With new automobiles becoming ever more expensive, more and more Americans have to finance their automotive purchases with auto loans. And with salaries largely stagnant over the past 20 years, terms on auto loans are getting longer and longer, as that’s the only way that most people can afford to buy a car.
Most people just look at the average monthly payment on a car when they look to buy. The lower the monthly payment, the more likely they are to purchase. But while longer auto loan terms may result in lower monthly payments, they mean that buyers will end up paying far more over the long term than their car’s initial purchase price. Even worse, due to depreciation their car will be worth significantly less by the time they finish paying it off.
Since auto loan terms are now moving from three, five, or six years to seven or eight years, an increasing number of people end up trading in their cars owing more on their cars than the cars are actually worth. The percentage of people in such as situation has roughly doubled over the past decade.
Of course, the more people who are able to take out cheap loans to buy cars, the more expensive cars become because automakers can afford to charge more. Those who otherwise might have been able to buy a new car relatively inexpensively now have to pay more or think about going into a debt, all because people who have no business buying a new car are getting zero-down loans from car dealers. That’s how loose monetary policy affects even those whose finances are in good shape.
Eventually this bubble will come to an end, just like all others. And those who really couldn’t afford these cars will be forced to give them up, or have them repossessed. That may bring some sanity to the car market, where even used car prices have escalated due to the number of people financing their purchases. And that’s good news for those looking to buy a car but who don’t want to spend an arm and a leg on one.