Americans are buying more to buy cars but should they be?

Americans are buying more to buy cars - but should they be?

Tiffany Franc, an attorney in Towson, Maryland, was surprised when she and her husband had no trouble getting a car loan last October. They had completed a short sale of an investment property in June, and short sales usually damaged loans significantly.

You bought a used 2013 Dodge Avenger. They went to their credit union and were approved for a car loan at 5%. Franc says the 5% rate "phenomenal" Was since her loans were pumped after the short sale. Still, they ended up getting an even better rate.

"At settlement, our loan was 3. 74%", Says Franc. "We received a 0.25% interest reduction from my current account with automatic debit. "The average 60-month new auto loan cost 4, 08% when it was on the market, according to Bankrate.

Franc's story is not uncommon in today's marketplace. Credit is easier to obtain, even for borrowers with lower credit scores. And according to a report on 25. February from TransUnion, a credit and information management company, consumers have taken on increasing amounts of auto loan debt for nearly three years. The average borrower had an auto loan balance of 16 at the end of 2013.769 US dollars. Auto loan debt reached a low point in early 2010 at just $14.764 U.S. dollars per borrower and has steadily increased since then.

Why consumers are taking out bigger car loans

Average interest rates on 60-month new car loans are currently 4.2%, according to Bankrate. At this time last year, the same loan cost 4. 09%. But in 2009, that loan cost consumers 6. 91%.

Lower interest rates make it cheaper to borrow more money. On a $17, 000, 60-month new car loan at today's 4. 2% average rate, you will pay $315 per month and a total of $1, 877 in interest over the life of the loan. In 2009, the monthly payment was 6.91% at $336 and the total interest expense was $3,154, a difference of $21 per month and 1.277 USD total.

Consumers are not only taking out bigger auto loans, they are taking out more of them. The number of loans has increased from 57 million to 60.5 million in the past year. One reason for the increase in the volume of loans is likely to be the rise in car sales, which last year reached 15.6 million. has risen. That's a 7.6% increase from 2012 and a 50% increase from 2009, when annual sales were just 10.4 million. Edmunds predicts even higher sales in 2014. The increase in sales could increase both the number and average balance of auto loans.

"Higher prices for new and used vehicles are creating bigger auto notes,", says Terry Anderson, partner and manager of Auto USA, which consists of two used car dealerships in Dallas / Fort Worth."New business is not as generous with discounts as it was a few years ago", he says, and manufacturers like GM are no longer flooding the market with inventory, but are cutting back sharply to make sales. "Price stability has been reduced to the used car business", he says.

Consumers may also take on more auto debt because they feel better about the economy. The unemployment rate fell from 7.9% in December 2012 to 6.7% in December 2013, and consumers are feeling more optimistic. Consumer sentiment in the U.S. has averaged 71.0 since 2008, according to the Thomson Reuters / University of Michigan overall index of how consumers feel about their personal financial situation and the overall economy. The 81.-6-measure in February is well above that average and about 10 points higher than a year ago. Consumers spend more money when sentiment is up.

With improvements in the economy, consumers who were finally able to refinance their mortgages were able to get enough room in their budgets to buy cars, and consumers who couldn't afford cars in recent years finally purchased.

"Consumers held on to their vehicles during the downturn and are finally feeling better about their finances", Says Joe Pendergast, vice president of consumer lending at Navy Federal Credit Union, the world's largest credit union for all the armed forces. Civilian and contractor personnel and their families. "I believe this trend will continue as economic conditions improve", he says. "Despite cold weather in most of the country, momentum has remained strong this year. "

How much car debt is too much?

Despite the increase in average auto debt, only 1.4% of borrowers were delinquent on their auto loans in the fourth quarter of 2013, according to TransUnion. While this is a slight increase over last year's rate of 1.9%, it is lower than TransUnion's average transaction rate of 1.3% since the fourth quarter of every year since 2007.

One reason overall delinquency rates are so low despite the larger loans is that fewer auto loan borrowers have subprime credit (a score of 641 or lower on a scale of 501 to 990) compared to a year ago, according to TransUnion. Subprime borrowers, however, are struggling more with their loans. The subprime delinquency rate increased from 5.73% in the fourth quarter of 2012 to 6.12% in the fourth quarter of 2013, much higher than the overall delinquency rate of 1.14%. But Anderson explains why even borrowers with subprime credit can now get auto loans.

"Our firm deals with damaged credit financing. When a vehicle needs to be repossessed, our losses are lower due to slower depreciation", he says. "Because we're losing less due to defaults, we're able to loosen our credit standards a little bit and sell a few more cars,", says Anderson.

What is an acceptable amount of debt when borrowing money to buy a car?Edmunds says your monthly payment should be no more than 20% of your take-home pay. So if you have a loan with an average interest rate and you're paying $315 per month, your car payment is affordable as long as you take home at least $1, 575 per month.

"My advice for any person looking to buy is to know what you can afford. Review monthly income, subtract any expected expenses and make sure there is money left over to not only afford a car payment, but also to build savings", Pendergast says. "Adding a car payment to a monthly budget shouldn't leave anyone without money for things like groceries or unexpected expenses", he says.

Looking at the big picture, however, is a better idea than looking at monthly payments. What will the vehicle you want to buy cost you in the long run, including retail price, financing over the life of the vehicle, gas, maintenance and repairs? How reliable is it? How many years is it likely to take? How quickly it depreciates? Do you plan to drive it into the ground or sell it after five years for something new? Sources like Consumer Reports, Car and Driver, Popular Mechanics, and Edmunds can help you answer these questions.

The better the long-term value is, the more comfortable you can be spending a little more up front. But if you're already swimming in credit card debt, student loan debt and mortgage debt, your smartest move might be to pay cash for the least expensive and most reliable used vehicle that fits your needs.

"If consumers had to save up front to buy a vehicle, most would likely choose a less expensive vehicle class. It's easier to incur debt than to take hard-earned currency out of your pocket", says Anderson.

The Bottom Line

As the economy has recovered in recent years, it has become easier to get credit and interest rates have dropped. Unemployment has also fallen and new car sales have increased dramatically. The consumer feels better overall about their finances and about the economy, and they can borrow money cheaply. It's a good time to take out a car loan if you have to; just make sure you don't jeopardize your entire financial plan by taking on too much debt.

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