By Robert L. Cain
My old friend John Clark drove a Toyota Camry. Nothing unusual about that except that John owned one of the biggest real estate companies in Portland, Oregon, and could have paid cash for just about any car he wanted. But John saw no reason to buy a Mercedes, BMW, or Lincoln Town Car. The Camry served him well and he didn’t have a car payment.
John came to mind because of three things I just read. First, in the March 1 edition of USA Today was an article about Americans “suddenly paying $550 a month for new cars.” Car shoppers are having to pay more and more every month for that new car they just “had to have.” And the average is $551 a month! That’s 10 percent more per month than three years ago. With car prices at an all-time high of $36,000 in 2018 according to Kelley Blue Book, and with interest rates creeping up ever higher, the borrowing has increased and the term of loans has gone “to record lengths.” Lenders are writing 84 month loans now, seven years, just so people can manage a monthly payment. And the wheels are wobbling both on the cars and the economy.
Second, some 7 million people are now at least 90 days behind on their car payments. The article in the Feb. 12 Washington Post pointed out “Most of the people who are behind on their bills have low credit scores and are under age 30, suggesting young people are having a difficult time paying for their cars and their student loans at the same time.” Mostly these are people who had credit issues before buying a new car. And the majority of the delinquencies are on loans financed through car dealers. With the economy improving, car dealers have begun using lenders who charge 14.5 to 20 percent interest, depending on the buyer’s credit score while credit unions may charge between 4.5 and 6 percent. For a $36,000 car with a net loan of $29,000, after down payment and trade-in, over 84 months the monthly payment at 15 percent from a car dealer would be $603, while from a credit union at 4.6 percent, the payment would be $442.
Trouble is, many of these problem loans go to car buyers who simply wouldn’t qualify for a credit-union loan. They buy a car they can’t afford, or can only afford as long as they don’t lose any of their incomes, and dealers provide the financing through the lenders who reward them for writing the loans.
Behind this overpaying for cars and taking on unaffordable loans is the third thing, a lack of financial education. A 2013 study by the National Foundation for Credit Counseling found that 40 percent of American adults would give themselves a bad grade, a C, D, or F, for their knowledge of personal finance.
Heidi Moore formerly of The Guardian, pointed out “We have an entire generation if not several generations who have grown up with the belief that finance should be in the hands of the experts. So they’re signing documents, mortgage documents, loan documents, credit card documents, without knowing fully what the implications are or even how to begin to read what they’re signing.” Or they think they’re just “not good at math.” So many people think that anything that has to do with adding, subtracting, multiplying, or dividing is beyond them and they just have to trust the computer to figure it out, and then, of course, the lender to be fair.
It’s parents’ job to provide money education for their children, but they are unable to because they never got any themselves. After all, they may be the ones making the $550 a month car payments. And schools don’t provide much help, if any at all. Even grandparents are unlikely to have the financial education and perspective to teach how to avoid dumb financial decisions.
Put all three of those factors together, high monthly payments, increasing loan defaults, and no financial education, and the ingredients of the recipe for disaster are mixed together and ready for the frying pan. Already, those 7 million people behind on their car loans are affecting society. The USA Today article pointed out that people being three months behind on car loans is “the benchmark for many lenders to trigger a repossession.” The vicious cycle is once the repossessions hit, people can’t get to work so they don’t earn a paycheck and they can’t pay the rent.
While they are juggling insufficient income and before they lose their cars, people have to decide who gets paid. Phaedra Wainaina, a recent law school graduate from Michigan, was quoted in the article, “I had to make the decision between paying car notes and buying food.” People sacrifice other less essential debts to keep their vehicles. One of those debts could be rent.
This shouldn’t be our problem, but it has become ours. It’s too bad parents and schools have failed to teach anything our children about responsible money management, but they have. Businesses and rental owners may benefit by helping educate their employees and tenants about financial matters. There’s plenty of free material that we can provide. It can come in the form of a newsletter that we send out or just informal email updates. For example, I get a weekly email from my friend Sal Boenzi, an investment adviser, where he forwards all kinds of interesting and helpful information about good money sense that he receives from the company he represents. Other financial advisers provide a similar service. They are happy to have us pass along their information to our employees and tenants as long as we say where it came from.
My friend John Clark was from the old school that valued good financial decisions and avoiding debt. His business was successful because he valued responsible financial management. Peer pressure and advertising have made that seem silly in this day and age. It is far from silly if our employees and tenants dig themselves financial holes they can’t climb out of affecting their ability to work and live.
