In trying to understand our individual needs for borrowing and our nation's desire to continue spending more than it receives in tax revenue, I have shared some information which is available on the internet concerning household debt. As previously mentioned the current tax reform package (graciously labeled a "tax cut"), actually will require the government borrow an additional $ 1.5 trillion (maybe more, but not likely any less) to keep meeting our nation's obligations. This precedent seems to carry over into our personal lives as our standard of living outpaces the growth of lower and middle income levels. Debt affects all of us whether personal or government related because it all comes due at some point in time. But, who can afford to buy a home without borrowing all or part of the cost?
The government and business philosophy says "borrow and repay with less valuable dollars" in the future. This is called utilizing the "time value of money'" theory. The concept is tomorrow's dollar will be worth less due to inflation. However, what works for our government and business doesn't necessarily work as a model for the individual who pays the taxes or buys the goods from the business. But, as we learn more about household economics, we observe others using borrowed money for many of the better things in life. This makes it easier to justify keeping up with our neighbors.
The Federal Reserve's report on American families' debt from September 2017 revealed that 77.1 percent of families had debt. The median balance, half higher and half lower, was reported to be $59,800. That number is usually a combination of one or more categories including, credit cards, auto loans, student loans and "other" loans. I'm not sure if it includes home loans because one study reported an "average" household debt in 2017 of $131,431 which sounds like a more accurate figure if home mortgages are included.
We have covered two of the three major contributors to household debt -- student loans and credit cards. Our study does not include home loans. The third category up for discussion is auto loans. They affect approximately one-third of United States households.
Not many of us are able to pay cash for a new car at any point in our lives. And that statement is also true for most used car buyers. And, the cost of a new car has grown over the years since my first recollection of the cost of a 1946 or 1947 Ford was under $1,000. Today it is easy to find a new car with a price tag of over $30,000 and pickups with all the luxury items sell with a Cadillac price tag. From data on Nerdwallet, a typical car loan in June of 2016 was $30,032 with a monthly payment of $503 and the length of the loan stretched out to 68 months. That is approaching six years on an item that can lose about five percent of its value when you drive it off the car lot. This is something we have all experienced if we bought a new car from a dealer but it could be a potential national disaster if too many people have too much debt and the economy slows down and unemployment rises. This is not a forecast, just concern about our nation's rising debt.
One source called YCharts gave some quarterly statistics about total car loans. They reported Feb. 28, 2018, that the previous quarter ending Dec. 31, 2017, total auto loans were $1.221 trillion. For the same quarter (ending Dec. 31) in 2012, the total was $10.783 trillion. The total debt for a quarter exceeding $1.0 trillion occurred June 31, 2015. The obvious conclusion is the price of cars and trucks (pickups) is increasing, necessitating larger loans and longer terms on the loans at a time when the larger percent of Americans cannot afford it. When Detroit logs more production and they still have imports to contend with, we might expect the automotive market to respond to the increased volume with lower prices. If they are lowering prices, they are doing so by rebates and discounts, not lower MSRPs.
There is a wealth of information available on the internet if one chooses to devote the time to searching for it. According to www.cnbc.com, the effect of credit scores on automobile loans is incredible. They report that interest rates on car loans for "subprime credit scores" (a subprime credit score is 500-600 points) are 10.65 percent on a new car and 15.72 percent on used vehicles. (I can't calculate that over a five-year loan, but if the rate is correct, it would make a car prohibitive to most people.) If one has a "prime credit score," (661-780) the rate drops to 3.59 percet on a new car and 5.12 percet on a used car.
As I said, I can't verify any of this but it might be worth researching for yourself if you are in the market for a new vehicle. I have never personally seen interest rates on vehicles that low but I haven't bought one recently either. With student loan debt, our average credit card debt and trying to buy one's first car, it is no wonder so many young couples have difficulty trying to survive even with both working. And, the same explanation may be the reason many single young adults are moving back home with their parents -- or trying to anyway.
•••
Editor's note: Leo Lynch, an award-winning columnist, is a native of Benton County and has deep roots in northwest Arkansas. The opinions expressed are those of the author. He is a retired industrial engineer and former Justice of the Peace.
Editorial on 03/21/2018