Is now the time to finance a new car?

To follow the crowd or not to follow, that is the question.

Auto loan originations reached a ten-year high in the second quarter of 2015 according to the Federal Reserve Bank of New York’s Household Debt and Credit Report. In fact the aggregate auto loan balance has now passed $1 trillion. According to Consumer Reports, the typical model depreciates about 65 percent over five years. Your new car is worth less than half of what you paid for it five years ago. The sad truth is that most new-car buyers who financed their purchase are paying for the car even longer. According to a release by Experian, the average term for new auto loans increased to 67 months.

That’s right. People are paying for their cars for five and a half years! Is this a good sign for the economy? Melinda Zabritski, Experian’s senior director of automotive finance said, “While longer term loans are growing, they do not necessarily represent an ominous sign for the market.” Zabritski also said, “Most long-term loans help consumers keep monthly payments manageable, while allowing them to purchase the vehicles they need without having to break the bank.” However, the same referenced report shows that the average monthly payment for a new vehicle rose to $488 in the first quarter of 2015.

For the person making $10 dollars an hour for a forty-hour work week, $488 represents 28 percent of their gross-monthly income. In the article, “How do I know if I have too much debt?” a 25 percent debt ratio would mean “Red Alert!” You are overextended and in need of dramatic changes. It may be time to review our needs verses wants and follow some simple steps to financial decisions.

You need to be in control of your money decisions. Before you walk into the new-car show room, do your homework. Could you buy an inexpensive used car with cash and save for the new one. Considering the interest saved, you should be able to save for a new car in less time than it would take for you to pay one off. Determine how much you can afford. Do not let someone else decide. Create a spending plan and determine how much you can afford each month in light of your other expenses. In the end, you must consider the long-term effects on your personal economy, not the economy.

Michigan State University Extension offers a variety of money management programs throughout the state of Michigan, check out this website for more information.

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