Americans continue to take out auto loans higher than the vehicle is worth

[BurnItDwn]

When rates were extremely low, people who had long terms didn't have to pay too bad of interest.

Now however, rates are back around "normal" historic levels, and any loan longer than like 4 or 5 years, the interest really adds up a lot.

I dont see how anybody would ever really justify buying a car that costs more than around 20-25% of their household's annual income.

 

[Greenman]

Or we can just make WFH a standard thing, so that people can still live in nice places without having to commute anywhere.

Not a good fit for anyone in construction, forestry, mining, farming, aviation, medicine, waste disposal, shipping, and a few dozen others.

 

[dullard]

Not a good fit for anyone in construction, forestry, mining, farming, aviation, medicine, waste disposal, shipping, and a few dozen others.

Roughly 40% of jobs can be done fully from home. Yes, there are many jobs that require travel from home. But, they certainly don't need to live so far from work as they currently do.

 

[Red Squirrel]

Not a good fit for anyone in construction, forestry, mining, farming, aviation, medicine, waste disposal, shipping, and a few dozen others.

Those jobs are also not typically in the middle of a metro area, so it's less of an issue, you can still live close to work in those cases and still have a property you can enjoy.

 

[GodisanAtheist]

That really seems to be what they're doing. Even when you look at trims, if you want one option you end up having to take a bunch of others you don't want.

- Yep, generally the second trim level from the top is the best bang for the buck IMO. The bottom trim isnt much less expensive while being pretty badly cut back, while the top trim doesnt add much more while being quite a bit more expensive.

It's all about that upsell.

Roughly 40% of jobs can be done fully from home. Yes, there are many jobs that require travel from home. But, they certainly don't need to live so far from work as they currently do.

-Thing is the thread is asking why people are doing this today, not the million and one things we can do so they don't do it tomorrow.

 

[[DHT]Osiris]

Not a good fit for anyone in construction, forestry, mining, farming, aviation, medicine, waste disposal, shipping, and a few dozen others.

Imagine how much better the traffic would be for those guys if all the desk jockeys like me were at home in their pajamas drinking coffee at 9am rather than taking up their 15' of space on the road.

 

[dullard]

- Yep, generally the second trim level from the top is the best bang for the buck IMO. The bottom trim isnt much less expensive while being pretty badly cut back, while the top trim doesnt add much more while being quite a bit more expensive.

That is pricing strategy 101. Bracket what you really want to sell with options few will take. Makes people think they are making a wise decision while all along buying exactly what you want them to buy (at a price you want to charge).

* Make one version ridiculously expensive without giving much added value. It makes people think the next lower price option is a great value. But, for the few suckers who pay a fortune for not much more, you'll be glad to take their money.
* Choose what you really want to sell at a price you really want to sell it at.
* Make one version that is ridiculously terrible and not much cheaper. Almost no one would want this version and they'll gladly buy the next version up. For those few suckers who take it, you charged them an awful lot for this junk.

And:

 

[manly]

Surely some of this is on the underwriters, are they now under pressure to issue loans they're not confident can be fulfilled, or proceeding with the assumption they'll come out ahead after a repo?

I believe auto loan default rates have been low for quite some time, even as the aggregate amount of loans has skyrocketed. Some experts have predicted that it's a bubble ripe for popping, but that hasn't happened yet.

A lot of these effects are hangovers of the pandemic. Housing markets appear similarly distorted at a glance. Mortgage rates have jumped, which normally means prices have to go down substantially. But potential sellers have no reason to ditch their low locked-in rates, so supply is highly constrained. Prices have quickly stabilized, and affordability is extremely poor.

So it seems it'll take a moderate recession to drive missed payments, auto loan defaults and mortgage foreclosures.

 

[dullard]

So it seems it'll take a moderate recession to drive missed payments, auto loan defaults and mortgage foreclosures.

When it comes to those issues, there is another way out other than recession. Build more. Even if people won't leave their existing locked-in rates, prices can come down if there is more supply. And it looks like the supply is coming: https://www.reuters.com/markets/us/us-housing-starts-surge-13-month-high-2023-06-20/ It just means sales will shift towards new models and less for used models until enough time has passed that either (A) rates come down in a few years, (B) sufficient equity has built, or (C) people reach their desperation breaking point and sell off their items with locked-in low rates.

Auto production is trending up the last 9 months, but not nearly up enough though.

 

[Captante]

Amazingly there's a part III as well but no and here's a link!

 

[Captante]

I see it all the time, the exception are people driving cars within their means. Or people just repeatedly lease, which I still don't understand nor care to ever dive into.

Makes sense with some cars ... expensive/complex and even semi-exotic ones that you only want to drive around/be responsible for while they're under warranty! (or if you write off the lease payments for business with any car)

 

[RPD]

Makes sense with some cars ... expensive/complex and even semi-exotic ones that you only want to drive around/be responsible for while they're under warranty! (or if you write off the lease payments for business with any car)

Yea but then you always have a car payment. I had my last truck for 12 years give or take, it was nice having it for over half that with no payments. Current car I was going to get a short term loan but the car salesmen just said get the longer term, which at the time also came with lower interest rate and just pay it off sooner, which I am, effectively paying 2x on the payment every month.

 

[Mai72]

I bought a $2k 2006 Hyundai Elentra 3 years ago. Had some work done to it. The hood is rusty, but its clean and runs great. I live near the shore and so cars tend to rust.

The sad reality is most people can't afford their cars. If you make $45k a year, and purchase a $45k car you are putting yourself in financial trouble. But, people don't want to hear it. The reality is if you make $45k a year, your car shouldn't exceeed $10k maximum. Gotta put on the facade that you have money, and attempt to achieve validation from people who are too stuck on themselves to even notice. I'd rather put the money that I'd use on a car paymeent into my investments. I received a very generous inheritance last year. I could had bought a new BMW or Mercedes if I wanted. The money went into my Index funds. I'd rather get a 10% return on my investments than a new car that will eventually go to zero. I wish more people could see the big picture...

 

[AdamK47]

Makes sense with some cars ... expensive/complex and even semi-exotic ones that you only want to drive around/be responsible for while they're under warranty! (or if you write off the lease payments for business with any car)

Supercars and Exotics are still holding their value very well. Over the past couple of years people have been buying them, driving them for a few months or more, selling them, and either getting back what they paid for them or making a small profit off them.

 

[Captante]

Supercars and Exotics are still holding their value very well. Over the past couple of years people have been buying them, driving them for a few months or more, selling them, and either getting back what they paid for them or making a small profit off them.

Depends on the specific cars your talking about. MOST (as in the vast majority) of vehicles go DOWN in value over time not up.

And contrary to popular belief buying an "exotic" car is in no way the path to sure-fire riches. (more like sky-high insurance and insane repair-bills unless you do the work yourself a lot of the time)

IMO the only reason to spend money and effort getting a "dream" vehicle is that it's something a person LOVES driving.

Otherwise it won't be worth the compromises in fairly short order .... go buy a loaded Camry instead!

 

[MrSquished]

I've never bought a new car. I've never been wealthy but I've also never really cared about having a new car. Even though I like nice things, luckily I've never really obsessed about cars; I tend to spend money on nice things besides cars - bikes, cameras, audio gear, tech gear, camping gear, Japanese cutlery, and everything in between. Still driving a 2006 Honda Accord. Never had a major mechanical issue.

But, knock on wood, if this year pans out 75% as good as it looks I'll buy an Elantra hybrid with cash. Only at MSRP though. And keep it for many many years.

I know a lot of people who financed cars where the payments were way too high considering their income.

 

[blackangst1]

I suspect many of these are because of rolling negative equity on a trade in to their new loan.

 

[dullard]

I suspect many of these are because of rolling negative equity on a trade in to their new loan.

The logic (or probably lack of logic) of people just baffles me. "I don't have the money to pay for the car I have. I know the solution! I'll buy a more expensive car."

 

[blackangst1]

The logic (or probably lack of logic) of people just baffles me. "I don't have the money to pay for the car I have. I know the solution! I'll buy a more expensive car."

Well, its easy to understand. People buy a car based on its monthly payment. If they can buy a new car, with negative equity rolled in, on a 72 month loan, they;ll get a lower monthly payment, but more expensive in the long run. Its simple economics.

 

[Red Squirrel]

Shows how dumb people are. Not only people, but companies and even government, all think the same way. They don't care how much something costs in the long run they only care about what the monthly cost is. This way of thinking means they're basically going to be paying something monthly non stop forever.

 

[dullard]

Well, its easy to understand. People buy a car based on its monthly payment. If they can buy a new car, with negative equity rolled in, on a 72 month loan, they;ll get a lower monthly payment, but more expensive in the long run. Its simple economics.

Simple economics is to look at the long run, total costs not monthly payments, and see that it is a bad idea. Psychology is why people look at monthly payments. If they can barely get away with it and ignore all future consequences, then they'll do it.

 

[dullard]

Shows how dumb people are. Not only people, but companies and even government, all think the same way. They don't care how much something costs in the long run they only care about what the monthly cost is. This way of thinking means they're basically going to be paying something monthly non stop forever.

We don't 100% agree often, but I do 100% agree with what you posted there.

Governments are elected (or maintain non-elected positions) based solely on short term effects. Companies get stock price boosts and executives get bonuses based solely on short-term effects. People tend to over-value short term gains and under-value long-term costs. In all cases, that is the worst possible way to run the country/company/personal budget.

 

[AdamK47]

Shows how dumb people are. Not only people, but companies and even government, all think the same way. They don't care how much something costs in the long run they only care about what the monthly cost is. This way of thinking means they're basically going to be paying something monthly non stop forever.

There is a psychological reason for this. It's called "anchoring bias". Some people have been trained to look at the monthly number instead of the totality of everything involved. Dealerships know this and take advantage of it.

A good article that coincidentally came out today: https://www.cnbc.com/2023/06/21/4-ways-anchoring-bias-can-hurt-you-financially.html

 

[nakedfrog]

There is a psychological reason for this. It's called "anchoring bias". Some people have been trained to look at the monthly number instead of the totality of everything involved. Dealerships know this and take advantage of it.

A good article that coincidentally came out today: https://www.cnbc.com/2023/06/21/4-ways-anchoring-bias-can-hurt-you-financially.html

They use the 4 square method to exploit it too.

 

[repoman0]

I hate when companies and salespeople pretend they’re giving a good deal by telling me about the low monthly payment for some product or add-on scam insurance policy. It’s a good way for me to walk or for them to get booted from my property. Pella windows tried it on me recently .. “just $220 / month for 60 months!!!” to replace my upstairs windows! I made a point of asking her what the actual one time cost is even though I’d done the math in my head so that I could tell her the locally run window installer would do it for under $5k.