Could you afford to spend $1,000 or more each month on a car payment? Not counting the costs on top of that – such as insurance? Apparently, about 15 percent of the car-buying public is paying that much – or more – each month, on a car payment.
Not counting the costs on top of that.
But can those 15 percent afford it? The credit reporting agencies are doubtful. They point to alarming loan-to-value ratios that are increasingly tilted in the direction of default, as the car is worth less than the loan outstanding. This being a function of depreciation. The car’s value declines with each month, but the monthly payment remains the same. In fact, it goes up – as a practical matter – as the value (buying power) of money goes down.
It is most alarming in the used car market, where the cars depreciate even faster and the loans are more expensive, because the interest applied to them is higher.
According to J.D. Power, the loan-to-value ratio in this market is now 125 – which when parsed means the loan balance outstanding amounts to 125 percent of the market value of the vehicle.
When this happens, what often happens next?
The borrower often decides it is no longer worth making those monthly payments and so stops making them. The loan goes into default and the car is repo’d. It is then put back on the market – often, via auction – where it tends (writ large) to depress the value of used cars generally. This is good news, if you are in the market for a used car.
Assuming you do not need a loan to buy it.
Aye, there’s the rub.
Because most people do – whether for new or for used. Because cars are now so expensive a loan – a long one – is the only way most people can afford to “buy” a new (or used) car. Because most people are not in a position to plunk down more than a small fraction of the almost-$50,000 that the average new car “transacted” for last year. Or the $15,000 or so that it takes to buy a serviceable used car.
So they finance most of the cost – and set in motion the loan-to-value scenario described by J.D. Power. It is worth making the payments for the first three or so years. But by the fourth or fifth it becomes less so.
Time for the heave-ho.
This is done for sound reasons as well as out of desperation. It is stupid, after all, to keep on paying top dollar for a thing that isn’t worth half the dollars it originally sold for. People walk away. People also have to walk away, having assumed more debt than they can pay for.
Twelve grand a year – not counting insurance and not counting gas – is a lot to pay for a car. It is $60,000 over six years – not counting the cost of insurance and gas, which together probably push the total well over $70,000.
This latter figure is now routinely spent (that is, borrowed, at interest) on a new truck or SUV – the “family cars” of choice as most cars (the few you can still buy) are too small for families. In 1985, one could buy a six passenger family car like the Chevy Caprice sedan for just under $10,000. This amounts to about $28,000 in today’s depreciated-value dollars.
It did not take six years of $1,000-per-month payments to pay off an ’85 Caprice. It took about three years (maybe four) and about $250 per month (in 1985 dollars). This does work out to about $700 per month in today’s devalued dollars but the relevant point is the borrower was only paying that for three or four years rather than six or seven, as is typical today. Put another way, after three or four years, the buyer of the ’85 Caprice was no longer paying anything for the car.
What he paid was also more aligned with the value of the car as it depreciated. By three or four years out, the ’85 Caprice may have only been worth about half what it sold for new – but by then, the borrower had paid it off, so he was “net green,” to borrow a phrase from the very red “environmental” movement. He owed nothing and the car was still worth something. It is not surprising to note that – back in 1985 – most people could afford things, because they weren’t making endless payments on things they could not otherwise afford.
How about a basic transportation car?
In 1985, a new Chevy Chevette cost about half as much as a new Caprice, so it took about half as much money in monthly payments to buy one. Imagine paying around $150 per month for a brand-new car. And paying it off after three or four years. You’ll have to do just that – imagine it – because it’s no longer possible to do that. It costs several times as much to finance a used car now than it cost to finance a new one, once-upon-a-time.
And why has this changed? Because the system has changed. It used to be that people bought what they could afford – and if they could not afford it, they waited until they could afford it. Now – courtesy of a system that eggs on debt-serfdom because it profits from debt serfdom – people are effectively forced to buy what they cannot afford, as there is no affordable alternative.
But there is a lot of money to be made – for those entities in a position to loan it (and profit) from it.
. . .
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