Hello Everyone! These blogs are meant to inspire financial awareness from an economic, business, individual and behavioral sense. I hope you enjoy!
Back to Blog
Ever since I was a young child I have been in love with cars and I’ll never forget telling my dad when I grow up, I want a yellow Corvette with a NASCAR motor. Today more than ever, like many Americans my passion and love of cars is still strong. It is important to remain resilient and understand that cars depreciate, and for many, these vehicles would be considered a liability. A record number of Americans in the United States have auto loans currently and today's piece is to discuss what this means for the overall state of our economy, how this affects individual's investments and why taking out a loan or leasing a car isn’t necessarily the best option.
It is well known that wages haven’t increased significantly over the past decade, while the prices of many products have increased several times over the same period. Cars specifically have been the weak spot for many Americans and currently, we have over one hundred million Americans with auto loans. What does it say when a country is approaching nearly a third of its population having to make monthly payments to get from point A to point B? Are they trying to leverage debt and take advantage of low-interest rates (average auto loan interest rate stands around 4.2%), or are they squeezed financially to the point where they are unable to pay cash for a car? I think it is a combination of both with more emphasis on Americans being squeezed financially. It is written on the wall right now on why we have a record amount of loans. Unemployment is hovering around the lowest it has been in the past decade; the stock market is currently at an all-time high and the market is simply euphoric with near all-time low-interest rates. People feel comfortable taking these loans because they are the ones on the party bus, it is going fast and these people don’t want to see that good times eventually do taper off.
The average U.S. citizen pays roughly $550 per month for their auto loan as of 2019. If individuals were to simply put this amount plus the initial investment of $5,000 into an S&P 500 index fund over forty years monthly at a rate of return of 8%, they would have $1,880,216 tax-deferred. Do you love your car that much?! Come on everyone! Even if you were to reduce the average monthly payment in half to $225 per month you would still come ahead with $833,365 extra in retirement. This is just something pivotal to consider if you are falling behind on your investments or if you want to live a very nice lifestyle in retirement these are things to consider. Remember, just because the smiling car dealer with remarkable teeth and a comforting personality tells you everyone is doing this, does not mean you need to also. Go against the grain if you want to have a heightened level of freedom and a wonderful life. Short term pleasures? No. Long term results? Yes.
I will discuss leasing in a future article, but essentially leasing a vehicle is being left with nothing at the end of the term. Leasing would be considered the worst rate of return, but it can be argued that it is the most convenient. I will write a future post on leasing versus buying, but anything with a return of 0% should be avoided at all costs! The main problem with financing is that many buyers are then in the cycle of always making payments for the rest of their lives. Once when the five years are up, the car doesn’t have the latest features and the consumer then typically rolls over the residual value into a new and more expensive loan, and the cycle starts again. The next problem is on average, most cars can lose anywhere between 40-70% of value in the first three years. If the hard times hit and one were to lose their job, they would be underwater on their loan and would either default and get the car repossessed or roll it into another higher rate loan. Both are horrible options. How can one break out of the middle or lower class if one is always paying someone else?
Cars are almost a necessity in the modern world, but if you live in an area where you can take public transit or ride your bike take advantage of this! Honestly, riding a bike or a scooter is much more fun anyways 😊. If you must buy a car, it doesn’t have to be new. Plenty of reliable Japanese makes produce reliable cars at a fraction of the cost that can last 250,000 miles +. In summary, we have a record number of individuals in auto loan debt today, it is sacrificing many people’s retirements and therein introduces unneeded risk into people's lives. Avoid the pileup and race out of debt. You AUTO know better! Give me a BRAKE!