Are you preparing to purchase a new car either for the first time or after a long time? If you are, then brace yourself (and your wallet!) for more expenses.
A buyer who purchased a car last 2013 may go through a sticker shock because of the new-car trade-ins during the previous six years, and this doesn’t include the number of leased autos.
According to Edmunds, an auto-research firm and online buying guide, buyers last month spent $36,902 due to an additional $5,468 compared to June 2013, wherein buyers paid an average of only $31,434.
Although down payments and trade-ins significantly lessen the need to borrow money for expenses, compared to six years ago when the average was $26, 940, the modern standard turns out to have $5,884 more and amounts to $32,824. Compared with the 17% average price growth, the numbers show a 21.8% increase.
The reason why customers end up in more debt for car purchases is because of three things: expensive costs, rolled-over loan balances, and low prices on trade-ins. Although you can quickly obtain cars, car enthusiasts and shoppers are currently having a hard time. And they may not be entirely prepared for whatever that’s going on right now.
Aside from technology and safety features playing a part in the price increase, another thing to consider is that consumers have started choosing high-end SUVs and pickup trucks. Compared to small cars and sedans that are low cost, people often select high-end autos. On average, a non-luxury vehicle is priced at $25,200 while a non-luxury SUV is at $34,400. Additionally, pickup trucks have a price of $47,200.
In line with this, an estimated 33% of buyers go back to a dealership long before they pay off the loans they have before. For instance, these consumers are still more in debt to their trade-in than the actual worth; the remaining numbers will go to the car loan. The negative equity average amounted to $5,038.
Six years earlier, 25.8% of consumers were in debt regarding their previous loan, which resulted in an additional average of $3,988 onto the new loan. In addition to this, interest rates have greatly influenced the borrowing game. Higher rates also mean higher possibilities of debts.
For instance, if you compute and add the current average annual percentage rate (in interest and fees) of 6.03% to the average numbers financed ($32,824), it will yield the following outcomes:
$635 monthly dues
$5,278 additional in line with a 60-month loan
$38,102 total financing cost
A few years back, the Annual Percentage Rate (APR) for new car loans was 4.1%. This APR, if introduced to the current average amount, which is $26,940, would amount to $29,841. In addition to this, a $497 monthly dues would ensue for the borrower.
With current dues bombarding the pockets of consumers and budgets intended for the essentials, loans are the number one solution to be able to purchase a new car. This June, two months before it reaches the six-year mark, the average loan is nearing seventy months.
To make it simple, the new car’s price increases because of the extended loan time as well as the shooting up interest rates. In addition to this, your credit score also plays a vital part in all of this. The higher the score, the lower the available price.
According to the Federal Reserve Bank of New York, during the first three months of 2019, the loans that have a possibility of entering delinquency was significantly low. This occurrence was despite the increasing car and interest rates. At 2.36%, this is still a notable increase since 2012.
Based on statistics, however, there are almost seven million Americans that are involved in severe delinquency regarding car loans by the end of 2018. It shows that there is 1 million more compared to 2010, a time when the country was still trying to recover from the Great Recession.
The U.S. PIRG stated that the continuous rise in car debt puts the consumers in a very vulnerable place, which could turn out badly if in an economic downturn. In line with this, Jones highly recommends thinking things thoroughly, and if the car you choose will be worth it in the long run.
The more you make a loan wait, the bigger it will be compared to the actual price. If you think your current auto is of no use anymore, consider trading it in and introducing the negative equity onto the next loan.
Don’t be blinded, Jones said. Because some customers tend to purchase cars that have unnecessary features which end up being a total waste and it costs more. If ever a high end, the new model car seems a bit out of reach for you, try considering a second-hand or pre-owned unit. These autos are cheaper and easier to maintain, as well as be worth the money you spend on them.
“You’re not just buying a car for July 2019- you’re talking about having it in five or six or more years from now,” Jones said in an interview.
This year, according to a Cox Automotive report, 35% of new cars are priced at less than $30,000 when compared to 2012’s 54%.