Costly cars
Vehicle prices leaving a bigger dent in consumers’ pocketbooks

By EILEEN MOZINSKI SCHMIDT - Special to Conley Media

June 22, 2019

In this May 19 file photo, a line of unsold 2019 sedans sits at a Hyundai dealership in Littleton, Colo.
Associated Press

WAUKESHA — Cars are one of the big ticket items in many household budgets, and prices have been on the rise.

The average amount borrowed for a new vehicle in the U.S. was $32,187 in the first quarter this year, according to a report from the credit reporting company Experian published this month.

And the average used-vehicle loan also increased, to $20,137.

Vehicle prices have increased as more advanced safety features and technology are implemented, and as cars are built to last longer on the road.

Corresponding to the increased costs, car owners are stretching out the time they spend paying for their vehicles.

Carl Gahala, an assistant professor in the department of business and economics at UW-Milwaukee at Washington County, said the average car loan is now about six years.

The extended loans have correlated with vehicle prices, but also a change in consumer preferences, according to Gahala.

“They are shifting from buying passenger cars to SUVs, crossovers and even pickup trucks,” he said, noting that Chevrolet recently announced plans to discontinue the production of six cars and Ford plans to stop producing almost all of its cars.

These more expensive models often translate to longer payoff times.

“Consumers who take the longer-term loans, there are two drawbacks. One is more interest because the loan is over a longer period of time, but also a higher interest rate in the loan,” Gahala said.

In the face of rising prices, how should consumers look to fit a vehicle purchase into their budget?

The Freeman asked for advice from area financial experts.

Avoid the ‘upside-down’ loan

Most creditors want to see debt-to-income ratios of 40 percent or less, according to Kim Rodeman, site manager for Consumer Credit Counseling Service in Waukesha.

He advised shoppers to look carefully at how their credit score is affecting the vehicle purchase price.

“If an individual has a poor credit record, they may still find an affordable monthly payment offered for the purchase of a vehicle, but they may also find that the loan interest rate and the purchase price are higher,” Rodeman said.

He warned against situations in which the car value depreciates faster than the reduction in the loan balance.

“This results in a situation known as being ‘upsidedown,” he said. “The result is the vehicle cannot be sold or traded in for enough money to pay off the existing loan.

“This can lead to a situation where a person is still paying for a car that is not running or is in poor running condition.”

Gahala agreed.

“It’s very important for consumers to budget and to be careful about the car loan that they’re signing. If they’re signing a long-term loan and don’t expect to keep that car that long, they’re going to put in a difficult position,” he said.

Careful shopping

Overall, Rodeman said it is best to use credit as a tool, not a crutch.

“It is OK to use credit for a car, house, education, needed items, etc., if you have the means to pay back the financing, the terms of the purchase and financing are favorable, and you are not using the money for an unwise reason,” he said.

Rodeman recommended saving as much for down payments on auto loans as possible.

“It’s never good to buy a car strictly based on the payment amount,” he said.

Before buying, Gahala urges looking at the vehicle reliability ratings and assessing potential maintenance costs, which can vary significantly.

He recommended using sites like Kelley Blue Book to determine the value of a vehicle and encouraged shopping around.

“Don’t rush it if possible,” Gahala said, noting dealerships vary greatly in pricing and policies. Don’t be afraid to negotiate. It’s OK to offer a lower price than what the dealership is asking. Most expect you to.”

Other options?

In response to the rising prices, car leases have become increasingly popular.

Gahala cited one statistic showing that nearly 1 in 3 consumers are now leasing rather than purchasing, as the leasing market moves away from what was previously its mainstay — higher end cars and trucks.

But while leases may appear a cheaper option due to lower monthly payments, and help a consumer afford a car they cannot afford to buy outright, Gahala urged caution.

“Comparably, a lease is usually going to be more expensive in the long run,” he said.

It is best to look carefully through the paperwork for hidden fees, advice that holds true with purchasing as well.

“Whether leasing or purchasing, it’s just important to be cautious and to look at the statements and look at the paperwork,” Gahala said.