Automobile Debt Increases

I read an article in the Arizona Republic this morning taken from the LA Times that spoke of automobile debt. Debt that in most cases exceeds the vehicles worth. "todays average car owner owes $4,221 more than the car is worth at the time it is sold-up from $3,529 in 2002" . 45% of the car loans made today are longer than 6 years. Most cars are traded in between 24 and 36 months. This means that in order to get another car, the buyer needs to come up with cash to cover the negative equity, or the negative equity needs to be added to the new loan.

There was a time many years ago when you needed 33% down to buy a car and the balance had to be paid off in 2 years. It sounds terrible, but this was the era when a new car cost $3,000. The other side of the equation was that around $1.00 per hour was an average wage.

As inflation has kicked the price of a base car to over $10,000 you can see what has happened. You can probably buy the $10,000 car with $500 plus tax and title, the salesman has also sold you an extended warranty and credit life. You now owe about $14,000 on this car. The sad part is that the car depreciates faster than you can reduce the balance.

This doesn't sound too bad, but if you want something besides a Chevy Aveo, Hyundai Accent or Kia Rio be prepared to spend $15,000 up.

This state of the auto loan industry is very near the state of the housing mortgage industry. When you have no concept of having any equity in something its very easy to walk away. We see consumers who are looking for another car and buried in their present car. We ask what they will do with the present car, and the response is we are giving it back to the bank. Most lending institutions are realizing this and tightening up their standards on term, credit rating etc, but this is like putting a bandaid on a 3" gash in your arm. It will help, but not a lot.

My advice is the same as always. Get the car you want, put as much down as possible and pay it off as quickly as possible. that way when you do want to trade, your car will be worth more than is owed.