Why Are So Many People Choosing to Be “Car Poor”?

Have you ever stopped to wonder why so many people in America find themselves stretched thin by car payments? Not long ago, I came across a post about how local dealerships are now offering six-year car loans for cars like the Honda Civic. I had to take a step back and think, “Six years for a car payment? That’s nearly as long as my daughter’s entire childhood so far!”

Car loans, especially long-term ones, seem to be more common these days, but they also highlight an uncomfortable truth: Americans are often financially strapped due to their car expenses.

Why Are People Getting Trapped by Car Payments?

Just after reading that blog post, I came across an article on MarketWatch about how lower-income families are increasingly relying on car loans to afford basic necessities, including transportation. Initially, I felt some empathy, but then I read a startling statistic. According to the Wall Street Journal, the average car loan term hit 66 months, marking a historic high. And to top it off, nearly 25% of new car loans in the first quarter of 2014 were between 73 and 84 months. These extended terms are not just a trend; they’re becoming the norm.

The article went on to reveal some jaw-dropping figures: the average amount financed for a new vehicle loan had reached $27,612, and the average monthly car payment had climbed to $474, up from $459 the previous year. It’s no wonder so many people are struggling financially. With these kinds of numbers, it’s clear that people are being lured into taking out massive loans to cover the cost of their vehicles.

Why Are We Choosing to Be “Car Poor”?

Here’s the reality: If the average car payment is $474, it makes sense why so many families are having trouble making ends meet. When you’re borrowing over $27,000 to finance a car, it says something about our country’s priorities. Despite the focus on vehicles, retirement savings are lagging behind— the average 401k balance for people aged 22-34 is just $16,500, and for those aged 35-48, it’s only $63,600.

When you’re putting so much money toward car payments, you’re sacrificing long-term financial health, and that’s a dangerous game.

How to Avoid Becoming “Car Poor”

As someone who isn’t particularly fond of cars and doesn’t rely on one for daily commuting, I recognize that it’s easy for me to downplay the importance of a car. But I know that many people do need a reliable car for work and everyday life. That said, the idea that you have to have the newest, flashiest car is a common misconception. You don’t need all the bells and whistles, like heated seats or a high-end stereo system. If you want to avoid the “car poor” trap, here are a few strategies:

• Understand That Cars Are Depreciating Assets: New cars lose at least 20% of their value in the first year alone. That shiny new car smell isn’t worth the financial hit.
• Consider Buying a Used Car: Used cars are often a much more affordable option. If you’re unsure where to start, Jacob from IHeartBudgets.net has an excellent guide on how to buy a used car without falling into a trap.
• Buy an Efficient, Budget-Friendly New Car: If you must have a new car, there are many low-cost options that can serve you well. For instance, a new Ford S Sedan costs around $16,810—over $10,000 less than the national average!
• Focus on Your Financial Health, Not Appearances: A new car may seem like a status symbol, but it’s not worth compromising your long-term financial security. Ask yourself, “How would my life improve if I didn’t have a car payment hanging over me?”

To give some context, I drive a 2007 Dodge Caravan. Sure, it’s a little worn, with some duct tape on the front, but it’s reliable, comfortable, and—most importantly—paid off. While I might not drive a fancy car, I can walk into any store knowing that I’ve made a smarter choice for my finances.