With the price of automobiles skyrocketing in the United States, it should not come as a surprise the average car payment for a new vehicle in 2021 is now $563. American drivers are increasingly becoming poor due to the need for transportation. Although auto loans are leaving many people with little money left at the end of the month, it is not just the initial cost of a car that is a problem. Record-high gasoline prices and maintenance costs are making car ownership increasingly a financial burden.
With the average American car owner having a progressively challenging time financially with vehicle ownership, there should be several concerns for the future and how it will impact daily life socially and economically.
What are the average auto loan terms?
With the average auto loan for a new car at $563, buying a used vehicle is not far behind with a median monthly payment of $397. According to Experian, the average interest rate for a new car loan is 4.09% while used transportation has a rate of 8.66%. The average loan length of a car payment is 70 months for new cars and 65 months for used.
The average monthly auto loan payment has climbed about 25% over the last decade. This is all while previous auto loan terms were typically three to five years. This has now been replaced with auto loan payments often lasting six years or more.
The average auto loan payment is a problem.
The cost of new automobiles is now estimated on average at around $40,000 while a used one will cost $25,000. Although some of this pricing can be attributed to low inventory and a shortage in microchips for vehicles at the present time, the increasing cost of buying a car has not leveled off and it likely won’t for the foreseeable future. The problem with this is the dependency so many people have on the use of a car for daily life. Transportation is needed in most areas around the country to get to work and go to school.
The problem with the price of vehicles today and their loan terms is it’s increasingly leaving many families with less money at the end of the month. A smaller amount of money to save for retirement or higher education. With the average auto loan at $563, this is close to $7000 per year for a new car and the payment is regularly for six or more years.
Because most new vehicles historically depreciate by about 50% after the first five years, this is leaving many people with something they are just throwing their money away on.
I do understand some people live above their means by buying new cars with outrageous monthly payments. But even people that purchase a moderately used vehicle can expect to pay close to 28k after six years. This is all while about 21% of the country has no retirement savings and 39% of people have no savings at all.
With the median income in the United States between $50,000 and $60,000, people are paying a large portion of what they earn in order to drive a car. This is a problem because it leaves most middle-income families with no financial security. It leaves most car drivers with no room for error when it comes to paying their bills on time and planning for the future financially.
Many financial experts would argue that a person should not spend more than 10% of their monthly income on auto loan payments including, insurance, and fuel. It doesn’t take long to do the math to understand that much of middle America is likely extended when it comes to owning a vehicle and particularly a new one. Just the payment alone already puts most car owners at their 10% threshold. It doesn’t even consider fuel, insurance, and maintenance costs.
Although 10% of a person’s income is often used as a good starting point to afford a car payment, it doesn’t really consider the length of a loan or the interest rate. Because people are taking out longer loans to purchase a car, they are paying more for them. Payment is not everything when looking at the financial sense of purchasing a vehicle. Most car salespeople would like you to believe this is the case but it simply is not.
Car payments are increasingly leaving people poor.
With auto loan payments of $500 to $600 a month or more on average for either a new or used automobile, it is leaving most middle-income families without much financial security. The reason for this is historically wages have remained flat for some time now when the cost of living is taken into consideration. This doesn’t even factor in the rapid inflation the country is currently experiencing.
The real issue for the future and the requirement for much of the country to have a car is affordability. Prices for vehicles are not likely to go down in the future. This is only going to result in even more expensive transportation with longer loan terms. As owning an automobile becomes more expensive for the middle-class, the only answer to getting transportation will be to extend the terms of auto loans. Paying on a car for 72 or 84 months is already too long taking their rapid depreciation into account. Eight years or more of having an auto loan could be in the future for many consumers at even a more expensive average monthly payment than it is now.
Having to rely on a car for transportation is only going to be a big problem going forward with the direction the economy is currently in combined with increasing automobile prices. The problem with this is it will hurt almost all middle-income America that require a car for transportation.
With an increasing number of employers cutting back on benefits for healthcare coverage, retirement savings, and higher education, more people are having to cover larger expenses every day. The cost of car ownership unless something changes is going to hurt a large portion of the country going forward.
What happens when no one can afford to own a car any longer?
An economic question that should come up with owning a car is what happens when most people can’t afford to drive any longer? There was a time in history where only affluent people could afford to own an automobile. Is this where the country is headed?
I don’t believe America will get to the point where only wealthy people can afford to drive. The infrastructure of the country is built for daily commute. The more likely result is going to be long-term loans at lower rates with higher payments as the cost of car buying keeps rising. If something more drastic does occur and most people simply can’t afford to drive, complete economic collapse is likely to occur. This is unless better public transportation infrastructure is built in every city around the country, which is next to impossible.
What is the conclusion when it comes to the average auto loan payment?
As the prices for cars keep rising and auto loan terms keep being pushed out further, more people are going to have a challenging time owning a car. This is regardless of the price for repair costs and fuel.
Although it is generally best to buy a used vehicle and avoid the depreciation of a new one, even a good used vehicle is rapidly rising in price making it challenging for many consumers to drive without some type of payment. Flat wages for much of middle America in combination with growing prices for auto repair is also not helping with owning a car.
With the average auto loan payments between $400 and $600, a growing number of consumers are driving around in their future of financial security. Auto loan payments are making it difficult for people to afford a home. Moreover, the increasing cost of car ownership is likely going to leave many middle-income families with much less money when they need to retire and can no longer work.
Something needs to change to make car ownership more affordable.
For most of America to not become more car poor than they already are, something needs to change in the future to make owning a vehicle more affordable. Either wages need to start increasing drastically along with other living costs, such as healthcare and education, or the price of owning a car needs to be more sustainable.
I don’t really see corporate America consistently raising wages and offering more benefits in the future. The wheel has already been set in motion with more job outsourcing in a global economy with the chase for the lowest competitive price while enriching politicians and shareholders. The problem with this is auto manufactures also belong to the corporate profit center.
What car manufacturers need to start realizing along with corporate America is the same thing Henry Ford did which is to make automobiles affordable to almost everyone. Thus, the vehicles might be sold at a lower price but a larger number of them. Thus, the result is a larger profit.
Car manufactures need to stop loading up their vehicles with technology that is not required and only raises the build cost. They need to stop putting things in vehicles that would not compromise reliability or safety and only reduce costs. Automakers need to figure out a way to make cars at a more affordable price. If this doesn’t start to happen soon, there will be a cost to pay in the future and most of middle America will be paying the ultimate price. The price will be a comfortable retirement and the future for their family.
