Cash and Cars
May 19, 2023
Americans love cars. Ipsos finds “81% of Americans agree… their car reflects who they are…” One might argue they love them too much, so much so that they consistently look for loans in order to get their vehicles. According to Statista, 83.67% of new vehicle purchases were financed in 2022. That number should be incredibly concerning. It is one choice to purchase on financing because rates are so low it would not make sense not to, but with high-interest rates as a result of the Fed’s fight with inflation, the interest rates absolutely do not benefit borrowers.
Even more concerning, CBS’ Kristopher J. Brooks reports, “Nearly 15% of drivers who financed a new vehicle toward the end of 2022 are shelling out more than $1,000 a month….” Not only are American consumers heavily reliant on debt to purchase vehicles, but many are also going after some of the most expensive ones. Some might wonder why financing a big purchase is such a bad thing. Debt for certain purchases, like properties, is not; however, cars are another story. Unless collectibles, which these new purchases are not, automobiles are depreciating assets. Borrowing and signing up for a long road of payments in order to work towards owning a vehicle that will not be worth anything close to what it costs once payments are completely made should not occur.
While it is easy to criticize those who cannot pay cash for their vehicles for splurging on them, without solutions, no value is added. First, the idealization of the new car must be addressed. While for many Americans, an element of “making it” is a new car in the driveway, that can be an unnecessarily expensive purchase. Low mileage and pre-owned cars are reasonable and more affordable alternatives to aid in avoiding debt for a depreciating asset.
As a result of global supply chain issues, the car market has been in a unique place in recent years, with used and new prices reaching astronomical levels. While many may believe now is not the time to purchase a vehicle at all, if a consumer has reached the time for a change, high-interest debt should be avoided at all costs. Rather than taking major losses on the depreciating asset that is the automobile, consumers should take advantage of their depreciation by buying pre-owned. Ultimately, a car purchase, like any other, is a personal decision, but new car loans, especially those that involve $1,000+ monthly payments, should be thoroughly thought through.