Who can afford to spend $30,000 – the average purchase price paid as of 2013 – on a new car?
The answer is … very few.
Most new car “buyers” are in fact debtors. They sign loan documents and make monthly payments. Typically, for five years, the length of the average new car loan. Some extend this to six years – and sevenyears is not unheard of.
Some of you may remember when the typical new car loan was three years.
What’s happened?
Several things.
First – and most obviously – cars have become more expensive in real/inflation-adjusted terms. In 1970, a full-size family car – something like a Chevrolet Impala sedan – had a base price just over $3,000 (see here). Using the government’s own inflation calculator, this works out to just over $18,000 in 2014 dollars (see here). In contrast, a 2014 Chevy Impala has a base price just under $27,000 ($26,910).
Now, it’s true the ’14 Impala is a much better-equipped car than its 1970 counterpart. The ’14 comes standard with air conditioning and power everything, while the ’70 came standard with power nothing – and AC was optional. But the fact remains that the buy-in price of the ’14 Impala is about $10k higher than the ’70 Impala. And it is not possible to order a “de-contented” or “stripped” Impala without AC and other cost-adders. If you want the new car, you must come up with the money.
The problem, of course, is that most people haven’t got it. Wages (real take-home pay) haven’t increased appreciably since 1970 for most people. And the cost of nearly everything – excepting consumer electronics – continues to go up. Especially important things like food and fuel. It doesn’t leave much left for car buying.
So, most people borrow.
At interest.
For a long time.
Payment schedules are now close to twice as long as they were circa 1970 because otherwise, very few people could even afford to assume the debt load. That 2014 Impala, for instance, would cost you about $450/month for 60 months (five years) assuming no interest. On the 1970 “three year plan,” the monthly payment would be $750.
Which is why the five (and six) year plans are now the rule.
I expect this to trend to continue for the simple reason that cars are not going to getcheaper – at least, not unless the government stops piling on the mandates. If anything, these compliance costs are going to go up rather than down. Because there appears to be a complete disconnect between awareness of economic (and engineering) realities and the cost-no-object demands of politicians and regulators in Washington.
