There have been some interesting articles in the news related to cars over the past few months. When taken individually they do not appear to be significant, yet when combined together, they paint an interesting picture for many Americans. The pieces of this puzzle involve rising new car prices, the growing length of car loan terms, and vehicle depreciation.
In March of this year, several news sites (USA Today, Forbes, Motley Fool, etc.) cited a report by Interest.com stating the average cost for a new car in 2013 was $32,086 according to Kelly Blue Book. If you were able to pony up a 20% down payment and financed the balance for 48 months, the monthly payment would set the new buyer back $633 a month.
Only one metropolitan area in the US, Washington, D.C., had a median income higher than the average new car price. Their median income is $32,531, while the median income in San Francisco, Boston, New York, Atlanta, and Houston were $28,009 to $20,000 range.
Experian, one of the top 3 credit bureaus, released a report in December showing interest rates for new vehicle loans dropped to 4.27%, the lowest rate since 2008. This was contrasted by the average amount financed for a new car was up to $26,719, an increase from $25,963 in the third quarter for 2012. What’s really interesting is the new car loan terms are at an average of 65 months, up from 64 months in the third quarter of 2012.
When combined these two trends show that most Americans are financing their new cars longer in order to be able to afford them. What most aren’t considering is the effect of depreciation on their purchase decisions.
New cars depreciate between 9% and 20% the moment the new owner drives them off the lot. After the initial first year hit, vehicles tend to have an average depreciation rate of 15% per year for years two through five. This rate slows after the fifth year, but the owner may still be making payments for another 5 to 12 months or more.
Most people are underwater on their car loans based on the cost of cars, length of the average finance term, and the depreciation effect. Underwater simply means the buyer owes more than the car is worth. According to Edmunds, most car owners have a negative equity of $4,223.
It’s pretty easy to see from this data why GAP coverage is so important. GAP coverage pays the difference between the value of the car and what’s owed on the note should the car be totaled. Without this coverage, the car owner could be on the hook to pay off the loan after the car insurance company totaled the car (see http://188.8.131.52/~wiseinsu/car-insurance-totaled-car/). Imagine paying the loan on a car that’s no longer owned and still needing another car.
There are two places where GAP coverage +can be purchased; from your insurance agent and through the dealership. While the dealership will roll the cost of the GAP coverage into the car’s loan you may actually get a better rate from your car insurance company but it would be worth it to know what the difference is before walking into the finance manager’s office!
In either case, get the GAP coverage because it doesn’t look like cars are going to get more affordable anytime soon! What do you think? Share your questions, comments, suggestions, and experiences with me in the comments section of our blog or on our Facebook and Google + pages. I’d love to hear from you!