We're supposed to keep our living costs as low as possible to buy ourselves the maximum amount of wiggle room in our budgets. But new data suggests that when it comes to vehicles, Americans aren't shy about spending.
In the first quarter of this year, the average monthly loan payment for a new car reached an all-time high of $523, according to data from Experian. That's a $15 increase from last year, and it also points to a troubling trend: drivers taking on more auto debt than they can afford. In fact, buyers of new vehicles during the first three months of the year borrowed $31,453 on average, which is also a record high.
As such, those on the hook for auto debt will probably find that it takes longer to rid themselves of it. Experian reports that the average length of an auto loan taken out during this year's first quarter is over five years and nine months.
Of course, there's nothing wrong with purchasing a vehicle if you don't have access to public transportation. Even if you do live in or near a metro area with an extensive bus or train network, you may be willing to spend some money for the convenience of having a car. But if you're thinking of taking on a monthly payment in the ballpark of $523, make sure you can actually afford it first. Otherwise, you'll be setting yourself on a dangerous financial path.
How much is a vehicle worth to you?
Owning a car is undoubtedly expensive, especially when we factor costs like insurance and maintenance into the mix. Still, for most people, having a car is a necessity more so than a luxury. Of the 95% of U.S. households that own vehicles, 85% use those cars to commute to work.
Still, there's a difference between buying a regular car versus a pricey one, and it's clear that a growing number of Americans are opting for the latter. Of course, vehicle prices aren't the only thing contributing to an increase in the average monthly car payment this year; interest rates on auto loans are also a factor. But it's hard to ignore the fact that many buyers purchase vehicles that are more expensive than necessary.
Now here's the problem with overextending yourself on a car payment. First, the more you're required to pay each month, the less money you'll have left over for other expenses, including those that arise unexpectedly. And since the majority of Americans live paycheck to paycheck as it is, taking on a higher vehicle payment could have serious consequences the moment a financial emergency pops up.
Additionally, the more you spend on a car payment, the less money you'll have available to build a nest egg for retirement -- something most Americans are behind on. Imagine that instead of spending $523 per month on a car payment, you buy a less costly vehicle whose resulting payment is just $373 -- a $150 difference. If you were to then take that $150 a month and put it in a retirement plan for five years, you'd have $10,350, assuming an average annual 7% return on investment. Even if you were to then not add another dime to your nest egg, leaving that $10,350 invested for 30 years would give you close to $80,000 for retirement, assuming that same 7% average annual return.
And that's why if you're in the market for a new car, it pays to keep your monthly payment as low as possible. You may need to sacrifice some nifty features to do so, but that's a better bet than sacrificing your financial security both now and in the future.