What’s the best car on the road? One that’s paid off.
That’s what my father loves to say. Regrettably, too many Americans aren’t heeding his advice. What’s worse is that they’re taking on “underwater” loans that far exceed their cars’ value.
The Wall Street Journal recently featured a 40-year-old electrician who bought a $27,000 Jeep with a $45,000 loan.
How is that possible?
A string of bad luck was part of it. He “replaced one because it had 100,000 miles and another when he went through a divorce, and he changed cars again when his family was expanding.”
Since auto dealerships earn more from financing cars than from selling them, they’re happy to extend “underwater” loans that can take many years to repay - though in those cases, “car owner” probably isn’t the right term for the buyer.
Buyers often trade their cars in before those lengthy loans are paid off, driving into a perpetual state of indebtedness. In 2019, a third of car buyers have taken on “underwater” loans, The Journal says.
It also says rising car prices are another cause of growing debt. I know a few fellows who’ve borrowed $60,000 or more to buy new trucks, which get pricier by the day.
A 5%, seven-year loan on a $60,000 truck costs $850 a month. You can still buy a house for that amount in Pittsburgh!
“Easy lending standards are perpetuating the cycle, with lenders routinely making car loans with low or no down payments that can last seven years or longer,” reports The Journal.
“Easy lending standards”? When has our country encountered that eerie term before?
“Consumers, salespeople and lenders are treating cars a lot like houses during the last financial crisis: by piling on debt to such a degree that it often exceeds the car’s value,” The Journal reports.
Automakers have realized they can charge more for their vehicles if they give buyers, who aren’t very good at math, monthly payments they can swing - even though those vehicles depreciate massively and are “underwater” throughout the loan’s lifespan.
“A record 7 million Americans are now 90 days or more behind on their auto loan payments,” The Washington Post reported in February.
Some observers are starting to use the “bubble” term regarding auto loans, as such debt has grown 75% since 2009, to about $1.26 trillion or about 5.5 percent of GDP, according to a U.S. PIRG report.
Look, I’m a car guy. I’ve owned 27 vehicles. When I was younger, I did my fair share of boneheaded deals, taking on more debt than I should have to drive nice cars. I figure everyone has a right to be foolhardy this way once or twice in a lifetime.
But I’ve learned that paid-off vehicles are for more enjoyable to drive than those the bank still owns - that massive debt on rapidly depreciating automobiles takes the joy out of driving. And that all that auto debt combined with college-loan and credit card debt is doing no favors to our economy.
Thankfully, I finally came to my senses.
I now own a 2008 Toyota 4Runner in mint condition; a super-clean 1992 Chevy S-10 that sits in my father’s garage, waiting to haul furniture or mulch; and a recently acquired cherry 2011 Chrysler 200 convertible, which I’m enjoying the heck out of.
Why are they three of the best vehicles on the road? They’re all paid off!
Tom Purcell is a Pittsburgh Tribune-Review humor columnist. Send comments to Tom at Tom@TomPurcell.com.