Here are some sobering statistics from a recent Experian study on auto loan debt in America:
- Over 85% of new vehicles and 55% of used vehicles are financed with a loan or lease, both slightly higher from the prior year.
- Americans have 1.18 trillion dollars in outstanding auto loan debt in 2019, up nearly 20% in the past 3 years.
- 70% of new autos financed are with loans between 61-84 months.
- The fastest growing auto loan option is the 96 month offering, which for new vehicles represents a 38% growth year over year.
For those with less than stellar credit, the subprime auto lending market has remained strong, accounting for 1 in 5 loans booked in 2019. While delinquencies among car loans and leases (30-59 days past due) hovers around 2% at the moment, the increase in debt and longer terms of debt repayment are red flags for many economists of consumers purchasing cars they simply cannot afford.
Sam over at Financial Samurai wrote a great piece about cars, and mentioned the 1/10th rule, in which you should not look to acquire a vehicle with a purchase price greater than 10% of your annual income. While that seems very logical, most Americans simply are doing the polar opposite.
The median American household income is $62,000, and the average auto loan is currently $32,000, accounting for over 50% of the total annual gross pay. The average monthly payment for 2019 auto loans is $554, a new record since Experian has been compiling this data. You compound those numbers with the fact that Americans do not have any emergency savings, and the vast majority of the country is one very small life event away from being in serious financial trouble.
If you find yourself in the market for a new vehicle heading into the new year, make sure you review these four tips before signing any loan paperwork:
Check Your Budget For Affordability
If you must finance your next auto purchase, take time to crunch your numbers to see how much you can afford to keep you in line with your big picture financial goals. Don’t assume that just because the bank will lend you $50,000, you need a car with that price tag. Get as close to the 1/10th rule as possible.
Calculate the True Cost To Own
Many people make the mistake of shopping for a car based on a loan payment they believe they can afford, which is the equivalent to showing up at a gunfight with a steak knife. Run an insurance quote from your current provider to see the differences in price of your current car to your potential new one. Review information online regarding the any recalls, maintenance issues, or average gas mileage, and equate that to how you will drive the car. Will your potential purchase cut down on trips to the gas station?
Auto dealerships that advertise they do not negotiate are not places we suggest purchasing from. As a consumer, you have the purchase power to walk away and buy a vehicle from anywhere, and in today’s competitive market, you need to not reliquenish that to any dealership. Negotiate everything from price to extended warranty to service options, etc.
Get Your Financing In Place First
Before you begin car shopping, take time to get approved at your local financial institution for auto financing. Often, many local credit unions will offer outstanding pricing for members with strong credit profiles that dealerships cannot beat. By going through your current bank or credit union, you also know your true purchase power, and have no worry about terms of the loan changing at the last minute.
We cannot stress that our personal recommendation is to not finance an auto. Your primary means of transportation should be a safe, reliable vehicle that can get you from point A to point B. If you carry consumer debt, you need not worry about what friends or neighbors think if you pull up in new Audi. The sooner you escape the consumerism rat race, the sooner you will be financially free.