heavy monthly charge of your cash flow to other financial goals.
In 2009, about one in four car loans were for at least 72 months. Today, 40% of new car loans are for at least 72 months, according to Experian.
Even with today’s lower interest rates and longer loan terms, a new Vehicle Affordability Index launched by Cox Automotive and Moody’s Analytics reveals that cars consume more household income. Earlier this year, the index said it took about 30.5 weeks for a median-income household to buy a new car, assuming a 10% down payment and a 72-month loan term. In the fall, it was up to 33 weeks. (The index only considers “primary” borrowers with strong credit scores.)
Falling household incomes during the pandemic are partly at stake for declining affordability, but so too is the appetite for more expensive models. In the vernacular of personal finance, there is a tendency to buy the car you want, rather than paying less for the car you need. Even if you insist on a new car, there are many that have price tags under $ 30,000, but as mentioned before, the average new car loan amount (after down payment / trade-in) is $ 36,000. .
If you have financial stress points, your car buying goal should be to spend as little as possible, so that you can finance it with the smallest loan that you pay off sooner (say 48 months) than later.
Ideally, this will lead you to buy a used car. A 3- or 4-year-old car will have many more years of reliability to come, with a price that can be half that of a new model.
But lately, even smart used car buyers seem to be keen to splurge. A recent analysis from the car-shopping site iSeeCars.com reported that the used cars with the biggest average price increase in the 12 months through October were the BMW 5 Series ($ 6,924 more expensive) , the GMC Sierra 1500 ($ 6,380 more expensive) and the Ram Pickup 1500 ($ 5,911 more expensive). This is a big blow to cash flow, when right now you might have many other financial goals that might require an infusion of funds.
Amid the coronavirus pandemic and despite lower interest rates, the average amount borrowed for a new car has jumped $ 4,000 in the past year.