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Oct 9, 2019

Beep, Beep! Don’t Lose Sleep Over Car Loans

By Team Stash

Put on the brakes before taking out a major loan.

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aerial view of highway with cars

U.S. consumers are reportedly paying more than ever for their cars, and they’re racking up record amounts of debt to make their purchases.

That’s according to a new report from the Wall Street Journal, which says the average car loan has climbed to $32,000, about a third higher than it was ten years ago,  while the average loan is held for 69 months, or nearly seven years.

Meanwhile, car dealerships have more incentives to offer loans, as dealers reportedly make more than twice as much money from financing a car than the sale itself, also a shift from a decade ago. Banks that originate the loans for a dealer typically offer a percentage of each new loan, according to reports.

On average, dealerships make nearly $1,000 on financing each new car,  compared to less than $400 for the sale. That’s a reversal from a decade ago, when dealers tended to make about $800 on average sales, and about $500 from financing, the WSJ says.

Consumer debt, including car, credit card, and student loans, has increased to about $14 trillion as of the second quarter of 2019. That also marked the  20th straight quarterly increase of consumer debt, according to the Federal Reserve Bank of New York.

Why are cars getting so expensive?

The car industry has changed in recent years, as consumers have opted for bigger and costlier SUVs, rather than smaller and relatively more affordable passenger cars. The car industry is responding to changing market dynamics.

All three of the largest U.S. automakers, including Fiat Chrysler,  Ford, and General Motors,  have slimmed down their production of passenger vehicles in recent years, according to Bloomberg. And SUV sales are expected to make up more than 50% of the U.S. car market by 2020, up from 35% in 2018, according to reports.

Meanwhile, the average cost of a mid-size SUV is about $33,000. The average cost of a new mid-sized passenger car is $25,000. And the average cost of a used car is about $20,000, according to recent data.

Some of the possible reasons for increased car prices include the trade war, where tariffs on imported goods like metal and electronic parts could be adding as much $1,300 to car prices, as well as the ever-increasing cost of new technology powering many standard car features.

Borrowing basics

Here are some things to keep in mind before you borrow:

  • Create a budget, and try not to spend more than you earn.  (For some budget ideas, check here and here.) Spending more than you earn can quickly run you into debt, which could include high-interest credit card borrowing.
  • As a general rule, your debt-to-income ratio, which is how much monthly debt you owe compared to your monthly gross income, shouldn’t exceed 43%.  Attempt to keep your debt load well below that. Borrowing more than that could affect your ability to meet future financial goals, such as purchasing a home. Many mortgage lenders want to see debt-to-income levels below 43%.
  • Your credit score isn’t affected by your debt to income ratio, but it is affected by something called your credit utilization rate. That’s essentially how much of your total available credit you use. The more credit you use, generally speaking, the more that can affect your credit score.

You can find out more about credit scores and credit utilization here.

  • If you plan to borrow, for a car or anything else, figure out how long it’s going to take you to pay off your loan. The longer it takes you, the more you’re likely to pay in interest and fees, which can dramatically increase your original loan amount.
  • If you plan to take out a loan for a car, try to pay it off as quickly as you can. Here’s why: The average U.S. consumer doesn’t own a car longer than 6.5 years. You don’t want to continue owing money on a car that you no longer plan to drive. Also, and perhaps more importantly,  the value of a car decreases significantly over time and is typically only 40% of the original car cost after 5 years.

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Written by

Team Stash


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