In the Netflix era, many Americans are managing their finances based on their monthly subscription payments, often with little regard to the total they’ll pay in the long run.
That paradigm benefits the automotive industry and the lenders that finance car loans, as auto sales remain near record levels.
The average price of vehicles hit an all-time high of more than $36,000 in 2018, according to Kelley Blue Book – and with interest rates rising, car shoppers are now borrowing more than ever and extending their loans to record lengths.
New-car buyers agreed to pay an average of $551 per month for 69 months in January, according to car-buying advice site Edmunds. That’s nearly 10 percent more per month than three years earlier.
It’s a clear-cut sign of how Americans feel confident in a strong economy.
Car debt has risen 75 percent since the Great Recession in 2009, reaching an all-time high of $1.2 trillion, according to the U.S. Public Interest Research Group.
“Easy credit and longer repayment terms have coaxed many consumers into buying more car than they can really afford,” said Ed Mierzwinski, U.S. PIRG’s senior director for consumer programs, in an email. “It’s even worse for those who have been subjected to deceptive and predatory lending practices at auto dealers.”
Average annual interest rates jumped from 4.68 percent in January 2017 to 4.99 percent that same month in 2018 and then to a 10-year high of 6.19 percent in January 2019, according to Edmunds. With new-vehicle prices averaging nearly $37,000 in January, according to Kelley Blue Book, monthly payments are getting out of reach for many buyers.
Several automotive executives interviewed recently by USA TODAY said car buyers can afford it amid a strong job market and encouraging stock gains.
“The economy is still at a very strong level,” said Henio Arcangeli, Jr., a leading executive in Honda’s U.S. division. “Although interest rates are coming up, which obviously can increase the purchase cost of the vehicle, on a historic basis they’re still at a very low level.”
That’s true. Auto interest rates on 4-year loans were never this low in the 1990s, for example, when they ranged between about 7 percent and 12 percent, according to the St. Louis Fed.
More people are 60 days behind on their car loans, Experian Automotive says More people are falling at least two months behind in making payments on their auto loan, a new report showed Tuesday. USA TODAY
But car buyers could run into trouble if the economy takes a turn for the worse and their income drops, especially because they’re locking themselves into long-term loans.
Netflix subscriptions can be canceled. Car payments can’t – at least not without giving up the vehicle. About 83 percent of Americans rely on their own car or someone else’s to get to work every day, according to an August 2018 poll by research firm Gallup.
More than 7 million Americans are now at least three months delinquent on their auto loan payments, the benchmark for many lenders to trigger a repossession.
According to the Federal Reserve Bank of New York, the number of these troubled borrowers is a million more than in 2010, following the global financial crisis that led to a bailout for automakers and financiers.
Phaedra Wainaina, a new law school graduate in Michigan who recently lost her job as a legal researcher, was quickly overwhelmed by her bills, including a car loan….