No one sets out to dig themselves a financial hole when buying an automobile, but the life-long impact of car showroom decisions can be enormous, and the tendency toward self-inflicted car loan harm seems to have accelerated during the pandemic.To get more auto finance news, you can visit shine news official website.
Despite the litany of financial worries afflicting many households, Experian reported that at the end of June — well into the destabilizing coronavirus recession — the average amount borrowed for a new car was $4,000 more than a year earlier. Buyers with the best credit scores had an even bigger borrowing appetite, as that group’s average loan amount was about $4,500 higher.
Even though the average interest rate for a 60-month car loan is nearly one percentage point lower compared to a year ago, the average monthly payment for new car buyers is higher, not lower.
It’s part of a long-term trend. In late 2009 the average new car loan amount was $22,700. If we adjusted that amount for inflation over the intervening years, the amount in 2020 would be around $27,500. Not even close. Experian says the average loan amount for a new car is around $36,000.
Part of that sharp rise is a function of many new car buyers trading in their existing car and still owing money on the older car’s loan. The loan amount on the new car includes rolling over whatever negative equity was left on the prior car loan.
Lenders are happy to arrange this. And a small silver lining is that interest rates recently are lower than in the past few years, so the new car loan will likely carry a lower interest rate. But before you convince yourself that this is indeed a win, remember that you just reset your loan term. If you traded in a three-year-old car with a loan for a new car with a spanking new 72-month loan term, you’ve effectively agreed to making car loans for nine years.
The average new car payment is now more than $550 a month. The faster you get a car paid off, the faster you can reroute that hefty monthly drain on your cash flow into other financial goals.
In 2009, about one in four new car loans was for a period of at least 72 months. Today, 40% of new car loans are for at least 72 months, according to Experian.
Even with today’s lower interest rates and longer loan term, a new vehicle affordability index launched by Cox Automotive and Moody’s Analytics finds that cars are eating up more of household income. Earlier this year, the index flashed that it took about 30.5 weeks for a household with median income to buy a new car, assuming a 10% down payment and a 72-month loan term. By this fall that was up to 33 weeks. (The index only considers “prime” borrowers with solid credit scores.)
The drop in household income during the pandemic is partly at play for the drop in affordability, but so too is the appetite for more expensive models. In the personal finance vernacular, there’s a tendency to buy the car you want, rather than pay less for the car you need. Even if you insist on a new car, there are plenty that have price tags below $30,000, yet as mentioned earlier, the average new car loan amount (after down payment/trade-in) is $36,000.