Today I was watching the CNBC channel and one of the commentators had said that the average monthly car payment is $474. I, not having a car payment in over 20 years, was astonished. I had purchased my car 7 years ago this month new and did not realize that the average car payment was that high. I had paid my car cash and even though the car cost me over $20,000 and was a significant hit to my bank account, I just thought of it as an investment in my business.
When I think that most people who are employees and mainly use their car to commute, I became aggravated. I can at least can write off the miles I use my car for business, however as an employee commuting is not deductible.
So being an accountant, I wanted to see the affordability of having a car for the average employee. I started adding up all the necessary costs to keep up a car and to be frank, it does not add up. First there is the car payment, the $474 average car payment does not take into account the terms. What consumers have done to try to make the car payments lower is to stretch out the length of the loan.. So now the average loan term is not 60 months or 5 years it is 66 months or 5 and a half years. If you cut it back to the industry standard that was established years ago that $474 payment would be about $515 a month for 5 years. Consumers are stuck paying for a car for years after the warranty has expired. Can you imagine your paying a car payment of $474 and along comes a $800 or more repair bill?
Car insurance is no bargain either. I am not sure what full coverage costs. The one thing that is good when you pay for your cash is that your not obligated to get full coverage. I, being a safe driver, took the risk of not paying for comp and collision when the car was new and that saved me thousands. Of course that is your judgement call. Having a car loan the bank requires that you have full coverage and depending on your driving record, your age, the car, where you live, and other factors your insurance payment is calculated. Assuming that you have a good driving record and that you have been driving for years my guess a fair insurance payment would be $150 per month.
So that adds to $624 per month. Add in oil changes, maintenance, registration, a few car washes, and no repairs. It adds up to around $700 per month not including gas. That $700 is after tax money so in reality you have to make about $850 in gross income to have the $700 to spend. That can be a rent payment.
Now lets look at the incomes of employees to see if this is affordable. Lets take a single person who makes $30,000 per year. You take out 7.65% for social security and medicare tax and conservatively another 7.35% for income tax. That comes out to 15%. Lets not even take out for health insurance withholding which for many people can easily be $2,000. So 85% of $30,000 leaves a net income of $25,500 a year. $25,500 divided by 12 gives you $2,125. Subtract the $700 conservative car carrying cost and your left with $1,425 to live on per month.
Now with $1,425 you have to pay everything else. In Florida where I live a decent 1 bedroom 1.5 bath rental apartment will cost about $1000 a month. $425 which is left over is not going to cover the electric, food, gas, phone, and so forth. Like I said before it does not add up. Stretching the payments only adds to the agony. The payment term has to be shorter not longer. The longer the period the greater the chance something unexpected will occur and you don’t have the money because your car consumed it. This is one of the biggest reasons why so many millennials are staying home. They are also victims of the non affordability of autos.
Over the past few decades, the affordability of the car has plummeted. Even if your making a decent salary, in my example $30k per year is a lot higher than many jobs paying at or near minimum wage (Florida it is $7.93 an hour or $16,495 a year). Paying the average monthly car payment is really no option.
This realization gets me angry. You could do all the right things and still be behind the 8 ball. I hope this article puts in to perspective what employees/households are facing everyday. Before you go ahead and sign on the dotted line and promise to pay $474 per month for the next 5 and a half years, know what you’re getting yourself into.