Autos: The dangerous rise of ‘permanent car debt’

A car is quickly becoming one of the costliest things you can own, said Venessa Wong in MarketWatch. Between rising gas prices, steep insurance rates, and hefty repair bills, U.S. households are spending more than is recommended getting from A to B. That’s not even including the cost of the vehicle itself. “The average new car” in the U.S. is “now selling for more than $50,000,” while the average interest rate on a new-car loan is 6.35% — up from 4.09% in 2021. That double whammy is “making it harder for car buyers who need financing.” Most financial experts “recommend larger down payments to reduce the amount borrowed,” but a growing share of buyers “have been moving in the opposite direction”—borrowing more over longer periods. “You’re looking at a clear recipe for long-term financial strain,” said Jessica Caldwell, head of insights at Edmunds.

Even used cars are expensive, said David Welch in Bloomberg. New vehicles selling for record prices are still commanding “hefty premiums when they hit the used market,” pushing the average used-car price above $30,000, up from about $20,000 in 2019. The problems with the car market began during the pandemic, when a supply crisis paralyzed global auto sales. But that experience “also taught auto companies a lesson: Producing fewer, high-priced models means better profits.” Those higher prices have also helped cushion the blow from President Trump’s tariffs and the higher price of diesel that truckers need to ship cars around North America. That’s all trickling down to the used-car lot. Six years ago, a $10,000 to $15,000 budget could buy a five-year-old car with about 58,000 miles. Today, the same amount gets you a roughly nine-year-old car with close to 100,000 miles.

Longer loans aren’t “necessarily a bad thing for car buyers,” said Mike Winters at CNBC.com, as long as they make their payments for the life of the loan. Where buyers get in trouble is “if they want or need to replace the car before they’ve paid down enough of what they owe.” Because borrowers “typically pay down their loans more slowly in the early years, when more of each payment goes toward interest,” a longer loan leaves “the borrower owing more as the car loses value.” That balance then “gets rolled into the next car loan,” steepening the financial hole until it becomes so-called permanent car debt.

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The bottom line is Americans need cheaper car options, said The Washington Post in an editorial, and that’s where Chinese cars can make a big difference. China’s auto industry appears “to have genuinely advanced the technological frontier of making cars more efficiently,” which translates into affordability. BYD’s Seal EV, comparable to a Tesla Model 3 sedan, lists for $24,190. U.S. consumers “should be allowed to reap those cost savings.”