Why Are We Paying So Much for New Cars?

Americans forked over an average of $33,280 for new vehicles in March, according to some new estimates from KBB. That’s more than half of what the most families earn in an entire year. Why are we buying such expensive vehicles?

KBB said that new-car prices increased by $1,125 (or 3.5%) from March 2014 to March 2015.

Not only are like-for-like vehicles more expensive than they were last year, but people are choosing bigger, fancier – and more expensive — vehicles as well.

To accommodate these expensive tastes, automotive finance companies, banks and automakers have been teaming up to offer Americans the most vehicle at the lowest monthly payment possible.

These efforts include factory-sponsored lease deals and very long-term financing plans for purchases. While these financial programs result in fairly low payments for very fancy vehicles, they could be leading Americans into a trap.

For instance, financing a vehicle on very long terms (more than 60 months) almost guarantees that the borrower will owe more than the vehicle is worth for most of the loan term. It also means that the interest payments will add up to a big number over the years – even if the APR on the loan is fairly low.

Leasing more car than you could otherwise afford to buy is a nice way to get into a premium vehicle at payments you can afford. However, leasing a vehicle by definition leaves you with nothing: no equity, and nothing to trade in.

During the worst years of the recession the trend was for Americans to hang on to older cars that were paid off, rather than to buy new ones. But with the increasing popularity of leases, the car is never paid off. Very long payment terms on a purchase contract often result in a vehicle not being paid off for seven years.

It’s a great feeling to drive the vehicle of your dreams. But sometimes a little moderation can result in more money in your savings account, and a vehicle that’s paid off in just a few years. This, too, is a great feeling to have.