221- The Madness of 2021 Vehicle Buying
Are you looking for a new or used vehicle (i.e., a car or light truck)? Have you seen the recent large increase in prices? In this post, I will share the background of why prices are so high and try to provide some perspective. I will also discuss some considerations you should make before deciding to procure a new vehicle. Let’s begin with some background information.
The Average Age of Vehicles on the Road
The average age of vehicles on the road in the U.S. has topped 12 years old for the first time, according to IHS Markit, a research firm that specializes in the U.S. automotive market. The report reflects a continuation of the trend of people keeping their vehicles longer, which reflects better manufacturing quality and durability for today’s vehicles. The average age of vehicles on the road is 12.1 years, up from 11.9 in 2020, according to IHS.
To me, this lengthening age reflects consumers looking to avoid having to take on the high costs of procuring a new vehicle. It also shows the likely need for new vehicles in the next few years as the vehicle fleet continues to age and mechanically wear out.
The Impact of the Pandemic on Vehicle Supply and Demand
The pandemic has impacted transportation like no prior event. We saw empty roads due to lockdown restrictions, automaker factories shutdown, rental car companies selling their fleets and putting off buying new cars due to low traveler demand and computer chip manufacturers (a key component of today’s tech filled cars) reducing production in anticipation of poor economic conditions.
Once the pandemic restrictions were eased and the economy reopened, these actions led to a situation where there a huge increase in new car demand resulting in a shortage of vehicles — new and used. The shortage has resulted in increased prices for used cars and long wait times to have a new model delivered. I could write about this for several pages, but these are the main factors that have caused the current situation.
Vehicle Loan Considerations
Overall, Americans are taking on vehicle loan obligations at larger and larger amounts for longer repayment periods. According to a February 5th post on LendingTree.com, here are key statistics relating to US vehicle loans to ponder:
The average monthly car payment in the U.S. is $563 for new vehicles, $397 for used vehicles and $450 for leased vehicles.
Overall, Americans owe nearly $1.4 trillion in auto loan debt.
Auto debt makes up 5% of American consumer debt.
Americans borrow an average $34,635 for new vehicles and $21,438 for used vehicles.
The average loan term is 70 months for new cars, 65 months for used cars and 37 months for leased vehicles.
The average auto loan average percentage rate was 9.46% in 2020, but that ranged from an average of 5.49% for borrowers with the strongest credit to 22.66% for borrowers who are credit invisible.
Americans younger than age 50 take out $35.6 billion in auto debt monthly, compared with the $22.6 billion auto debt of older generations.
Gen Xers are the most likely to have a car loan, and they carry the highest auto loan balances with a median of $19,223.
The average price of a new, light-duty vehicle is $39,259, a 1.3% increase over the same period a year prior. Average used car prices are over a third less expensive — $22,351 at the end of January 2021.
As you can see from the information presented, the purchase or lease of a vehicle represents a major ongoing cash outlay for most households. It makes up a large percentage of most household’s monthly expenditures.
Making the Right Vehicle Decision
In my book, The FinancialVerse Guide to Savings – 600 Practical Cash Savings Ideas, I offer suggestions on how to make the right vehicle procurement decision. Here are the most cogent ideas I can offer:
Consider getting rid of your car. Do you need a car? If there are alternatives that don’t cost you too much time or money, it might be worth getting rid of your car altogether. For example, if you live in a major city, it might be easier and cheaper to take the sub- way, bus or walk. When you get rid of your car, you eliminate a lot of related expenses, e.g., car payments, insurance, repairs, registration, taxes, inspection, tickets, gasoline, etc.
If possible, cut back to one car in your household and don’t buy a second car. Trying to get by with one car may seem like a challenge, but it’s well worth it if you are a two-car family. With the average car payment over $500 along with insurance, gas and maintenance, you can really do your budget a favor with just one car. The benefits do not include your contribution to an improved environment.
Drive your car longer. With very high prices for new and newer model used cars, improvements in vehicle quality and the lower per mile cost for operating (including depreciation), it will likely pay you to hold on to your car for a few more years to avoid costly car payments. This is particularly the case if you have had a good repair history with your car. Drive it as long as it is cost effective to do so.
Reduce the number of cars in your household. The average American family owns 2.28 cars and more than a third of households own three or more vehicles. According to the Bureau of Labor Statistics, the average household spends $10,742 a year on transportation, the second largest expense, with much of it for maintenance and gasoline. Living on one less car in the household can save big money. This is one of the tougher money saving tips because we love the freedom of movement our vehicles provide. It will take some getting used to but cutting back to just one car can save the average family nearly $5,000 a year.
Stick to reliable, fuel-efficient cars. Buying that sexy new model might not be the best long-term purchase you can make. A reliable and fuel-efficient car can save you thousands over the long haul. Let’s say you drive a vehicle for 80,000 miles. If you choose a car that gets 25 miles per gallon over one that only gets 15, you’ll save 2,133 gallons of gas. At $3 a gallon, that’s $6,399 in savings right there. Reliability can pay the same dividends.
Consider using vehicle sharing options instead of owning a car, you can use car-sharing services, slugging or carpooling when you need to.
Consider fuel efficiency when you buy a new car. This is especially true if you put a lot of miles on your vehicle or if you are in consistent stop-and-go traffic. As the new models roll out, purchasing an electric vehicle may be a wise choice.
Consider switching to a less expensive car. If you use your car regularly and can’t get rid of it, it might be more practical to switch to a less expensive one.
Don’t buy a new car as soon as you’ve paid off your car loan on the old one. The advice is to wait as long as you practically can before committing to another car loan. A lot of people see paying off their car loan as an achievement—which it is! —that deserves a reward of a new, bigger car with a new, bigger loan. Instead, think about whether you really need a new car or if your existing one does the job perfectly well.
Drive a more affordable car. Vehicle loan or lease payments can be very expensive. This debt service load stretches the cash budgets of many borrowers. In addition to the payment, you must also pay gas, maintenance, insurance, taxes, registration costs and more. You should look to buy a car that you can comfortably afford, not one you can fit into your budget. The cash savings can be substantial.
If you’re selling your car, do it privately. While it can be more hassle, selling a car privately can often get you thousands of dollars more compared to going through a dealer. This is true especially if your car is in above-average condition.
There are numerous considerations that must be looked at when considering a vehicle purchase or lease. You should take the time to think through this decision and not make an emotional choice.
Buying or leasing a car is one of the largest financial commitments we make. The pandemic has made the cost of vehicle less affordable and requires that we pay closer attention to our related money decisions. The key to making those decisions is to only purchase the type of car you need and not what you can afford. Lessening the amount spent on transportation will have a favorable impact on your budget and monthly cash flow.
If you're looking for ideas on where to find cash savings, please check out The FinancialVerse Guide to Savings – 600 Cash Savings Ideas. This guide provides practical suggestions on where you can save money in your day-to-day life. For most households, I believe you will find at least $600 in annual savings.