With rising car prices comes the rising risk of car debt.milorad kravic/iStockPhoto / Getty Images
“Don’t be car poor,” goes the meme that financial planners and finfluencers are circulating on social media. It points out that if a person chose to spend $10,000 on a car outright rather than taking on a years-long monthly car payment, they’d have more money to invest.
For many people, the reality isn’t that simple. The days of cheap, reliable, almost-new cars are mostly over. Sometimes, those three-year-old vehicles cost the same as, or more than, new vehicles, which can take weeks or even months to make it to the showroom.
Of course, there are unicorn cars. But purchasing a reliable used vehicle now means forking out around $37,000, on average, as I wrote in a story this week about how cars are leaving financial plans in their dust.
And it’s not just the cost of buying a car. Newer cars with advanced technology are pushing up maintenance costs, too.
Scott Terrio, manager of consumer insolvency at Toronto-based Hoyes, Michalos & Associates Inc., emphasizes he’s “not anti-car, but anti-broke.” I spoke with Mr. Terrio about rising car debt.
What are the consequences of large, monthly car payments?
With the people who come to see me, I’ve noticed a huge increase in the proportion of net monthly income going toward financing vehicles. Unfortunately, they’re probably locked into that vehicle payment for years. It’s very hard to adjust your car payment once you have it. It’s a fixed expense. The car debt is secured, and the lender can sue you for the shortfall owed.
For the past two or three generations, we’ve become accustomed to car payments the way we’ve become accustomed to mortgages. We all want a nice car, but we don’t want to think about how much it costs. Many don’t sit down and figure out the cost over time. And because of that, some people do end up in big financial trouble.
Who are you seeing with car debt?
Lots of different people. Recently, I’ve been seeing some Uber drivers. I filed a guy and his partner who both financed Teslas. I know that to be an Uber driver, you can’t be driving a jalopy around; customers won’t call you again. But for some, it doesn’t make good financial sense.
What happens to car debt if a person is faced with a consumer proposal?
We have the option of putting the car debt shortfall into the proposal and giving the car back. I always tell people who have crappy car deals that this is their chance to get out of it. I get that changing cars is a pain. The person may need a car, but they may not need that car. I don’t push them to give the car back to the lender, but they do have that option. But once we do the proposal, they can’t change their mind later.
- Deanne Gage, Globe Advisor reporter
This interview has been edited and condensed.
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