Total U.S. automotive debt up 53% since post-recession low in 2010.
If you happened to buy a new car this year and used a financing option to do it, you’re not alone. Experian Automotive reports auto loan debt hit a new high in the third quarter of 2015. Total automotive debt in the U.S. hit $968 billion this fall, its highest point since the post-recession low reached in 2010.
“Continued growth in the automotive finance market is a clear sign of improved consumer confidence over the past few years,” says Experian’s senior director of automotive finance Melina Zabrtiski. “What’s critical to this success is that consumers stay on top of their payments. If they can continue to manage their financial obligations and make timely payments, the automotive industry can continue to flourish and grow for quite some time.”
Of course, managing the debt accrued by taking on these new auto loans is the key component in achieving that success. While auto loan debt is rarely a root cause of financial distress, it adds to a consumer’s total debt level which can easily get too high to be sustainable if the consumer doesn’t maintain control over their debt-to-income ratio (DTI). Consolidated Credit President Gary Herman explains…
“A household’s total monthly debt payments should never exceed 36 percent of the family’s total monthly income. Spending more than roughly a third of your paychecks on debt payments leaves little for saving and covering emergency expenses,” Herman says. “When debt levels get too high and a family is budgeted down to their last dollar, that’s where financial distress can crop up. One unexpected expense or emergency drives you into a hole.”
Buying a car before the end of the year?
Herman and the experts at Consolidated Credit always recommend that consumers check their debt-to-income ratio before making a major borrowing decision. Basically, you calculate your ratio now and then play with the numbers to see how much vehicle you can afford before your DTI goes higher than 36 percent. This allows you to walk onto a car lot or dealership with a target monthly payment you can afford.
“Car buyers also need to make sure they can afford the total vehicle cost and not just the monthly payments,” Herman adds. “Vehicles that guzzle fuel increase your household transportation costs to cause problems for your budget. Insurance costs can also add up quickly, depending on your driving record and the car you want to buy.”
Bureau of Labor Statistics data shows the average family spends about 18 percent of their budget on transportation and another 11 percent on insurance. Spending more than those amounts if you have a gas guzzler or a car that’s costly to insure means your budget will have less flexibility to weather changes and challenges.
Recent studies also show just how rarely consumers shop for insurance. Make sure to take time to shop around for insurance before you settle on a policy and talk to your agent to identify discounts you may be eligible for now.