The automobile industry is experiencing sluggish growth globally, although it’s worse in some countries (Russia, Brazil, China) than in others such as the US. This might seem like good news to car buyers who are looking for a good deal, and indeed dealers have been rolling out incentives, most notably, longer loans for the financially challenged. But some market watchers have been warning that there is an auto bubble and that it is a disaster in the making – one that could lead to a true economic crisis as subprime mortgages did a few years ago.
Is that true? And if so, will it affect you if you’re in the market for a vehicle?
A bubble waiting to burst, or just a negligible risk?
There have been some grumblings that as we continue to emerge from the recession, the increase in car sales, along with a push to longer-term subprime loans to purchase those cars, might be paving the way toward yet another financial bubble that some are warning is about to burst. To some extent, their warnings are supported by the relatively steady 22% default rate on car loans. Such defaults can indeed cause problems for banks, as the majority of cars represent a negative equity value due to the rapid depreciation of the vehicles that secure the loans.
If we look a bit more closely at the scale of the respective markets, however, such offhand comparisons of the two amount to significant overstatements. In 2015, the total dollar value of car loans in the U.S. topped $1 trillion for the first time, whereas the total dollar value of the mortgage market was over $8.4 trillion. Furthermore, the amount of each individual car loan comes nowhere near the amount of the average mortgage loan. So while it behooves us to keep an eye on the car loan market, we apparently have a long way to go before even approaching the crisis level of 2008.
All of which brings us back to the question of whether and how current trends could affect you if you are, or soon will be, in the market for a vehicle.
Shopping smart for financing is just as important as shopping for a car
The answer to that question may very well lie in the choice you make for financing your car. If you are in the market for a vehicle, it’s likely that you have done extensive research on makes and models, carefully weighing factors such as features, safety, reliability, and of course overall cost for purchase or lease as well as operation and maintenance. That’s smart, of course, as your research could very well help prevent you from making a big mistake. But there is more to being a smart shopper than determining the best car for your needs.
Unless you have cash on hand to pay for your purchase in full, financing will be an issue. And it is one area in which you are likely to stumble if you’re not careful. Most auto dealers offer their own financing and strongly encourage you to take advantage of it. While financing at the same place you are buying the car is admittedly convenient, more often than not, the dealership’s financing plans are an even bigger profit center than are the car sales. And if you compare the total cost of the vehicle financed through the dealership with the cost of financing at a more traditional lender, you will realize that the dealer is actually taking advantage of you.
No matter how eager you may be to drive that shiny new set of wheels off of the showroom floor, you need to carefully research all of your financing options, and to shop as carefully for financing as you do for the car itself. You could contact several different banks and other lenders and ask them to work up the cost of the loan, but it would be simpler, less-time-consuming, and possibly have less of a negative impact on your credit score to research comparison websites that provide you with a free, side-by-side comparison of the different lenders and the details of the loans they offer. The best of these will also have a mechanism whereby previous customers of the different lenders can submit reviews of their experiences with the lenders. Such reviews are admittedly subjective, but at least they are not filtered to fit with the lenders’ promotional objectives.
Keep in mind that new isn’t necessarily better
Finally, don’t be so attached to buying a new car that you end up over your head. It is pretty common knowledge that a car is the second-largest investment most people make, second only to their house. And the prices for both cars and houses have risen at a staggering rate, well beyond the increases in average income, rendering both commodities – especially new cars – beyond the financial reach of many if not most families. In 2016, for example, the average price of a new American car or light truck is roughly $34,000, which is well above the standard for affordability even in areas with higher average incomes, and nearly four times the affordability level in areas where income is lower. Although these figure are for the U.S., a similar disparity between new car prices and affordability for middle-class families exists in other countries as well.
There are times when you can get a slightly better deal on a new car, such as the period surrounding the release of new models, but to get the most car for your money, you should really consider buying a two or three-year-old used car in good condition. The price will be considerably lower, you won’t take the immediate depreciation hit you would with a new car, and your insurance premiums will likely be considerably lower, to boot. You won’t have the same leeway as a new car where the length of financing is concerned, but neither will you be paying exorbitantly higher monthly payments for an extra two to four years as you would with a new car. Some used cars are subjected to extensive testing to ensure that they are reliable, and come with impressive warranties, but it is always a good idea to have any used vehicle inspected by a trusted mechanic before buying it.
Whether or not the “auto bubble” bursts – or even turns out to be a real concern – it is up to you to keep your own financial house from crashing down around you. If you make smart decisions not just about the type of car you want but also about the way you pay for that car, you will save yourself and your family a lot of grief. And you’ll avoid becoming part of a larger problem that could, despite more optimistic projections, eventually lead to an economic catastrophe.
