New cars are better than ever: more creature comforts, better gas mileage and all-time high safety marks make getting a new ride very desirable. For some, a 2005 Toyota Camry with 200,000 miles would be a badge of fiscal pride, but for younger car buyers the lack of navigation or Bluetooth audio would have likely prompted a new car purchase years ago. Millenials are finally buying cars, and it has pushed the auto industry to pre-recession sales marks for the last few years. Moody’s Analytics say that consumers 34 and under are now the largest segment of new auto loans at 26 percent.
Younger buyers are shopping for new cars not on the price of the car, but based on how much the monthly payment is. Unsurprisingly, this is a bad way to shop for a car, and a car dealer will take you to market. Car loans are now reaching lengths of 72 months or longer, and dealers will recommend just adding on a few extra payments so that you can make your monthly budget instead of discounting the car.
How much does a car cost? It’s not the total of every dollar you pay for a car. It’s the total of everything you pay minus the value of your car when you sell it. It’s not uncommon for new car buyers to roll over thousands in negative equity into a new car loan. In 2017, 33 percent of new car buyers are carrying an average negative equity of $5,300 into their new loans. Unless something changes, this feedback cycle will continue.
Things will likely get worse before they get better, especially if you own a car and not a crossover. New car sales are slow, to put things nicely, and discounts are way up. While that sounds great, this also pushes used car prices down so that they can compete.
So what can you do?
Make a savvy car choice and budget accordingly. It may be hard to plan for years in the future, but the number one way to increase your equity in your car loan is to own the car longer. Even an extra 12-18 months can have a significant impact. If you are carrying over negative equity into a new loan, don’t make out your monthly budget on an 84-month loan. You are setting yourself up to fail. There are plenty of cars that offer immense value for under $20,000, so go give them a test drive and maybe skip the Mercedes C-Class or BMW 3-Series.
Before you go …
… we’ve got a small favor to ask. More people are reading The Tribune than ever. Advertising revenues across the media spectrum are falling fast. And unlike many news organizations, we haven’t put up a paywall – we want to keep our journalism as open as we can. So you can see why we need to ask for your help. The Tribune's independent, investigative journalism takes a lot of time, money and hard work to produce. But we do it because we believe our perspective matters – because it might well be your perspective, too. If everyone who reads our reporting, who likes it, helps to support it, our future would be much more secure. Support the only locally owned, locally produced news product in the Lake Houston area. And thank you!