The world is filled with scams. Some of them are in the spotlight while others are a bit subtle. However, auto loans may be the biggest scam in America. That's what real estate investor and financial YouTuber Graham Stephan believes.
He and his co-host discussed how auto loans eat away at people's finances. They provided hard numbers to back it up, and Stephan concisely summarized the industry.
"It's scary," he stated.
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The Average Car Payment
Stephan's co-host states that the average new car payment is $800 per month. Many people make that monthly payment for five to six years, and it quickly adds up. An $800 monthly payment turns into $9,600 per year. If you expand that to five years, a borrower ends up paying $48,000 for their car. This amount goes up to $57,600 for a six-year term.
Meanwhile, the U.S. Census Bureau reported in September that the median household income is $80,610, which comes to $6,717.50 per month. More than 10% of the median household's income goes toward one new car's monthly payments. It gets more expensive if the family has two cars.
It gets even worse when you think about what the money could have done in the Nasdaq Composite or S&P 500. While a car is an essential resource for many families, it's hard to deny that they gobble up wealth.
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Auto Loans Have Less Regulation
Auto loans are already expensive, but the lack of regulations is another big concern that Stephan mentioned. He explained that student loans, credit cards, mortgages, and other financial products have more regulations than auto loans.
"Most auto loan places are able to give you the loan that you want by just extending out the term, even if the interest rate is 20% or 25%," he said.
He doubled down on credit card regulations, saying that issuers review your income before assigning a credit limit. These companies aren't offering high credit limits for low-income credit cardholders. However, auto lenders can sell off the loans privately even if the borrower couldn't qualify for any other type of loan.
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Don't Buy More Than You Can Afford
The best way to avoid high car payments is to skip new cars. Instead of buying the latest model, you can save a lot of money by searching the used car market. Cars depreciate quickly, and you can find great deals if you do your research.
You can get a used car that is 50% cheaper than the new model. You will save even more money if you are willing to buy a used car that has more than 100,000 miles on it. Car owners should assess how often they use their vehicles. The fewer miles you drive each week, the easier it is to get a car with plenty of miles on it.
You can then get out of an auto loan much quicker or even give yourself the option to pay for cash if you have enough funds available. A car is one of the biggest purchases you will make, and if you chase the newest model, you can end up paying far more than necessary.
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