Dec 29, 2023
Even newcomers aren’t immune to America’s auto loan crisis.
Aleena, a 31-year-old physician on a U.S. work visa, pays a hefty $718 per month to lease her Toyota RAV4. Based in Hartford, Connecticut, she says she “needs” an SUV because she’s not used to driving in the snow.
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Aleena grew up in a subtropical region of Pakistan and says driving in a location that regularly has snow each year makes her anxious. Aleena believes her SUV is essential in this weather.
Personal finance YouTuber Caleb Hammer wasn’t convinced by her story.
“Justification, justification, justification!,” he exclaimed about her situation on his show, “Financial Audit,” calling the expensive SUV unnecessary.
Here’s why overpaying for an automobile has become more common in recent years.
High costs push car owners to the edge
High vehicle costs along with elevated interest rates have pushed many car buyers to the edge.
The average price for a new vehicle in November was $48,247, according to Kelley Blue Book.
Meanwhile, the typical interest rate on a new car loan was 10.33% while the typical monthly payment was $766, as of November 2023, according to Cox Automotive.
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Aleena might be fortunate to be paying slightly less than these figures — even on a lease she acquired with bad credit rather than a loan — but if you take a close look you will find a growing number of car owners are paying more than $1,000 a month for their wheels. A record 17.5% of consumers who financed a new vehicle were paying more than this amount in the third quarter of 2023, Edmunds data shows.
Over 100 million Americans have auto loans, according to the Consumer Financial Protection Bureau, so the scale of this crisis is truly national. The total debt burden of cars is $1.6 trillion, Federal Reserve Bank of New York data shows — equivalent to the student loan crisis.
The debt burden is already too much for some borrowers. According to data from Fitch Ratings, 6% of subprime borrowers were more than 60 days late on their car loans as of October. In September, this rate hit a record 6.11%.
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Boosting income while avoiding ‘lifestyle creep’
Besides a car loan, Aleena also has credit card debt and a student loan. However, she saw a big jump in income after getting a job as an infectious disease physician in 2022. Now, she makes $300,000 a year, pre-tax, plus bonuses.
In Connecticut, the threshold for the top five percent of income earners is $336,800, according to SmartAsset. Aleena’s total compensation, including bonuses, could be somewhere near that threshold.
Hammer says Aleena is “the highest income we’ve had on this show.”
Simply put, she has the opportunity to mitigate her debt, unlike most average income earners. However, to do this Aleena needs to change her spending habits and avoid “lifestyle creep” — the temptation to spend more when you earn more.
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Vishesh Raisinghani is a financial journalist covering personal finance, investing and the global economy. He's also the founder of Sharpe Ascension Inc., a content marketing agency focused on investment firms. His work has appeared in Moneywise, Yahoo Finance!, Motley Fool, Seeking Alpha, Mergers & Acquisitions Magazine and Piggybank.
