MW Cars were once a financial engine of America's middle class. Now they're a 'wealth killer.'
By Venessa Wong
Large car payments are stunting people's ability to achieve financial security and independence
Chezni Carrion of La Crosse, Wis., was seven months pregnant when her 2012 Ford Taurus began having "extreme problems" that cost more than she could afford to repair. While there is a public bus system where she lives, the schedule was too limited for her needs and she didn't feel safe on the bus, particularly with a baby on the way, Carrion said.
A dealership gave her $1,500 for her broken car, which it had to tow, and she put the money toward buying a used 2009 Hyundai Santa Fe that cost $14,895. Despite this car being three years older, Carrion's monthly payment went up to $406 from $163 due to the increase in used-car prices since the pandemic and rising interest rates over the past two years.
Carrion, a single mother whose child is now 1 year old, works 32 hours a week as a client-service representative at a veterinarian office, where she earns $18 an hour. Her monthly car payment, not including gas and insurance, is more than 20% of her take-home income - over twice the 10% ceiling personal-finance experts say people should spend on their total vehicle expenses.
"I'm trying to get into the middle class, and I can't get there because of the increase [in my car payment]," she told MarketWatch.
She's not alone. Vehicle expenses have gotten too high for many car owners, drawing scrutiny from an increasing number of personal-finance experts who say cars should function as a tool that shuttles people to their main source of income and wealth: their jobs. Instead, they say, rising prices have turned cars into a financial trap for many Americans.
In a podcast episode earlier this year, the author and podcast host Ramit Sethi described car payments as "one of the true wealth killers of today that no one wants to talk about," arguing that Americans have normalized having outsize car payments against their own interests.
Transportation is the average American's second-largest expense after housing; it accounts for 17% of a household's average spending. (Housing eats up 33%.) Average monthly payments on new cars recently hit record levels. Yet unlike real estate, cars are depreciable assets, and most vehicles lose 20% of their value after one year.
In other words, many people aren't just spending a lot on cars - they are also losing a lot on them.
The average selling price for a new car in September was more than $47,000; for used cars, it topped $27,000, according to data from the car-buying site Edmunds. Even nine-year-old cars were selling for nearly $15,000 on average.
As a result, the average monthly payment on new cars is now over $700, and nearly one in five monthly payments now exceed $1,000. The average used-car payment has risen to about $550.
For most Americans, these costs are too high. Based on average incomes and expenses, the typical U.S. household can afford a $400 monthly car payment, Cox Automotive Chief Economist Jonathan Smoke said last year.
Cars, like housing, have become a financial burden for many Americans struggling with rising prices overall. "It really is what's keeping the middle class [in the] middle class," Jade Warshaw, a financial coach and host on the Ramsey Show personal-finance podcast, told MarketWatch of people's car payments.
While cars are a practical necessity in many parts of the U.S., many people also see their vehicles as a trophy for their hard work. "I 100% understand that," Warshaw said. But "the truth is, the car doesn't serve any purpose in a wealth-building journey - because it's a depreciating asset."
Cars keep owners in 'a financial cycle that's hard to break'
Carrion, the Wisconsin mother, receives public assistance for food and child care, making the car her second-biggest expense after rent. If her car payment were lower, she said, "I'd be saving [the extra money] for sure." She noted that she has about $500 in her emergency savings account at the moment.
Although the majority of Americans use cars to commute to work, many personal-finance experts argue that car owners today are paying off large debts on these depreciating assets for too many years, reducing their ability to save and invest thousands of dollars that could help them build wealth during that time.
When people need to trim budgets to achieve savings, retirement and debt-payoff goals, their car payment should be the first thing they look at, Warshaw said. She noted that if a person was able to save and invest the equivalent of the average monthly payment on a used car ($549) into an index fund that tracks the performance of the stock market - which has increased by an average of 15% annually over the last five years - they could have grown that money to nearly $50,000 over that time.
"When a car payment eats up that much of your paycheck, it can be tough or even impossible to save, invest, or start building and maintaining an emergency fund," Tori Dunlap, the founder of Her First $100K, a personal-finance media platform geared toward women, told MarketWatch in a statement. "And it comes down to a tough choice - the financial health they need or the car they rely on."
For example, to cope with high prices, more car buyers are taking out longer loans: 18.5% of loans are now for a term of 84 months, up from 14.2% in February 2020. Based on the average amount financed on a vehicle in September, someone with an 84-month loan would pay more than $11,000 in total interest, about $2,000 more than someone with a 69-month term. Five years ago, when car prices and interest rates were lower, the average interest paid over the life of a loan was closer to $5,800, according to Edmunds.
"A car can be a necessary purchase, but the high costs associated with financing and maintaining a vehicle can keep people in a financial cycle that's hard to break," Dunlap said.
Brian Preston, co-host of the Money Guy Show podcast, called cars "wealth napalm" in an episode earlier this year. While people need reliable transportation, many car buyers' "eyes get bigger than their wallet," said co-host Bo Hanson, noting that having debt on depreciable assets stunts efforts to build wealth.
Radio and podcast host Dave Ramsey, who often comments on American consumers' unsustainable car-buying habits, said in one episode: "The way you know someone's going to stay middle class is when they have two very nice cars that are obvious $500, $600, $700 payments sitting in front of a middle-class house."
These influencers generally advise that people buy used cars instead of new - and, if possible, set aside savings specifically for a car so they can pay with cash. Many encourage car buyers who need financing to put down about 20% so they borrow less. It's best, they say, to agree only to a monthly payment that is below 10% of take-home income on a loan that can be paid off in three to four years.
Yet such advice sits in stark contrast with the reality of how people pay for their cars today. Many can't pay in cash: In the second quarter of this year, 80% of new-car buyers and 36% of used-car buyers used financing, according to Experian.
And despite well-intentioned budgeting guidelines, low-income households who own a vehicle still spend 38% of their net income on transportation, according to the Bureau of Transportation Statistics. For most of them, there is no other option, as "owning or having regular access to a car is necessary for daily mobility and economic security," according to a 2023 Transportation Research journal study about car ownership among low-income households. About 45% of Americans have no access to public transit. And for daily commuting, using ride-hailing apps like Uber $(UBER)$ likely costs even more than owning a car, according to Rocket Money.
Automakers' focus on more profitable models forces buyers to take on bigger loans
As car ownership continues to drag down Americans financially, there is little hope the situation will improve for those who need relief now.
Auto-industry experts, who have warned about affordability issues for years, do not expect prices to fall meaningfully in the near future. First, it takes years for automakers to shift production. "Automakers typically work on a three- to five-year cycle," Erin Keating, executive analyst at Cox Automotive, told MarketWatch. "[They] cannot just immediately switch back around."
It is possible for carmakers to start planning lower-cost vehicles with fewer features that still eke out a profit. But based on Americans' historical preferences, automakers "also know that once interest rates go down or people are feeling better about the economy ... they're going to want the nicer, bigger vehicle," said Ivan Drury, Edmunds's director of insights.
Car prices shot up over the last few years as a result of pandemic-related supply-chain disruptions, the global chip shortage, and higher raw-material and energy prices, as well as "rising borrowing costs and wage bills due to inflation," according to a report by Bain & Co. Automakers got through "the supply shortage by focusing production on the highest-margin models and raising prices." Their average profit margin shot up from 4.9% in 2019 to 8.5% in 2023, the Bain & Co. report said.
These manufacturing issues then increased demand for used cars, leading to higher prices in the used-car market as well.
When car buyers started taking out longer loans in response, it worsened problems with negative equity, a term that refers to when owners owe more than the trade-in value of their cars. That's because in the earlier years of a loan, most of the monthly payment goes towards interest, and it only starts meaningfully chipping away at the balance later on. Meanwhile, the value of the car keeps declining each year.
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