We've heard this all before. It was called the housing crisis that began back in 2007. Remember that lovely debacle? The Great Recession was the result. Some of you may be too young to remember the absolute shitstorm that caused, how many peoples' savings were wiped out, the layoffs, and plunging home values. Perhaps you were a victim. The recovery is still ongoing and yet another crisis is already in the making: default car loans.
According to Experian Automotive, America's average new-car loan payment is at an all-time high: $483 per month and climbing. So what's the average price Americans are paying for a new car or truck? $33,560. That figure is from Kelley Blue Book data from last April – a year ago. The average transaction price has gone up since. Interest rates? An average of 4.8% for new cars. And if you think buyers are financing cars only from expensive luxury brands, think again. The average Hyundai/Kia was $24,980 in April 2015. That's an increase of 4.7% from the April prior. Doesn't sound so bad but consider this: Hyundai/Kia has the cheapest average new US car price. Honda's is $27,567. Toyota? $30,463.
FCA (who's previously been criticized for financing buyers with shitty credit) is at $33,901. Ford and GM are at $35,406 and $38,632, respectively. The average American last year made just under $45,000. For some people, that's about 75% of their yearly salary going towards a new car. What's more, because cheap credit from banks, credit unions, and dealership financing partners is available once again, buyers are able to stretch their car loans to more than 60 months. Financiers are more than happy to do that because, duh, buyers are paying more and more interest along the way. The point here is simple: The car loan bubble is going to burst at some point. Capitalist economies are like roller coasters, going up and down.
When millions of people finance a big purchase they couldn't afford in the first place, shit hits the fan. Economics 101, folks. And remember, cars depreciate the moment they leave the lot. Why pay more than you can afford and get stuck paying thousands of dollars in interest on something that's already losing its value? While you can't do anything about the depreciation part, what you can do is so very, very simple: buy within your means for your next car, new or used. How much do you really need that "Technology Package" for an extra couple of grand? Yeah, but that TruCoat…
Quoting "Fargo" aside, those who'll end up defaulting on their bloated car loans will pay the price, pun intended. The car dealerships already have their money, and the banks will start calling. They can get nasty. Don't fall into this trap and buy smart. Do the math. Calculate the interest before you sign the dotted line. You'll thank yourself later.
