The mentality of "push the envelope" ...

from CNN ...

Car buyers are going deeper into debt and for longer periods of time as they reach to buy more expensive new cars.

The average car loan last month stretched out for 69.3 months, or nearly six years, according to

Cars buyers end up owing money on about a third of cars that are traded in at dealerships, Caldwell said. That debt then usually gets wrapped up in the new car loan, making for bigger monthly payments and a cycle of expanding debt.

Americans are going deeper into debt to buy cars

Tamara Shepherd's picture


I just don't understand and I tend to fault the banking industry more heavily for this phenomenon than I do these covetous consumers.

My bank, ORNL Federal Credit Union, writes mortgages with no money down, too, and also grants home equity lines of credit for up to 100% of home values. Their website advertises their foreclosures these days, of course.

All I know is that it's hard to pass on to my kids the lessons of conservatism and frugality that my own parents taught me, what with practices like these having become the new normal.

Tamara Shepherd's picture


I just took another look at ORNL's website to see for how long they'll finance a car but it's not indicated. I know someone who recently financed a new car there for seven years, but I was wondering if they could have run the loan for even longer?

Anyway, ORNL will finance 100% of a new car purchase, too, and sells *optional* "gap insurance" so that if the car is totaled or stolen and not recovered and the debtor's car insurance payout is then inadequate to repay what's owed to the bank, he won't be left twisting in the wind.

But why is this "gap insurance" optional???

R. Neal's picture

Bubble? (link...)



michael kaplan's picture

People have less and less

People have less and less money to spend, so the credit component of the economy gets larger and larger. It's, like, the definition of capitalism ...

If Marx is too dense, try Istvan Meszaros' "Beyond Capital." He lays it all out, and explains why Bill Lyons' 'economic development' is a dead end.

Tamara Shepherd's picture


People have less and less money to spend, so the credit component of the economy gets larger and larger. It's, like, the definition of capitalism

I'm not sure that's what's going on with this phenomenon, though.

As the article points out, it's still possible to buy a perfectly nice compact car for under $20,000, yet many people are gravitating to higher priced (and less fuel efficient) crossover SUVs, with lots of techno bells and whistles.

This appears to be the reason that, effective last month, buyers averaged $31,000 loans, run over nearly six years, to get their payments "down" to $517.

In other words, buyers do have more economical, more sensible options, they're just not choosing them.

Nor are their banks counseling economy and good sense.

bizgrrl's picture

Nor are their banks

Nor are their banks counseling economy and good sense.

I have to say I don't see how we can blame the banks for not counseling on car purchases. In the past 20 years or so, whenever we bought cars, it does not seem we spoke to a banker. We speak to a car dealer F&I person who gives us some options. We may have done some research on what the interest rates are at local financial institutions but I can't remember the last time we dealt directly with the financial institution to finalize a car loan.

Is there a standard rule for how much you monthly car payment should be as there is with a mortgage (e.g. 28% of income before taxes)?

Tamara Shepherd's picture


Perhaps rather than saying that banks aren't counseling economy and good sense, I should have said banks aren't encouraging economy and good sense--via the terms they're offering on their loans, I mean.

The ball's in their court because they're the ones setting the required down payment amounts (today that's zero) and the maximum repayment periods (today that's seven years), both of these terms unheard of in the past.

Here's my first hit when I asked Mr. Google "what percentage of our incomes should we budget for a car loan?"

The 20/4/10 rule

It all starts with what we call the 20/4/10 rule, which says you should:

Make a down payment of at least 20%.
Finance a car for no more than four years.
And not let your total monthly vehicle expense, including principal, interest and insurance, exceed 10% of your gross income.

A car payment of $517 (before insurance cost) certainly exceeds 10% of the average household income in Knox County. Keep in mind, too, that just that one car payment would exceed the average income here. Meanwhile, households with older children need to own and operate three or four vehicles.

I'm someone who has lived in a household of that type in recent years, so to me this notion of a $517 car payment on a single vehicle (and of having to run the single car loan for nearly six years to get the payment "down" to even that amount) is jaw-dropping.

Tamara Shepherd's picture


And again, banks aren't looking after buyers' interests when they offer these zero down/seven year repay terms then make "gap insurance" optional, either.

I certainly recognize that buyers share culpability for this kind of recklessness, but we've all seen the polls indicative of how little most Americans know about personal finance. The banks, on the other hand, we should expect to know better.

I just don't see any evidence of "consumer protection" in these recent terms that would serve to protect new car buyers from themselves.

R. Neal's picture

About 30% of new car loans

About 30% of new car loans are made through manufacturer's financing companies.

michael kaplan's picture

They're as much in the

They're as much in the finance business as in the car business. GMAC was one of the reasons for GM's bankruptcy - failed loans and mortgages.

michael kaplan's picture

My dad always bought cars

My dad always bought cars with cash. If he didn't have the cash, he didn't buy the car.

Credit is an industry. Just look at Chapman Highway ... and the 'plantation' banks that line Kingston Pike.

Tamara Shepherd's picture


Well, let me clarify that I certainly don't begrudge anybody who can afford those $517 a month car payments (before insurance) and I want to be one of 'em!

All I've meant to point out above is that if this is the average new car payment, we ought to be able to examine that amount relative to the average household income (and the average household size, I guess) to determine whether that amount seems prudent for that household. So I'm talking relativity, you understand.

If I may briefly return to this tangentially-related subject of mortgages, though, the rule I was taught was to keep housing cost, rent or mortgage either one, no more than 25% of "take home" income (to include one's taxes and insurance on any mortgage). In my previous life as a single person and over the years I was married, I always did (which has something to do with why I live in a 1456 square foot house, ha ha).

I just asked Mr. Google what that guideline imposed by the banks is today, though, and look what he answered:

Income used for housing: What others say

The traditional model: 35 percent/45 percent of pretax income.

In an article on how the mortgage crash of the late 2000s changed the rules for first-time home buyers, the New York Times reported:

"If you’re determined to be truly conservative, don’t spend more than about 35 percent of your pretax income on mortgage, property tax, and home insurance payments. Bank of America, which adheres to the guidelines that Fannie Mae and Freddie Mac set, will let your total debt (including student and other loans) hit 45 percent of your pretax income, but no more."

Let’s remember that even in the post-crisis lending world, mortgage lenders want to approve creditworthy borrowers for the largest mortgage possible. I wouldn’t call 35 percent of your pretax income on mortgage, property tax, and home insurance payments “conservative.” I’d call it average.

The conservative mode: 25 percent of after-tax income!

On the flip side, debt-hating Dave Ramsey wants your housing payment (including property taxes and insurance) to be no more than 25 percent of your take-home income.

(Ramsey says) "Your mortgage payment should not be more than 25 percent of your take-home pay and you should get a 15-year or less, fixed-rate mortgage … Now, you can probably qualify for a much larger loan than what 25 percent of your take-home pay would give you. But it’s really not wise to spend more on a house because then you will be what I call “house poor.” Too much of your income would be going out in payments, and it will put a strain on the rest of your budget so you wouldn’t be saving and paying cash for furniture, cars, and education."

Notice that Ramsey says 25 percent of your take-home income while lenders are saying 35 percent of your pretax income. That’s a huge difference! Ramsey also recommends 15-year mortgages in a world where most buyers take 30-year mortgages. This is what I’d call conservative.

Sure looks to me like the "conventional wisdom" has changed--and that it's not very wise.

Up Goose Creek's picture

Good news & bad news

From Bloomberg:

The rise in leases has contributed to a surge of vehicles being returned to dealers at the end of their term, which are then sold in the used-car market. The supply glut has started to depress used-vehicle prices. When those values fall by more than automakers and lenders bargained for, the companies rack up losses. Ford Motor Co.’s credit unit cut $300 million from its annual profit forecast,

The good news is I got a great deal on a lease return with 30K miles, a blingy little car for about half it's original list. Thank you, Ford.


The bad news is people using loans to buy used cars of questionable reliability. When the cars die before being paid off, borrowers are having wages garnished for a car they can't even drive.

Knoxoasis's picture

I bought my latest car as a

I bought my latest car as a year and a half old model with 13k miles on it and paid a third off the original sticker price. I feel pretty good about it.

Tamara Shepherd's picture


My late mom and dad always bought one and two year-old rental cars from Hertz and Avis. Very low miles, detailed maintenance records, and discounts of 20% to about 1/3 off their former new car sticker prices.

Well, not "always." In a brain fart of epic proportion, the only new car they ever bought they elected to buy the year I turned 16 and got a driver license. They didn't have it 30 days before I side-swiped a parked car and caved in the whole passenger side, from front bumper to rear.

Many years later, I also had kids who drove my cars and got my comeuppance.

Knoxoasis's picture

My dad always advocated

My dad always advocated buying rentals too. These days it makes more sense to me to buy them when they've come off lease from the dealer. As the previous article mentioned so many people are leasing now that low mileage off lease cars are available in abundance. My current vehicle is sort of a dream car and may be the last I ever buy. It was to me pretty expensive, but in line with the average price people are paying for new cars. I never could have afforded it at the new car price.

Tamara Shepherd's picture


Your and Goose Creek's purchases both sound well-considered. Thanks for the tips.

Tamara Shepherd's picture


An afterthought, Knox, because I realize you're a (likable) Republican.

Aside from my late parents, another role model from whom I took my cue early on was Democratic California Gov. Jerry Brown:

On taking office, Brown garnered some headlines when he canceled the inaugural ball and refused to live in the $1.3 million governor’s mansion that Ronald Reagan had built. He also sold the governor’s limo and wouldn’t use the jet plane. He lived in an apartment, walked to work, and had his chauffeur drive him around in his 1974 Plymouth.

Hey, if it was good enough for Linda Ronstadt, it was good enough for me, you know?!

trobinson's picture

Just bought a used luxury

Just bought a used luxury car in cash for 1/3 of the price new. Love the supply glut. Great online sites to find the bargains too. Check out CarGurus.
Only good news, not crying for Ford's credit unit.

Tamara Shepherd's picture


The bad news is people using loans to buy used cars of questionable reliability. When the cars die before being paid off, borrowers are having wages garnished for a car they can't even drive.

But in an instance like that, too, responsible banks (serving less-than-responsible or at least less-than-knowledgeable borrowers) really should be helping borrowers avoid such a scenario.

Banks can cap the age of cars they'll finance and cap the number of months they'll run the loans, too.

Working in tandem, those two controls should reduce or preclude the borrower's chance of disaster.

Tamara Shepherd's picture


Ouch. This site cites as assertion by that, as of 2015, 30% of new car loans were written for 72 to 84 month terms.

(Confirmed, then, that some institutions are now running car loans that long. Thought so.)

yellowdog's picture

It is interesting what we are not talking about

Most of the comments here are about how to get around the fact that people do not make enough money to buy a new car and about how to get around that problem by buying used ones or whatever.
We are so mired in this system that we do not see it.

Tamara Shepherd's picture


As for me, I wouldn't buy a new car even if I *did* make enough money. I just don't think it's logical at any income level to sink any more money into depreciable assets than is absolutely necessary.

Is it the case that in years past, a larger percentage of us bought new cars? That's not a rhetorical question, I just don't know.

Knoxoasis's picture

I think I see what you're

I think I see what you're getting at,but what if some of us just enjoy cars?

Tamara Shepherd's picture


I think what s/he is saying is that some of us may "just enjoy cars" but lack any opportunity to enjoy new ones, because they are out of our reach financially--and to a greater degree than they used to be because our wages haven't kept up with new cars' costs.

Which is why I asked if fewer people buy new cars today than they did in years past. I dunno.

Up Goose Creek's picture

New cars

I started out buying new cars, more accurately 2 new cars and a new truck (or two).

The first one, a civic, simply didn't exist before. 2017 price - 12,000

The second one in 1980 was a new model wagon with a hatch wide enough to haul plywood, 17,000 in today's dollars.

I helped my X buy a truck in 1980 for about but the same one I bought new in 1984 wasn't much more expensive, having lived through inflation I thought it was a deal, about 15,000 today*.

*Actually it was a deal, it should have cost $7200 adjusted for inflation, as opposed to the $6400 I paid.

But I digress, My point is new cars are a bit more expensive now than back in the day. But they have more amenities, like AC and cruise control, not to mention airbags & such.

mjw's picture

Buy new and wear them out

I'm in the "buy new and wear them out" camp. I paid about 1/4 of the purchase price and took out a two year loan on the balance on my first car back in the mid eighties. I drove that car for 13 years, then paid cash for my next car. I actually still have that one as a spare and bought another new one (for cash again) a few years ago.

I drive a stick and it is a pain in the butt to find a used manual transmission car that is less that five years old. But I also like being able to buy exactly what I want with the latest tech, even though I stick to relatively inexpensive compact cars. I already have the cash in the bank to buy my next car, but don't plan on doing it anytime soon. (It's faster and easier to save up the price of a car when the bank is paying you, even if the interest rate is a pittance. And if necessary, the savings are always there to stretch my emergency fund.)

Knoxoasis's picture

So I remembered this thread

So I remembered this thread while I was reading this interesting article that attempts to link the 2016 success of Trump and Bernie Sanders to car prices and affordability.

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