Why Car Payments Keep Americans Poor

About this video

• Video Title: Why Car Payments Keep Americans Poor
• Channel: Humphrey Yang
• Speakers: Humphrey Yang
• Duration: 00:12:58

Overview

This video explains the concept of being "car poor," where excessive car payments prevent individuals from building wealth. It details the financial statistics behind this issue in America, explores the underlying reasons why people fall into car poverty, and offers actionable strategies to avoid this financial trap.

Key takeaways

• Car Poverty Defined: Being car poor means overextending one's budget to finance a car, resulting in insufficient funds for comfortable living or savings goals. This can also include having negative equity on a car, where the amount owed exceeds its value.
• Financial Statistics: The average new car payment is $745/month, representing nearly 20% of the average American's gross income, which is double the recommended amount. Total auto loan debt in the US exceeds $1.6 trillion.
• Contributing Factors:
  • Unregulated Car Debt: Unlike mortgages, car loans have fewer regulations, making it easier for lenders to approve loans that stretch budgets.
  • Culture of Status Symbols: Cars are often used as a public display of success, leading people to overspend to impress others, especially in certain professions.
  • Ignoring Affordability Rules: Many individuals do not adhere to financial guidelines like the 2410 rule (20% down, max 4-year term, car expenses under 10% of gross income), leading to overspending.
  • Necessity of Driving: In many parts of the US, driving is essential due to a lack of robust public transportation infrastructure.
• Strategies to Avoid Car Poverty:
  • Follow Affordability Rules: Adhere strictly to financial guidelines for car purchases.
  • Buy Used: Purchase a slightly used car to avoid the initial, steep depreciation.
  • Separate Identity from Car: View cars as tools, not as reflections of personal worth or success.
  • Calculate Total Cost of Ownership: Factor in all expenses beyond the monthly payment, including insurance, maintenance, fuel, and finance charges.