GMR 186: Auto Loan Debt and Abusive Lending Practices
Consumer Reports did a year-long investigation, which included 858,000 loans from 17 major auto loan lenders, to look into the growing burden of car-related debt. What they found is disturbing and heartbreaking. In this episode of GMR, we discuss the reasons people are falling for bad auto loans and how to avoid being one of them.
Abusive Lending Practices
Consumer Reports investigation main takeaways
CR found that interest rates charged were as high as 25% when the average loan rate was around 4.5%.
CR claimed that 46 percent of the 800,000+ loans reviewed were underwater, with owners owing $3,700 more (on average) than what the vehicle was actually worth.
A major reason for this is dealers and lenders may be setting interest rates based not only on risk—standard loan underwriting practice—but also partly on what they think they can get away with. Studies show that many borrowers don’t know that they can negotiate the terms of a loan or shop around for other offers, or even that they should.
A high probability of default was known, yet the loans were still offered by these lenders.
Total auto loan debt held by Americans has increased dramatically over the past 10 years, surpassing $1.4 trillion — more than the gross domestic product of Australia.
Today, Americans with new-car loans make an average monthly payment approaching $600 — up roughly 25 percent from a decade ago.
New cars are more expensive and it is becoming harder and harder for people to save and outright purchase a car.
Most borrowers pay their loans with no problem. But in recent years, tens of thousands of consumers have found themselves in financial sinkholes after receiving high-interest, longer-term auto loans, serious risk of default
“You’re not helping somebody to get a car if the odds are they’re going to lose it,” says Kathleen Engel, research professor at Suffolk University Law School in Boston who studies subprime financial products and is also the vice-chair of CR’s board of directors. “That’s not getting somebody a car. That’s taking their money.”
Monthly payment mental framework
Information is available, but marketing pushes you away from it
Apple iPhone example, iPhone 10 - $1,000 switched online to monthly $25
Recommendations
Understand value not just monthly payment
Have a plan - budget so you can make an informed decision and keep you from potentially taking on more than it’s financially safe for you to take on.
Buy with cash whenever possible or work toward it.
Two Main Takeaways from this podcast
Get education and support from those who have the knowledge
Make car purchases based on a plan (budget)
Take into account the value not just the monthly payment
Make sure it fits into your financial plan
Rules of Thumb
Total of all motor vehicles value in your household should be less than 50% of your annual income.
$100,000 income = less than $50,000 worth of vehicles.
Two $25,000 cars.
$50,000 income = $25,000 worth of cars
Two $12,000 cars
Ashley & I have tried to stay more conservative, instead of the 50% rule, we try to stay under 30%
$5,000 - 4years
$9,000 - 7 years
= Total $14,000 of vehicles (very inexpensive compared to income)
Monthly cost of vehicle payments, gas, and maintenance should be less than 15% of your monthly income. Ideally closer to 10%-13% of monthly income.
$4,000 monthly income = $600 total
$200 gas
$100 maintenance
Two cars $150 payment each = two $10,000 vehicles
$50,000 = Two cars $150 payment each = two $10,000 vehicles
$100,000 = Two cars $300 payment each = two $20,000 vehicles
$150,000 = Two cars $450 payment each = two $30,000 vehicles
$200,000 = Two cars $600 payment each = two $40,000 vehicles
Resources
GMR 22: How to Buy a New Car
GMR 23: How to Buy a Used Car
9 Steps to Buying a Used Car From a Private Seller
Budgeting tools and other free resources - https://leosabo.com/resources
David’s website - www.stewardshippastors.com