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Total auto loans in America nearly doubled in 10 years

If the word crisis had two best friends, they would likely be named student loan and credit card debt, given how frequently those two forms of borrowing — totaling $1.56 trillion and $820 billion, respectively — are referred to as a crisis.

Fair enough. Payments on each drag down household finances and keep families from buying homes, saving for retirement and sending the next generation to college. And the crisis label has — in ways good and bad — made some people reluctant to take on these forms of debt.

But where’s the word crisis when it comes to car debt, which has nearly doubled in the past decade to $1.37 trillion?

Borrowing can be productive, necessary or self-destructive

In the culture of debt shaming, people often feel worst about their student loans, even though this borrowing often helps them get the education to qualify for a better-paying and more rewarding career. And guilt around credit card debt is nearly universal, even though one in three people says they borrowed on plastic to pay a medical bill and many, pressed for cash from low wages, use a card to buy groceries for the family.

Car debt, however, seems to get a cultural free ride. Maybe it’s due to the political favor granted car companies and their workers, or our general love of automobiles. But given that cars depreciate rapidly and increasingly are priced far above most households’ ability to afford them, car debt deserves some shade.

A necessity with a $40,000 price tag?

A car, or two, may be a household necessity, but the auto industry is loading cars with more than the necessities and car buyers increasingly take the bait.

Buyers in January paid an average of $40,857 for their new wheels, according to Kelly Blue Book, a price increase of more than 5% from a year earlier. (For the record: Inflation was under 2%.)

Cox Automotive reports that 24% of models had a base price below $30,000 last year, compared to 54% in 2012. During that stretch, cars priced between $50,000 and $60,000 grew from less than 5% of the market to nearly 20%.

Lease: A car payment that never stops

Experian Automotive says more than 80% of new cars involve a loan, and the average monthly payment for a new car was $563 in the third quarter of 2020. About one-third of used car purchases involve a loan; the average monthly payment according to Experian was $397.

Experian notes that among the most leased models, the average monthly payment is $110 lower, when leased, compared to using a loan.

But leasing is no bargain. The average monthly payment is around $450. And the “savings” is a mirage, as the lease is only for three years. Typically what happens is that a new car is leased after the three years, effectively locking that household into a new round of monthly payments. At least with a loan, you eventually can have five or 10 years driving without a payment.

Driving deep into debt

All debt makes a claim on monthly household cash flow, but some is more productive than others.

According to Mark Kantrowitz, publisher of Savingforcollege.com, in 2019 about two-thirds of recent bachelor’s degree grads left school with a diploma and debt. Among those borrowers, their total student loan tab was just shy of $30,000. That’s less than the average new-car loan, which was just under $35,000 in the third quarter of 2020. Borrowing for a used car was an average of more than $23,000.

The average monthly payment for students who graduated with a bachelor’s degree in 2019 is $448, less than the average new car payment and just $50 more per month than the average used-car payment.

There is every reason to question a system where students are required to borrow at all, given the message that a degree is the only way to be competitive in America’s 21st century economy. Especially for public school degrees, where borrowing has become more prevalent as states have pulled back their funding of programs.

But the median lifetime earnings boost from having a bachelor’s degree is more than $750,000.

Cars are just a depreciating asset from day one.

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