Car dealerships; even the seasoned negotiator can get a little nervous walking into one. Buying a car, like buying or renting a home, has gotten much more expensive over the years. There are many reasons for this, but one in particular I’d like to focus on today is the monthly payment as it pertains to affordability. It used to be you walked into a car dealership and looked at how much each model would cost. You know, the Ford Focus would be $14,000; the Mustang would be $18,000 and so on. Or course now, we hardly buy cars anymore, it’s all about SUV’s. Why not, SUV’s are big, beautiful machines we have come to love. Which also means they are more expensive, let’s call it $40,000 (Kelly Blue Book lists average mid-size SUV transaction price in 2018 at $38,541). So how do the car dealerships get us to afford these SUV’s? It’s no secret, it’s the monthly payment. Hence the title of this blog, what do you want your “payment” to be, not “the car costs this much”.
Luckily for us, interest rates have been historically low for so long that those payments are advertised and obtained at zero percent interest (for those with high credit scores). Zero percent is hard to past up when offered. But what has also changed over the years is how many years you can stretch out the loan. Car loans use to average 3 to 4 years in length. According to cars.com, today three out of every four cars loans are 61 months or longer. We have become accustomed to stretching out our cars loans with the increase in the price of our chosen vehicle. Now let’s compare this to housing. Average new home, and existing homes prices have been increasing too. Yes, interest rates have been low for mortgages too, but not zero. But, the loan length has not budged since the 1970’s.
The history of the mortgage length goes back to the great depression when most mortgages were short term. Short term loans allowed lenders to foreclose faster in tough times. Mortgages went from short term to 20 years, to 25, to 30 years over time. Most financial advisers would argue for the shorter term, and suggest the 15 year pay down. I’m not disagreeing, that is the great strategy. However, I’m advocating for home ownership more than I am for paying down the loan faster. Especially when rates are so low, and especially when it comes to building one’s wealth. I’d choose taking a sensible mortgage over renting in most cases, depending on your life circumstances.
Which brings me to why I’m comparing car loans to mortgages. Car loans have double in length on average over the last 30 years, while home mortgage loans have largely been stuck at 30 years. Housing affordability has reached crisis mode for our younger generations. We expect first time buyers to come out of the gates with a home purchase averaging over $230,000 on a loan term we have not changed in a generation. I’m advocating for a national standard mortgage option of 40 years. Sure, you can still choose a 15 or 30 year mortgage if you’d like. Furthermore, as with todays’ 30 year mortgage, you can add principle payments reducing the loan term. More on that strategy in my book. Be sure to get a copy! Anyways, the Government led the charge protecting consumers with FHA guarantees for longer term mortgages.
I challenge and encourage them to do it again for our Millennials. Raise the standard mortgage guarantee to 40 years from 30 years to allow more first time home buyers afford a mortgage. Otherwise, we’ll be “glad” the car companies have already done so. Since thousands and thousands of Americans already live in their vehicles not by choice. Longer term loans make homes more affordable. Let’s solve this crisis together.