By Prakash Kolli | Wealth of Geeks
The average American car continues to get older. According to new data from S&P Global Mobility, the average vehicle in use age increased by two months from last year to 12.6 years in 2024.
Multiple reasons drive the increase. A prime one being new cars are prohibitively expensive for most people. The pandemic caused severe supply chain disruptions to the automotive industry. Car manufacturers produced less, resulting in higher car prices and lower affordability.
Besides reduced affordability, other considerations include higher loan rates, a desire to avoid car payments, expensive operating costs, and, importantly, better-quality cars. Hence, it is not surprising that Americans desiring to stay within their budget plan drive their cars for more than ten years and, in many cases, more than 150,000 miles before buying a replacement.
New Cars Are Simply Not Affordable
Kelley Blue Book reports that the average transaction price (ATP) for a new car in April 2024 was approximately $48,510. Although lower than last year, it is still 2.2% higher than at the end of 2023. The ATP’s 34% climb over the past decade outpaces inflation as cars moved from about $32,000 to their present value.
Moreover, dealers’ incentives for new car buyers are just 6.3% of the ATP. The average dealer’s incentive was over 10% before the COVID-19 pandemic affected the market. Notably, the average value increased from a low of 2% to 2.5% in late 2023, but it is still below the typical incentive value before the pandemic started.
Automakers Don’t Make Inexpensive Cars
Manufacturers have moved away from inexpensive cars, compounding the pandemic’s impact on supply chains and accelerating existing trends focusing on more profitable, higher-priced luxury models.
In December 2017, automakers sold 36 models priced under $25,000. By the end of 2022, the number of modest models shrunk to five choices. Even historically economical models, like the Honda Civic and Toyota Corolla, are priced over $20,000.
In the same period, sales and the number of new car models priced over $60,000 surged; the number of available luxury models increased by 50% from 61 to 90, while sales rose by 163%.
New car unaffordability means people hold onto existing vehicles longer before purchasing replacements. Prices are “prohibitively high for a lot of households now,” Todd Campau, aftermarket leader for S&P Global Mobility, told the Associated Press. “So I think consumers are being painted into the corner of having to keep the vehicle on the road longer.”
Household Income Fails To Keep Up
Higher prices impact affordability, as do household incomes. Americans’ incomes have not climbed at the same rate as auto costs.
According to United States Federal Reserve data, the median household income in 2014 was $64,900, rising to $74,580 in 2022. However, the 15% increase is less than half that of new car prices.
Auto Loan Interest Rates Highest in Years
Higher loan rates compound the problem of slow household income growth. The Federal Reserve increased interest rates to curtail inflation, raising consumer borrowing costs. Auto loan rates depend on credit scores, location, and model type. New cars typically have lower rates than used cars.
According to MarketWatch, rates for new vehicles range between 5.64% and 14.78%, with an average of 7.18%. The average rate was only 4.4% in the first three months of 2022. Consequently, monthly payments have climbed to about $740, significantly higher than the $625 in 2022. The extra amount means an additional $1,380 annually.
Americans’ car loan terms are getting longer. Car loan length often falls between three and five years. Today, lengthy 84-month car loans are available. An effect is lower monthly payments, but buyers pay much more interest. At a constant 9% interest rate, a $35,000 loan over 48 months results in $6,807 of interest. The same amount financed over 84 months almost doubles the total interest to $12,302.
Stagnant wages and longer loans mean many people hold onto their existing vehicles longer to avoid a car payment. Melanie Allen of Partners in Fire says, “My car has 175k miles. I haven’t replaced it because I still love it, and it’s fully paid off. I haven’t had a car payment in years, and I’m not anxious to have another.”
Operating Costs Rise, Too
Routine maintenance is more expensive because of higher gas prices, insurance premiums, and repair costs.
Regular unleaded gas prices reached a record high in mid-2022. Although they have been down since rising above $5 per gallon, they are still a burden for many homeowners.
Inflation also drives soaring vehicle insurance premiums. Although new cars are usually safer, repair and replacement costs for advanced electronic and sensor systems have climbed. Electric vehicles are more expensive to insure than gas-powered ones since battery replacements are costly.
The same forces that result in climbing insurance premiums affect repair vehicle repair costs. Sensors, electronics, batteries, and safety systems are costly to fix. Basic models or older cars often have a lower average repair cost and are more straightforward for mechanics to work on.
It is often less expensive to keep and drive an older car for a few additional years than to buy a new one.
Better Quality Cars Change the Equation
Today’s technology combined with routine car maintenance means a car’s lifespan can easily surpass 10 years. Quality improvements across almost all manufacturers mean more cars with 150,000 to 200,000 miles or lengthy lifespans. Two decades ago, many people bought a new vehicle when their current one reached 100,000 miles, but that has changed.
This article was produced by Media Decision and syndicated by Wealth of Geeks.
