The average length of auto loans in the United States is longer now than ever before. That’s a worrying sign that American households are taking on more debt than they really need. The more debt people take on and the longer it takes them to pay it off, the more difficult it will be to save up enough money to live comfortably in retirement.
More Indebtedness All Around
The increasing length of auto loans accompanies an increasing level of debt in other areas too. Student loan debt has increased significantly in recent years, as has credit card debt. Overall household debt levels have recently eclipsed levels last seen just before the financial crisis. American households seem to be taking on more debt than ever before, which is very distressing.
Much of this growing indebtedness is caused by the Federal Reserve’s loose monetary policy. The main aim of the Fed’s quantitative easing policies during the financial crisis was to boost lending to consumers. When that lending boost didn’t happen immediately, the Fed continued pumping more and more money and credit into the system. It took a while for that lending to take place, but now it appears to be accelerating.
That means that the increasing levels of indebtedness, the increasing length of auto loans, the larger amounts of credit card debt, are not the result of households being in better economic shape so that they can afford to take on more debt, but are rather the result of artificially low interest rates. Rates are so low that people figure that there’s no sense in not taking advantage of cheap borrowed money to buy things that they otherwise wouldn’t be able to afford. They end up stretching their budgets to live outside their usual means, and will inevitably suffer once interest rates begin to rise.
The Effects of Artificially Cheap Money
Cheap money allowed people to buy more house than they could afford during the runup to the last housing bubble, and it’s doing the same thing today. Many people would have been better off buying smaller starter houses to build up equity, a solid credit history, and further savings for a larger house in the future.
Cheap money is allowing many students to take on tens of thousands of dollars in student debts, allowing them to go to college and obtain degrees that do nothing to enhance their chances of success in the workplace. In many cases, they would be better off learning a trade or starting a small business rather than losing four or more years of potential earnings to take on debt that they’ll be paying off for decades.
Cheap money is allowing Americans to buy more car than they can afford, enjoying the trappings of luxury by taking out loans to buy bigger and more expensive cars than they really need. They would be better off buying solid, reliable new cars or quality used luxury cars that have already seen their value decrease than by purchasing a new luxury car.
One of the first rules of using debt is never to go into debt to purchase a depreciating asset. Cars depreciate the minute you drive them off the lot and they continue to lose value the longer you own and drive them. If the term of an auto loan is too long, the amount owed on the loan can very quickly exceed the value of the car. If that happens, many borrowers may be tempted to stop paying their loans and surrender their cars. That’s what happened when the housing bubble burst when many homebuyers who found themselves underwater on their loans just left their houses. If it happens with auto loans then many lenders may find themselves owning used cars that they never intended to.
The lengthening of loans is just another indicator of bubble finance at work. The trillions of dollars of cheap money pushed into the financial system by the Fed are making their way through the system and encouraging people to make unsound financial decisions. Especially if those decisions are made by those nearing retirement, rising debt levels will endanger the retirements of thousands or millions of Americans.
A successful retirement requires sound financial planning, solid investment decisions, and an aversion to unnecessary debts. When it comes to assets, retirees need assets that protect their wealth but still can deliver a return. Unlike stocks and bonds that can plummet, crash, or become worthless when companies or issuing authorities go bankrupt, gold will always be in demand and maintain its value. Since 1971, gold’s average annual return is 7.6%. In times of crisis, gold holds its value better than any other asset. Those new luxury cars may lose their luster over time, but gold will never lose its shine.