Middle-Class Americans Can’t Afford Their Long-Term Car Loans

By Mia Bevacqua 

Travel through any middle-class neighborhood and you’ll see a multitude of costly, late-model vehicles lined up. Fully-loaded pickup trucks, which often have a price tag over $60k, and top-tier SUVs sit in nearly every driveway.

You might wonder how working-class families can afford these expensive vehicles. The answer is – they can’t. According to an article from the Wall Street Journal, just 18% of U.S. Households can afford the cost of a new car. As a result, more and more Americans are taking out extended, seven-year loans. And that’s putting many of them in a financial bind.

The Proliferation of the Seven-Year Loan

During the first half of 2019, about a third (33%) of new car loans had terms longer than six years. Back in 2009, that number was just 10%. The discrepancy stems from the fact that the cost of a new vehicle has gone up substantially, while wages have seen a minimal increase.

While the typical household can afford a vehicle that costs a little over $18k, the average cost of a new car has jumped to $32,119. High-tech features, such as multimedia centers and advanced driver assistance systems, have contributed significantly to the price hike.

To get behind the wheel of a shiny new ride, buyers are taking out longer loans. The average term is now a record-breaking 69 months long. Also, during the first half of 2019, 1.5% of loans were stretched to 85 months or longer.

Unaffordable Cars Equal Substantial Debt

Long-term loans make new cars seem affordable to middle-class families. That’s one reason Consumers in the U.S. had 1.3 trillion dollars in car debt at the end of June 2019. By comparison, in 2009, the Federal Reserve reported only $740 billion in auto loan debt.

All too often, buyers saddled with long-term loans are still paying on their car when they trade it in. A staggering one-third of buyers roll debt from their old car into their new one. Meanwhile, those who keep their vehicles are often stuck with a monthly payment, plus costly repairs, as the car begins to age and wear out.

Some financial advisors, such as Suze Orman, recommend consumers stick with a new or used car they can pay off in three years or less. Consumers need to be realistic and live within their means.