2008 January 12 Saturday
Car Loan Finances Show People Living Beyond Their Means

I always wonder how some people I see driving nice expensive cars can afford to drive those cars. Answer? They are living beyond their means. People are routinely buying cars that depreciate in value faster than they pay off the loans.

Gone are the days of the three-year car loan. The length of the average automobile loan hit five years, four months in October, up more than six months from 2002, according to the Federal Reserve. And nearly 45% of loans written today are for longer than six years. Even some staid lenders owned by the carmakers, such as Toyota Financial Services and Ford Credit, are offering seven-year financing. And a few credit unions, particularly in the West, are tinkering with the eight-year note.

At the same time, the amount of money drivers owe on their cars is soaring. In October, the average amount financed hit $30,738, up $3,500 in just a year and nearly 40% in the last decade, according to the Fed. More troubling, today's average car owner owes $4,221 more than the vehicle is worth at the time it's sold -- up from $3,529 in 2002, according to industry analyst Edmunds.

But Marty Jerome at the Wired blog says the numbers might overstate the size of the problem.

Not mentioned in the "Times" article is that the "average" amount owed on a car is hugely skewed by luxury makes (and utility trucks). A relatively small percentage of individuals and companies are assuming extravagant amounts of debt on auto loans for various reasons, including tax write-offs.

He doesn't provide any evidence for these assertions. Also, he still thinks the trend in auto loans is "unsettling".

My biggest problem with the debt nation is that people who live beyond their means their entire working lives will demand more from government (i.e. from people still working and paying more in taxes) in their retirement. Worse, the US government (and not a few other ones) has over promised on what it can hope to deliver to retirees. The currently retired are getting a great deal where they get far more in benefits than they paid in as taxes. Younger folks are going to get shafted on this and the economy will bog down with taxes to try to pay welfare benefits to baby boomer retirees.

Share |      By Randall Parker at 2008 January 12 04:59 PM  Economics Transportation

Bob Badour said at January 12, 2008 9:24 PM:

For more than a half-decade starting in the mid-90's, I earned several multiples of the median family income. A couple times back then, I priced new vehicles. A new truck that I looked at cost more then $50k. Even with my income, I could not afford that.

And yet, I saw lots of new trucks on the road. Seven years later, I bought a similar truck from that model year for a fifth of the price when it was new.

People living beyond their means and financing cars they cannot afford it nothing new. It has been going on for at least 15 years now.

VintageP said at January 13, 2008 11:40 AM:

It's like the old saying that "the only thing new is the history you haven't learned yet". We've had the S&L boom, the Internet boom, and the housing boom; all of which imploded and took on the label "crisis" instead of "boom". You can keep going back and will find the same behaviors; market speculation that led to the crash of 1929, even a tulip boom fueled by speculation hundreds of years ago in Europe. The only surprise here is that each time it is viewed as something new!

averros said at January 13, 2008 5:05 PM:

Do not forget that with the accelerating dollar inflation the longer-term loans may actually make more sense than short-term ones.

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