Wondering Why Car Loans Are So Expensive?
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Over the past few years, more and more Americans have been purchasing cars with higher car loan rates. We’re now seeing vehicle financing become much more expensive, as we saw during the housing bubble years back.
The fact is, American consumers are digging deeper in debt from car loans. Debt grows and grows to the point where the debt is more substantial than the total sale price of the car. Experts call this negative equity, often leading consumers underwater and trapped under their car loans. So, why is this happening? Can we stop this horrid car loan trend before it is too late?
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More Trade-ins Result in Higher Car Loan Rates
According to the car-shopping site, Edmonds, 33% of the people who traded in their car for a new one in the first none months of 2019 had negative equity. Let’s compare that to 28% from five years ago. Let’s compare that once again to 19% a decade ago. On average, buyers over $5,000 after trading in their cars before they took on a new loan. Five years ago, that average was $4,000.
With car prices rising, the affordability gap has only grown. American consumers become inundated in car loans and auto debt. Why? Well, lending standards are only perpetuating the auto debt crisis. Buyers often make low or no down payments, usually seven years or longer in terms.
Of course, the borrower must pay any remaining debt, even after having gotten rid of the vehicle on the car loan. So, said borrower goes and buys another car, and they roll their old debt into a new loan. The rollover happens because the lender, originating the new loan, must pay off the old lender. Now, the consumer is in more debt as they owe the balance on both car loans to the new lender.
What surprises most American consumers is that dealerships often encourage these types of transactions, where the consumer will undoubtedly be up to their ears in debt. The dealerships make more money on financing than actually selling the cars in their lot.
Borrowers Taking On More Negative Equity on Cars
Why do borrowers feel they need to trade in their vehicles in the first place? Engine and vehicle troubles, and often the borrower enters a new stage in their life. Borrowers typically opt for your standard Ford, Toyotas, or Hondas. The American consumer is stiffed with higher debt than the worth of the vehicle when selling their existing car due to a life event change.
Borrowers already have negative equity at the time of purchase, making loan terms longer, interest rates higher, along with monthly payments.
When the interest rates and repayment periods are longer, the American consumer ends up paying down a smaller share of their monthly principal within the first few years of the car loan. Then, add this cycle to trading-in the existing vehicle, and we see a burden of debt.
Consumers Want Cars with Upgrades
The problem does not stop with purchasers undergoing a significant change or looking to sell a vehicle with problems. Americans are also opting for upgrades on their cars, desiring bigger and fancier cars.
More Consumers Are Opting for Longer Car Loan Terms
The average car loan, for Americans, is 69 months. According to Experian, one-third of car loans in the first half of 2019 had terms longer than six years. The trend was up from 10 percent of car loans just one decade ago.
Car loan payments, in this case, are going to last well into when the vehicle’s significant repairs are needed, such as new tires and brake pad replacements. Monthly car loan payments might be lower, but stretched to 69 months (and often longer), this add ups to paying much more for the vehicle in the long run.
Inflation vs. Spending
Prices on vehicles are inflating faster than wages are increasing. Costs have gone up by $5,299 just within the past ten years. Meanwhile, the real annual wage has only gone up by $3,646.
So what can you do? Well, you shouldn’t purchase a car that you cannot afford. You should also research car loan terms and the price of the actual vehicle. However, many Americans do not research before heading to the car dealership, often leading to poor decisions when the car salesman asks you to add on to loans with ridiculous maintenance packages.
An astounding 37 percent of vehicle buyers have said researching rates is pointless, as it’s non-negotiable.
The process of purchasing a vehicle and researching car loans is very time and energy extensive. However, not putting in the effort may result in the typical consumer overpaying on their car loan and getting a vehicle they cannot afford with longer terms. The result is a large sum of money American consumers could be saving from research left behind.
When taking out a car loan, be mindful of how much money you can afford to spend on your take-home income as a whole. Look for a shorter length of a car loan with the best price possible. Oh, and no need to get the fancy paint trim maintenance packages. Likely, you will not use it, anyway. Doing as much research into car loans and affordability as possible will keep you on the road, and above the water.