People love their cars – auto loans skyrocket in Q4 2017

The American love affair with their cars, trucks, and SUV continues. The average loan amount for new as well as used cars hit a record high in Q4 2017, and this is while interest rates are rising, monthly payments are going up, and household savings are at a record low.

We are not sure why Americans borrow so much money to buy a car and why they “love” their automobiles. While we can sort of understand it if someone is “well off” and has the income, assets, etc. to do this, the fact is middle income and low-income Americans also borrow tons of money to buy expensive cars when they have very little or no savings, investments, retirement, and their income barely supports a high loan payment. It makes no sense to us.

Cars are depreciating assets. This means as soon as you drive one off the lot, it loses value overnight and losses value every month and year thereabouts. According to Carfax and other experts as soon as you buy a car and drive it for week(s) it loses 20% of its value just like that. So, a $30,000 car becomes worth only $24,000 overnight. That is a depreciating asset.

It is terrible to borrow money for that type of asset. As Americans are paying interest on their auto loan and that same time the value of it goes down. In Q4 2017 the average loan amount for a new car was $31,099 and used car was $19,589. The average monthly payment was $515 for a new car as well in Q4 2017. All those figures are record highs.

Americans are paying hundreds of dollars per month in interest for an automobile in which the value of it goes down. That money could be much better spent on an asset that may increase in value, such as a stock investment, home, education, or anything else that may be worth more tomorrow than today. If anything, pay cash for a car as the interest rates of CD, bonds, and short term investment is negligible, and since the returns on cash is so limited using it to buy an automobile is a much better option than a loan. A low income family can use cash for a used car as well.

I guess, as many say, Americans just love their cars, and we are not sure why. They go down in value, they can be dinged and nicked on the terrible roads/lack of infrastructure this country has, people may open their car doors into your car and damage it, and more. So, this is what Americans borrow a record amount of money in Q4 to buy? Crazy to us.

Low income families should not be doing that. Even the well off seem to love their car as they try to keep up with the Jones…need the latest and greatest on everything. They need to keep up with “appearances”. But data shows most of the “wealthy” (at least by “appearances” and the image they try to portray) still have a very low savings rate. Most live on the “edge”, and if things turn on them they could lose their house, car, and other “prized” assets that they do not even own but borrowed money to buy. All to make “fake appearances” and or to be “flashy”.

Data reflects the monthly auto loan payments are becoming more difficult for families to make as well, across all income levels according to Experian and the Federal Reserve. Since monthly auto payments of over $500 per month are stretching household income (both low income and higher income households), people are taking out longer term loans. The term of a loan in Q4 2017 was 69 months for a new car and 64 for a used car. These too are records as is the number of loans that are in arrears.

What taking out a longer loan does is it decreases the amount of the monthly payment. If Americans took out the “standard” or “recommended” 48-month loan, then their payments would be $600+ dollars per month. People apparently can’t afford that, so they took out longer loans in Q4 2017. This will come back to bite them as the cars value may very well be less than the balance on their loan as it ages.

All this borrowing money in 2017 and previous years, taking out longer and higher priced loans for the “love” of a car…something to get people from point A to B. People do that borrowing, but then complain when they have no savings or no money to retire. Oh well…just the American way I guess in that they spend money on items they can’t afford for the sake of appearance and “keeping up”, live above their means, and then complain when they have no money or can’t retire.

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