A Few Thoughts on Car Loans
Perhaps you’re only reading this out of modesty. Intrigued by how ‘other’ people live, you’re disregarding your own obscene wealth and researching how the less-fortunate buy cars. Well, you might want to sit down and brace yourself (on your double-king mattress, wrapped in 800-thread count sheets and covered with piles of hundred dollar bills)…because some people are unable to buy new cars with cash. They have to rely on …a car loan.
While you recover from your shock, after drinking your $219 bottle of Fillico mineral water, we’ll explain. You see…
107 Million Americans Have Car Loans
Don’t worry, we’ve already called the maid to clean up the water that you just spat out. But it’s true, according to data released by the Federal Reserve Bank of New York on May 19, 2017. That equates to 43% of the country’s adult population, and represents more than a 25% increase over the past five years.
While you may be breathing a sigh of relief knowing that 57% of Americans can still pay cash for a new car, pump your breaks. That’s nowhere near accurate. Based on an estimated median vehicle cost between $25,000- $30,000 (yes, many Americans drive vehicles priced at $40,000 or less) the majority have less than 20% of the total vehicle cost available to them.
That’s right. In fact, an estimated average car payment of $493 per month creates a huge burden, especially on families with multiple car payments. An estimated 1/3 of American households are one unexpected event (such as a health issue, home or vehicle repair) from being unable to cover their monthly expenses. All it would take is an unexpected bill for $500 or more, to put their finances at risk.
Going back to that 57% of Americans that you’d assumed were buying cars with cash, rest assured they’re not. Most of that number is based on families willing to ‘drive their car into the ground’ to avoid additional car payments. In fact, the number of Americans who pay cash for their vehicles is estimated at 12% or less. So, congratulations! You’re one the chosen few. Now you have something to talk about while you’re popping bottles of Veuve Clicquot at your next “White Party…”
The “Other 88%”
That’s right, we’re talking to you now (drinking your domestic beer, while you complain about the rising cost of your cable and internet bundle). Sure, you’ve read the syndicated financial column of your Sunday paper, where someone like Suze Orman recommends that you get yourself out of debtor’s prison by paying cash. We’ve read it, too. And if we didn’t have to worry about an upcoming 12th birthday party, the next 10 months of dance tuition, and the fact that Christmas is right around the corner, maybe we’d be inclined to play along.
The scenario is set for us. A financial whiz breaks down the incentive of buying a low-value used vehicle, but making monthly payments as if you were paying for a higher-priced new car. After the first 12-24 months, the vehicle is paid off. You then pocket the monthly payment (effectively paying yourself) over the balance of the five-year period to use as an upfront payment on a new car. Makes sense, right? With a temporary sacrifice, you’re able to set yourself up with a more substantial down payment the next time around. With the resulting reduction in monthly payment, you’re then able to set aside even more, so that (in another five years) you can buy a new vehicle outright. And hey…we’re not arguing it. It’s a great plan. It sounds so simple. So easy. So much so that, if you don’t do it, you must be an idiot.
But you’re not an idiot. The demands of your lifestyle may require more than a $5,000 beater. In addition, it must be really nice to live five years of life where you wouldn’t need to tap into that pile of monthly savings. This infomercial mindset that makes financial ‘uber-security’ seem so effortless is opiate for the capitalist masses. It’s bad enough that 31% of Americans are living paycheck to paycheck, do we have to make them feel bad about it? Maybe this is you; or maybe you’ve come closed to being part of this statistic. Either way, you don’t deserve to have this forced sense of inadequacy thrust upon you. Neither do the 107 million American adults who relying on financing to purchase a car.
What you do deserve is a vehicle that is safe and reliable, and one that meets the unique demands of your lifestyle. We’d even argue that you deserve a car (dare we say it) that you actually like. But here’s the real ‘fun fact’ (and don’t tell Moneybags this, but) you might actually be better off, as a result of your inability to pay cash for your next vehicle.
Scenario v. Scenario
While we don’t argue the viability of the aforementioned scenario for some, it simply may not fit all. But here’s one that does, and we offer it as food-for-thought.
Let’s say you have the cash to buy a brand new car for $22,000, paid in full. After a year of celebrating your debt-free lifestyle, you get railed by someone who runs a red light. Deemed ‘totaled’ by your insurance company, you receive a check for $15,000 (the depreciated value of the car). You loved this car, it never had any other owner, and you had no immediate plans to part with it. Now, you may have to buy a lower-priced replacement vehicle (potentially with a previous owner) unless you assume car payments for the next few years (which you had intended to avoid in the first place).
In all fairness, depreciation is a made-up concept invented by insurance companies so that they can pay you less in the event of an accident. But maybe you’re better off financing it, investing in gap insurance (covering any depreciation in the event of an accident), and waiting until you break even before paying it off in full. Best-case scenario, you have a long life with your car paid off within a fraction of the loan. Worst case, you get t-boned again, and you get the full $22,000 toward a replacement vehicle.
If you can buy a car for cash, or set a regimented budget that allows you to do so down the road…more power to you. If you can’t, don’t sweat it. Just do your homework, and find the best possible financing for your life and budget. You’re not alone.