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12.7% of New-Car Buyers Signed for $1,000+ Loans in June

Not many financial articles leave me speechless, but one such article in the Wall Street Journal just came across my eyes this morning…

According to Edmunds (car-shopping website), “a record 12.7% of new-car buyers who signed up for a loan in June have a monthly payment of at least $1,000. That share is up from roughly 7% a year earlier, 5% in June 2019, and 2% in June 2010.

Chart from The Wall Street Journal

On top of that, the average new-car payment reached an all-time high of $686 on loans given out in June, and the average used-car loan given was $554:

Chart from The Wall Street Journal

The two primary reasons that car loans have increased are:

  1. Car sticker prices have increased due to COVID-related supply chain disruptions that led to a shortage of new vehicles getting made and delivered
  2. Car loan interest rates have risen as a result of the Federal Reserve raising interest rates to fight record inflation

I’m not a car guy by any means, so I won’t even pretend to know what people are buying to get those record-high loans.

After years of having no car payments, the wife and I recently bought a brand new Kia Soul (she had beater cars for a decade) for her this year for around $26,000 and refinanced the dealer rate immediately with a local credit union for 2% over 5 years. I personally hate car loans, but I guess we should consider ourselves fortunate that the payment is only $289/month (and we’re even throwing a little more at it to pay it off faster).

Wife's brand new 2022 Kia Soul

The first thing that immediately comes to mind with a $1,000+ car payment is opportunity cost. Most buyers are now even stretching these loans over 60-72 months, meaning they’re tying all that money up into a depreciating “asset” for 5-6 years.

Let’s just say for hypotheticals that these 12.7% of $1,000+ car loan buyers opted to buy a cheaper new vehicle at the average new car payment price of $686. That is an immediate $314/month in savings. Let’s assume they invested that $314/month into a total stock market index fund from within their Roth IRA. Here is what that $314/month of additional savings would compound to if invested monthly (assuming an 8% annual return): 

  • 5 years - $23,071
  • 10 years - $57,445
  • 15 years - $108,655
  • 20 years - $184,952

What about if they opted to buy a reliable used car at the average loan price of $554/month? They would now increase their additional savings to $446/month, and if invested monthly (assuming 8% annual return) would compound to:

  • 5 years - $32,770
  • 10 years - $81,593
  • 15 years - $154,332
  • 20 years - $262,703

As I said, I am not a car guy and I don’t like to tell people how to spend their hard-earned money. But $1,000 car payments are beginning to approach some people’s rent/mortgage payments (it’s only $500 off my mortgage payment).

If you are also not a car person then I simply warn you to be careful on the dealership lot. There’s a massive opportunity cost that comes with expensive vehicles, and the money you have to pay for them goes into an “asset” that depreciates immediately when you drive it off the lot.

Prioritize your savings and investments first, then use what’s leftover to purchase a good reliable car.

Where you get in trouble is purchasing the luxury car before you account for your savings and investments, then have no money left over to build wealth.

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$1000 car payments are Clown World Express . Enjoy driving your retirement around because that's exactly what you are doing!

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