(snip)"A downward trend in inflation and a strong dollar helped cars get a lot more affordable starting in 1995, Johnson says, but since 2002, even though incomes have risen, the amount spent on cars has gone up and loan rates have increased. "It's sort of like the cost of acquiring a car has gone up in parallel with incomes in the last five years," he says.
You would never know any of this from the aggressive marketing tactics of car companies, who use creative financing methods to make cars feel more affordable, says Philip Reed, consumer advice editor with Edmunds.com.
"People waste all kinds of money when purchasing and owning cars. It's a depreciating asset. There's no way to get around that," Reed says. "So right from the get-go you will lose money, but the question is: How much? You want to control the bleeding."
Reed is fairly strict about how much money people should spend on a car. He says a good rule of thumb is 20 percent of income. This means someone who buys a $20,000 car should be making $100,000.
However, Bryan Lee, a financial planner in Plano, Texas, rejects such a hard and fast rule. He says it's more important to look at your overall financial picture, as well as your priorities."(snip)
At any rate, this is an eloquent testament to the fact that Americans no longer seem to bother finding out how much something actually costs, they only worry if they can afford next month's payment. However, the rising de-facto cost of owning a car combined with longer term loans and higher interest rates is creating a situation where tons of car loan borrowers are now 'underwater' - in other words they still owe more money on their car loan than than their car is currently worth in terms of resale value. To make matters worse, the car that they do own is now likely to be 4-5 years old, is likely to have fairly high mileage on it, and is likely to be experiencing rapidly escalating repair costs, but their 5-6 year loan still has lots of monthly payments left !!!
This is going to result in a huge cash 'squeeze' on these car owners as banks have tightened lending standards such that the car owner will no longer be allowed to 'roll over' their negative equity from their previous loan into a new loan for the purchase of a new vehicle. These 'underwater' car owners are either going to have to keep throwing increasing amounts of cash to keep their 4-5 year old car in running condition while continuing to make existing car payments, or they're going to have to pay off their existing car loan early plus save up down payment money for a new loan (since the future resale value of their present car won't cover a 20% down payment requirement on a new car purchase).
In a larger view, this situation is yet one more 'nail' in the coffin of an affordable suburban 'middle class' lifestyle, as well as one more 'nail' in the coffin of (what's left of) the North American auto industry. It's also a pretty good indicator that the future sales of Kia's, Hyundai's and next year's Chery's (first imported cars from China) with a Dodge nameplate are likely to be the only sales that will be rising.
Ironically, Detroit's fastest growing market for exporting larger / luxury cars is ..... China !
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