Upon being congratulated at the dealership for the 3rd time while buying my first new car, I couldn’t help but wonder, is this really something to celebrate?  I have purchased several used cars in the past and don’t remember anyone congratulating me.  We usually celebrate achievements and life-changing events: graduations, athletic victories, marriages, babies, etc.  Does buying a new car qualify?    

     Cars are embedded in the American psyche.  They have traditionally represented freedom, independence, and adventure.  Cue the classic rock: “Get your motor running, get out on the highway.”  Americans have a unique fascination with automobiles.  Perhaps it is the size of our country, the lack of significant public transportation, or just effective marketing, but we love our cars and trucks.  The newest, coolest, and fastest cars are omnipresent in our favorite movies, social media videos, and T.V. series.  But as automobile prices have increased much faster than U.S. wages, should we look at cars in a newer, more negative light?  Should a new car purchase be celebrated or derided?

The Bad News of Car Prices & Financing

     In 1968, when Steppenwolf released “Born to be Wild,” the average new car price was $2,822, which equates to $24,742 in inflation-adjusted 2023 dollars.  However, the actual new average car price in 2023 was $48,008.  The median household income in 1968 was $7,700, or $67,510 in inflation-adjusted 2023 dollars, while in 2022, the actual median household income was $70,784.  In 55 years, the average household income increased only 4.85% on an inflation-adjusted basis, while the average new car price increased 94%.  The reality is even worse when you consider that the average U.S. household owned 1.21 vehicles in 1968 while they own 1.88 in 2023.  

     In the last half-century, we have increased the number of cars a household owns by 50%, pay twice as much for them, and yet still earn the equivalent amount of money.  This has put a strain on the average household’s budget, and in typical American fashion, we have turned to debt to solve the problem.  Americans now owe $1.56 trillion in auto loans, nearly double from 10 years ago, and nearly as much as we owe in student loan debt ($1.78 trillion), yet no one seems to talk about it.  With cars costing more and the average consumer not having more money to spend, auto lenders have lengthened their terms.  Before the 1980’s, most auto loans were 36 months or less.  By 1986, 75% of loans were 48 months, while by 2009, 62% were 60 months or more.  In 2023, the average car loan is 72 months, and earlier this month, Tesla announced that they were offering 84-month loans on their new cars.  A $100,000 Tesla financed for 84 months at over 6% interest encroaches on student loan territory, yet no outrage or call for loan forgiveness exists.    

     Increasing the length of a car loan has several harmful effects.  Longer terms typically mean higher interest rates, as the loans become riskier to the lender.  Because the term is longer and the rate is higher, you pay significantly more over the life of the loan.  Since cars are depreciating assets, longer loans lead to negative equity, which means you owe more than the car is worth.  If you need to sell the vehicle, you will have to bring money to the table, and you may have to pay out of pocket if the car is totaled in an accident, even if you have full coverage.  Finally, longer-term loans mean that it is more challenging to save/invest money.  The average length of car ownership in the U.S. is 8.4 years or 100 months.  If you pay a loan for 72-84 months, you will nearly always have a car payment, making it harder to lower your expenses and save money for retirement.  

     The bad news doesn’t stop there.  The average interest rate for a new car loan in the U.S. is currently around 7.4%.  While average by historical standards, this is the highest rate since 2008.  For reference, the average rate was around 3.85% just two years ago!  This rise in interest rates translates to an 11% increase in the monthly payment on a 72-month loan.  This comes at a time when Americans are dealing with inflation and a looming risk of recession.   Given these problems, we should stop looking at the American car as a symbol of freedom and instead as a symbol of financial bondage.

  

financial bondage

The Remedy

     When asked if a customer could have a Ford Model T painted in a different color, Henry Ford famously replied, “Any customer can have a car painted any color that he wants so long as it is black.”  The original mass-produced automobile was designed to be affordable, durable, and simple to operate.  Thinking of a car as transportation removes the emotion from an automobile purchase.  A red car won’t get you from point A to point B any faster than a white one.  When viewed rationally, safety, reliability, and fuel economy become more important than style, speed, and driving experience.  If the speed limit is 75 mph, why do you need a car that can do 180?  Why do you need a three-row SUV to drive yourself to work?  Matching an automobile to your needs and not your wants is the first step toward solving the affordability crisis.

     If the problem is that we are buying more expensive cars financed for longer terms at higher interest rates, then the answer should be to do the opposite.  Much like George Costanza, if every instinct you have is wrong, the opposite must be correct.  If your instinct is to purchase new, first consider used cars.  Whatever you think you can afford, buy something significantly less expensive.  While the average new car price in 2023 is $48,000, you can still purchase six cars for under $20,000, with many more below $30,000.  If possible, pay cash for your car, avoiding the high-interest rates and preventing the tendency to overspend based on monthly payments.  If not, put down at least 20% and do not finance for more than 3 years, which will minimize the total interest you pay and (again) prevent overspending.  Finally, keep your car longer as you lose money every time you trade in, which usually means trading up.         

My Mouth & My Money

     I recently bought a new car, which you can read more about here.  It is the first new car I have ever purchased, and I wanted to put my money where my mouth has been as I teach others about personal finance.  So, I “downsized,” so to speak, from a 5500lb cartoonishly powerful 707 hp SUV to a small, gas-sipping sedan.  I based my decision on a series of rational steps outlined in the article referenced above.  My previous two used car purchases were emotion-based, irrational decisions.  I wanted to fix that, finding something that met my needs and nothing more.  I paid cash for a 2023 Honda Civic that cost me $29,500 all-in.  

MRSP Sticker

     I wanted to study the actual financial impact of my car-buying decision.  Obviously, the price is cheaper, but that is not the only consideration.  I counted the insurance costs, gas mileage, the type of gas required, and the number of miles driven per year over 5 years.  I also calculated the actual depreciation for the Trackhawk and estimated the Civic’s using a 2018 model as an example.  Next, I took the price difference between the two automobiles and calculated the return on investment of that money over the course of 5 years at a 5% annualized return.  Adding all this together gave me a Total Cost After 5-years of ownership, which I used to calculate a return over an additional 25 years of investing.  Finally, I calculated how much you would have if you chose a Civic over a Trackhawk every 5 years for 30 years, investing the money you save.  

     The numbers are liberating to those in financial bondage.  After five years of driving the Civic, I will have saved $48,000.  Over 30 years, this one decision could increase my net worth by over $327,000.  Repeating this simple decision every 5-years throughout a 30-year career could increase my net worth by a million dollars at retirement.    

     Naysayers may argue that not everyone commutes 20,000 miles a year in a gas-guzzling supercharged monster like the Jeep, which is fair.  However, the most popular truck in the U.S. for the last 30 years has been the Ford F-150, which gets 23 mpg.  Additionally, I can make the same argument and demonstrate substantially similar results by choosing a Tesla Model 3 ($40,000) over a Tesla Model X ($80,000).  

Conclusion

     Yesteryear’s wholesome image of the automobile being the symbol of personal freedom in America has become a bloated, financed caricature of itself.  Americans are laden with debt that chains them to their desks, the antithesis of freedom.  The solution to the current automobile affordability crisis is to return to the very origins of the car as a means of transportation, a utilitarian tool, not a reflection of our personal identity.  We may already be headed in that direction with the advent of the self-driving car.  The reality is that the average car sits parked 95% of the time.  Once perfected, it is easy to imagine a world where self-driving vehicles abolish that inefficiency by shuttling passengers around on a subscription basis.  Until that future arrives, the remedy lies in modifying our own car-buying behavior.