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An Auto Loan Debt Crisis Looks Imminent
(www.automoblog.net)
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this post was submitted on 08 Nov 2023
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Inflation doesn't help you on a loan unless you are actually getting Inflation level raises, otherwise you have the same amount of dollars and everything else is more expensive. Also mathematically cars go down in value, so you are paying interest on money that you lost, making that loss greater.
That's the whole reason this crisis exists, because Cara with 30k are being repossessed on loans with 40k in principal left.
It does help when you're comparing it to someone with a big pile of cash to buy outright versus buying with a low interest loan. That cash can be invested and give you great returns while the cost of your loan goes down with inflation.
Even high yield savings accounts are giving ~4% interest right now with zero risk meaning someone with a 2% loan would be earning 2% interest on that cash and driving a new car while the person who bought outright is earning 0% interest while driving the same new car.
To further demonstrate the point using an extreme example, imagine you bought a brand new car 40 years ago for an MSRP of $5,000 with a 50 year low interest loan. You'd currently be paying that $5,000 loan using 2023 dollars which are worth 209% more than they were in 1983 while the loan is fixed at 2% (or whatever). That $5,000 cash you had in 1983 is now $15,000 in your bank account while you still get the benefit of driving the car over all that time.