Auto sales in the past year have taken off – setting new records; the same is true with auto debt under the hood. So it’s time to get a new one but what and how to pay for it? Do you pull money out of savings and pay for it with cash or borrow money and incur more debt?t. I know you are thinking, the old car just isn’t what it used to be, not as stylish, a dent here, component lights not working any more, electric door locks stick and the thing-a-ma-jig makes a funny rattle
Most folks these days are financing their auto purchases, in fact very few autos are purchased with cash. This is causing consumers to take on larger
amounts of debt. According to a recent Wall Street Journal (WSJ) article; Consumer auto loan debt is anticipated to “reach an all-time high of $16,942 in the fourth quarter, according to credit reporting firm, TransUnion.”[i] This includes all auto debt – for both new and used car purchases. Experian reports that new-car financing hit a high of $26,719.
The average price of a new car hit an all-time high too; according to a recent AP article the average cost is a record $31,252, an increase of $1,000 over last year, as many folks are adding more expensive options to the vehicles they purchase[ii].
This means that people are purchasing their autos with an average down payment of $4,533. I know a fellow who has never paid more than $5,000 for a car in his life. He is skipping the debt.
Now if interest rates tick-up as they have been over the last six months that may slow down the auto sales, in the future; but people will still add the auto debt to their balance sheets. And that is the problem.
One reason people are borrowing so much is that current rates are so low in comparison when they may have purchased their last vehicle seven or more years ago. So it may make a more expensive auto have about the same payment as the last purchase.
However, debt is always expensive. Debt by definition means that you owe someone something, you have an obligation to fulfill. It is always better to be debt free and this should be the goal of every American. Adding more debt to the balance sheet is just not good period. It is risky business in today’s world where continuous change is the norm: jobs, illness of family member, interest rates, accidents, weather related problems, etc.
So here are a couple of ideas to make this happen. Purchase a less expensive automobile. A long time ago someone taught me that an expensive car gets bent up just the same as an inexpensive car. And the other day I was driving home on the freeway and saw a $60,000 car on the back of a tow truck all smashed up. Now I appreciate nice cars too, don’t get me wrong, it’s just that if you are committed to pay cash for a car and stay debt free, maybe for a while you purchase less expensive autos.
If you must go into debt take on as little as possible. Do this by putting at least 25-30 percent down on the car. If you don’t have that much save until you do. Or again buy a less expensive car. Remember, an auto is a depreciating asset, eventually it will be worth less than 10% of your original purchase price.
Another way to limit your debt is to commit to a savings program – over the years I’ve told my clients that they should save what they pay in debts. So if you are purchasing an auto with a $350 per month car payment then you should be saving $350 into some sort of savings/investment account.
If all you have in your budget is $400, then that limits the auto payment to $200. This does two things:
1. You limit the types of autos you can afford
2. It helps you approach savings with the same discipline as paying your debts.
Then when you go to buy the next car there will be a savings built up to help pay cash for the car or a significantly larger down payment. Work to get debt free and you will experience financial relief and a peace of mind that is unequaled. Are you paying for your car or did buy it with cash?
[i] WSJ – Wednesday, December 18, 2013, page B2, Car Sales Fuel Boom in Debt, by Christina Rogers
[ii] Daily News, Drivers Dashboard, http://www.nydailynews.com/autos/average-u-s-vehicle-price-hits-record-high-article-1.1447926