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Whether through credit cards or student loans, “debt” is a four-letter word that can wreck the financial future of many. But how big of a role do auto loans have in that equation?
You might be shocked to learn exactly how much money American households are spending on their cars these days. And the monthly payments on those auto loans might just be the tipping point between financial success and continued debt.
So, How Bad Is U.S. Household Debt?
No matter how you spin it, America is in a serious debt crisis. Even after accounting for inflation, the average household is in significantly more debt than ever before… to the tune of about $137,000 per family (over $13.51 trillion across the country).
This number includes all debt types, such as a home mortgage, student loans, auto loans, and – the average family is still in the hole by tens of thousands of dollars.
This trend shows no signs of slowing, either: the total household debt in the U.S. has risen exponentially for the 17th straight quarter, according to recent data from the Federal Reserve.
These numbers take on new meaning when you also look at the cost of living in this country, and the upward trends there. Home prices climb higher every day, cars are more expensive than they’ve ever been, college is not affordable for many, and food costs are through the roof.
That’s bad, but it’s not even the whole picture: not only do Americans owe more than ever, but they aren’t saving, either. In fact, less than half of adults in the U.S. have $1,000 in savings for emergencies.
Without some money set aside for a rainy day, the simplest of unexpected expenses – like a blown transmission or leaky hot water heater – which could be covered by a vehicle service contract) has the ability to break the bank or, at the very least, dig a household into even more debt.
Why Debt Got So Bad
So why do we, as a country, owe so much to the banks? Well, it’s a combination of things.
First, we have seen consistently rising prices for almost everything that we need to survive, from food to utilities to clothing. This makes it harder than ever to stay afloat even in the absence of frivolous spending, especially when you consider that the rise in the cost of living outpaces Americans’ increases in income. This is also true for vehicle prices.
Vehicles refinanced with RateGenius over the last five years have seen a steady increase in purchase price. This price increase compounded with other non-housing related debt is driving consumers to choose longer term periods to pay off their auto loans.
Many of us today carry around $1,000 smartphones, pay hundreds a month for cable and internet service, and drive cars we can’t really afford… yet, we are surprised that the average household carries nearly $7,000 in high-interest credit card debt.
In a recent RateGenius survey, we asked drivers how they would use savings gained from refinancing a vehicle. Not surprisingly a big portion (22.7%) claimed they would use those savings to pay off high credit card balances.
Can Debt Be a Good Thing?
From a household standpoint, debt can be crippling. It not only impacts your monthly cash flow, it often costs you exponentially more in finance charges, impacts your credit score, and decreases your ability to invest for the future.
From an economic standpoint, though, debt isn’t so terrible.
Small business loans and credit card balances can be vital to existing companies or new startups. Mortgages allow households to build equity in the form of a family home, or investors to generate profits through a rental property. And credit card debt – even if costly – means that consumers are spending money. All of these are good for the economy.
The catch here lies in your individual finances and the amount of money you spend over the course of that debt.
If you’re paying sky-high interest rates on a credit card that you’ll never pay off, the debt isn’t a good thing. If you’re barely making mortgage payments each month on a house that’s entirely too big for your budget, the debt isn’t a good thing.
And if you’re driving around in a car that you honestly can’t afford, making endless monthly payments before trading it in for the next shiny thing on wheels, the debt isn’t a good thing.
How Do Auto Loans Contribute to the Debt Crisis?
You might have seen our recent article on today’s auto loans. In it, we talk about how the average new car price is higher than ever before, even after you account for inflation. But just how significant is this data, and how impactful can an auto loan really be, especially in terms of household debt?
Let’s take a typical new car, financed through a 6-year auto loan with a monthly payment of $525 (the current national average).
Over the course of that loan, you’ll pay $39,600; however, if you’d instead invested that money and earned a modest return of 12%, you would have made more than $15,045 in interest alone.
Are you the type to trade in your car as soon as you pay it off? Well, if you head to the dealerships after those first six years are up and snag yourself another new car — with another 6-year auto loan, also at $525 a month — you’ll have lost out on $85,821+ in possible returns over the course of those 12 years.
Now, imagine that you do this a total of four times. Between the ages of 25 and 49, you buy four different, new cars, all with 6-year auto loans and $525 monthly payments. In the end, you’ll have paid out $151,200. However, had you invested that money, you could have earned over $636,972 in returns alone. That’s more than half a million dollars!
And if you are also carrying around credit card, student loan, or personal loan debt at the same time, you could be losing out on even more thanks to high interest.
How to Manage Your Debt
If you want to save for the future, reach financial freedom, and keep more of what you earn, you’ll need to learn how to manage (or eliminate) your debt. This means determining which debt balances are most impactful, and which ones need to go. Then, you’ll need to get control of your monthly finances.
Make (and Stick With) A Budget
One of the best ways to manage your money is to establish a budget. This means determining how much you make, how much you can spend, and how much you need to save.
Saving, whether in the form of a retirement account, emergency fund, or even a planned Christmas gift account, should be your priority each month. This is often thought of as “paying yourself first,” and ensures that you keep on track with your goals before you have the chance to overspend. Set up automatic transfers into savings accounts the day your paycheck hits to make sure that it happens each and every month.
A healthy budget should also involve trimming unnecessary expenses where you can. This might mean reducing your grocery spending, negotiating a better cell phone bill, or ensuring that your auto loan costs you as little as possible.
Reduce the Impact of Your Auto Loan
Financing a vehicle is a necessary evil for most of us. However, there are ways that you can make the repayment process as financially responsible – and pain-free – as possible.
Shop around for the most competitive interest rate possible when you take out your initial auto loan. That might mean financing through the dealer, or it could require finding an outside lender who is willing to offer you a lower rate.
Then, as soon as it makes sense, refinance your auto loan!
You can refinance, or refi, your vehicle as many times as you want over the course of the repayment. A refi makes sense any time you have the opportunity to snag a better interest rate or lower your total loan amount, saving you time and/or money along the way. This is warranted in a number of situations, such as:
- The economy has since shifted and interest rates have dropped.
- Your credit report has improved and you now qualify for a more competitive loan.
- You want to reduce your loan length, which often means lower interest rates.
- You need to lower your monthly payment to pay off other debt or free up cash flow.
- Your vehicle’s LTV (loan-to-value) ratio is too high and needs to be improved.
Choose a refi lender that offers competitive interest rates and doesn’t charge origination fees. You’ll never find these at RateGenius, which means even more money saved over the course of your new loan.
Reduce the Impact of ALL Debt
Just like refinancing an auto loan, there are ways that you can make other forms of debt less painful. Doing so will save you both money and time, and help you get out of debt more easily.
Credit card debt can be mitigated by balance transfer offers. These promotions, usually offered to new cardholders, allow you to transfer another balance to your new account and pay it off with zero interest. Balance transfer offers typically last around 6-18 months, and can save you thousands.
Control Your Debt
The average American household is carrying some serious debt these days, between their mortgage, student loans, credit card balances, and yes, even their auto loans. However, when managed properly, this debt can work for them instead of against them.
By optimizing your debt in smart ways, you can leverage your financial situation. This means spending within your means, shopping around for rates, saving on the side, and choosing the right lenders for your loans. And by refinancing with a company with access to multiple lender like RateGenius, you can ensure that you’ll always be in control of your debt… rather than letting it control you.