If you were to guess what the average new car price is nowadays, what would you guess? I guessed $23,000, since my Honda Fit is sweet and only costs $19,600 new. Given I’m frugal, leaving a 20% upside pricing buffer seemed logical. Too bad I was way off!
According to the valuation analysts at Kelley Blue Book reported the estimated average transaction price for a light vehicle in the United States was $37,876 in February 2020. New-vehicle prices increased $975 (up 2.6%) from February 2019, while falling $126 (down 0.3%) from last month.
Are you kidding me? The average new car price in 2020 is now almost $38,000? In 2021, I’m assuming the average new car price will be even higher, partially thanks to production shutdowns during the global pandemic.
I guess we must all be quite wealthy because I don’t know many people with a median household income of $67,000 who can afford such a price.
The Average New Car Price Is Crazy High
Take a look below at the most popular car brands and models on the market today and their prices. The data comes from Kelly Blue Book to get the average car price of $37,876 for 2020.
It really seems absurd that the average new car price is $37,876 according to Kelly Blue Book. However, who am I to deny their millions of data points? It’s what so many people who read my 401k by age chart do when they aren’t on track. They go in denial.
I’ve come to accept the reason why the average new car price is so high now is because demand is so strong and the average American is so rich! Forget the great recession and the pandemic. The economy is booming and people have money to spend. If people weren’t cashed up, prices would fall instead of rise to astronomical levels.
The Average New Car Buyer Is Rich
Given everything is rational, we can also assume the average new car buyer makes around $190,000 a year, or 5X $37,876 based on a 50% discount to my 1/10th rule for car buying.
If all new car buyers followed my 1/10th rule, they’d all be making ~$370,000 a year. But, I’ve still got a long ways to go to convince people not to throw too much of their money down the toilet, despite Financial Samurai being around since 2009.
With so many people from public train janitors to 26 year old programmers to food bloggers making $250,000+ a year today, $190,000 a year for the average new car buyer can’t be too far off.
There’s a bull market in the stock market and real estate prices have recovered to pre-crisis levels and then some in some cities like San Francisco, LA, and New York City.
To spend more than 20% of your gross salary on a car when you could be making mega bucks investing is completely irrational. Nobody I know would choose owning a new car over being able to retire years earlier.
Besides, those who don’t make $190,000 a year will simply buy a used car for less. That’s what I did for all but one of the previous cars I’ve owned. Everybody knows that a car is one of the worst financial independence inhibitors.
Therefore, it’s clear that all new car buyers are making around $190,000 a year. Used cars buyers make much less because cars depreciate very rapidly.
Take a look at the chart below. In five years, a $30,000 car is worth about $12,000 using an average depreciation rate. Therefore, one can rationally assume the average buyer of a $12,000 car is making ~$60,000 a year, very near the median household income today.
Average Auto Loan Size Is Absurd
Unfortunately, it turns out that most new car buyers are probably not making anywhere close to $190,000 a year. The reason why I know this is because the average auto loan is now $30,032!
Holy hell. Who on Earth goes out and buys a $38,000 car and then borrows $30,032 of it? Are consumers really that financially irresponsible? Borrowing lots of money to buy a depreciating asset is the best way to financial destruction. At least when you borrow money to buy a house, the house has a chance of appreciating long term.
The last salvation of hope for Americans is that maybe the $30,032 loan is paid back over a very short period of time, like 1-2 years. Nope. The average term for an auto loan is 68 months (5.7 years) – the longest average term ever! In case you’re wondering, the average auto loan payment per month is $503, for a total payment of $34,204 over the 5.7 years.
The $30,032 borrowed today for a car would be worth ~$50,293 in 10 years based on a 5.3% annual growth rate if invested in the S&P 500 instead. If we use a 7.2% growth rate for the S&P 500, the $30,032 invested would be worth $60,140 in 10 years. Opportunity cost is truly a car buyer’s worst enemy.
Even if the borrower decided to invest his average auto loan monthly payment of $503 in the S&P 500 for 68 months, he would probably have over $40,000 invested given 68 X $503 = $34,204.
Is there any wonder why those who are frugal or follow my 1/10th rule for car buying end up much farther head financially than those with zero financial discipline? In 10 years, the $34,000 car will be worth less than $10,000 due to a ~70% depreciation schedule. The investor of the $30,000, however, could have investments worth 5-6X more!
What’s Bringing Up The Average Car Price?
It still baffles my mind that the average net car price is about $38,000 in the new decade. As someone who drove a $8,000 used Land Rover Discovery for 10 years and more recently, a $20,000 Honda Fit, the $38,000 figure is hard to grasp.
Undeterred, I kept on looking for a reason for such a high average new car price when I came upon the SF Bentley dealer and their new Bentayga SUV for $235,000 MSRP, $250,000 nicely equipped.
The car sales people told me they can’t keep them in stock because demand is off the charts. It’s the same for their colleagues at the Ferrari, Lamborghini, Mercedes, BMW, and Maserati dealers. In other words, forget about the top 1% who can barely afford a $250,000 vehicle, it’s the super rich who have gotten super richer due to the raging bull market!
The top 0.1% are converting more of their funny money into real assets before it all goes poof like the last downturn. The super rich are also seeing folks like George Michael die at 53 with mega millions. As a result, they’re telling themselves to live it up while they still can.
Money Out The Tail Pipe
So there you have it. The super rich and the middle class who don’t read Financial Samurai are spending like there’s no tomorrow. The super rich don’t care about rising interest rates because they pay in cash or lease vehicles as a business expense.
The middle class don’t care if they’re spending a lot for a new car because they don’t know any better. Eventually, the middle class will get crushed again, but for now, let the good times roll!
Check for better auto insurance. Auto insurance is the second biggest expense to owning your car. Esurance is one of the leading online market place to help you find the most affordable and reliable auto insurance.
It is very important that everyone gets at least basic liability car insurance. You can total your car and be fine. But if you total someone else’s car and injure them, they can go after you for ALL your assets and wipe you out!
In 2009 I bought a barely 3 year old Porsche Cayman S for 35k$, all cash. God, times have changed.
How in the world do u supposedly make $250,000 a year? Especially being retired? We’re you born with a silver spoon or did you achieve this outrageous amount of alleged income on your own? Because I would love to figure out a way to make half that and I’d work if I had to but would love to make that retired as you somehow do!! What’s your secret?
Took a while. See these posts:
The Secret To Your Success: 10 Years Of Unwavering Commitment
The First Million Might Be The Easiest
How To Build Passive Income For Financial Independence
Paying cash = appetite control.
Helps you say no to all the add ons and be happy with what you have.
Cash brings a sense of pride when you realize many people driving around status symbols are actually just driving the banks car.
Financing removes you from the actual cost/value balance and makes your financial thinking about cars fluffy and irrational.
Even though several have argued that it is better to finance at 1-2% and invest rather than pay cash, I cannot help but wonder
(1) did you still get the same car you would have bought with cash and
(2) how many people actually invest that entire sum of $ instead of get a new itch and spend it elsewhere (I know I would)? Seems like a risky business.
My thought is that the best ROI is paying cash because that creates the most likely scenario that you will buy reasonably, avoid the trap of expensive luxuries, negotiate aggressively, and not overspend.