Summary:
Although interest rates are rising for auto loans, there are more people than ever that are borrowing to pay off the payment for new and used automobiles. The average new vehicle loan hit a record of $31,099 and the average used vehicle loan hit a record of $19,589. Melinda Zabritski, Experian's senior director of automotive finance solutions shocking, finds this shocking, since these payments are much higher than someone with the average individual income would be able to afford. However, there seems to be a trend where consumers pay more but pay it off over a longer period of time, generally 65 to 70 months. The reason people are spending more could be attributed to either the fact that people are buying more trucks and SUVs, which are more expensive, or because the interest rates have significantly increased. "We're starting to see a trickle-down effect from the rate increases happening at the federal level," said Jessica Caldwell, executive director of Industry Analysis for Edmunds.com.
Question:
1. Why do you think there has been an increase in the number of people that are buying vehicles, despite the rise in interest rate?
2. What do you think of the trend among consumers to pay more for a vehicle but pay it off over a longer period of time?
Link: https://www.cnbc.com/2018/03/01/americans-borrow-record-amounts-for-autos-even-as-interest-rates-rise.html
2 comments:
From what I have observed in the Bay Area -- I don't know if this is accurate or even if it is, it may only apply to the surrounding area -- but more people are moving toward cities and towns with lower house prices because they can no longer afford to live in the area they did previously. However, that means a longer commute for those who have been forced to move. Therefore, in order to maintain their income, people are willing to purchase a vehicle that will make their work commute easier. As long as they maintain their employment, individuals and families will be able to pay off the vehicle over a longer period of time.
People are more confident in the markets which is leading them to overborrow for the purchase or leasing of cars. The increasingly long time frames for financing the payment of cars is extremely concerning when one considers how little money is being paid monthly for a vehicle that they probably won't be able to pay off before they try to resell it for a lower value or attempt to get another car entirely. I think the strategy of tying consumers in for the long term with these 70 month financing plans is great for the dealerships and car manufacturers because they see more people thinking that they can afford the car as the payments are super low, however their perception of "cheap" is somewhat skewed in the expectation that they will be able to afford payments in the future. Unfortunately, for most Americans, even though the stock market has risen significantly in recent months, we haven't seen wage increases in values significant enough to allow citizens to put more in the bank for retirement. Also, a side effect of longer leases is there are less car owners out there and the used car market might be flooded with cars bearing unfinished leases, thus pricing many younger and lower income families out of the market.
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