high interest rates have sapped consumer
appetite for big-ticket items
And another question: Are people not saving for their retirement? If they do, wouldn't it be better to take the money to buy the car from your savings and avoid paying interest?
Second question's answer: No. They're not. 40 years ago the powers-that-be in the American financial system decided it'd be a great thing for their balance sheets if everything was turned into a purchase on credit, and for purchases that were already on credit (homes, cars, business capital, student loans) to draw even more in the way of fees. Meanwhile, everything's become more expensive (as it can be on credit) and wages have remained stagnant.
In the off chance that they are able to save for retirement, tax law makes it something you don't want to draw from until you're retirement age. If you have a 401k, for example, and withdrew from it to purchase a car, you're going to be expected to pay the tax on the money you put into it immediately.
It's a huge stretch to pin that on the proliferation of credit.
> In the off chance that they are able to save for retirement, tax law makes it something you don't want to draw from until you're retirement age. If you have a 401k, for example, and withdrew from it to purchase a car, you're going to be expected to pay the tax on the money you put into it immediately.
Uh... good? 401(k)s are tax-advantaged to encourage using them for what they're for. And if you really, really need the money, a 10% penalty on top of the taxes you legitimately owe on that pre-tax money is nothing. The real hit comes from losing all the future gains and the inability to "replace" that money the way you can with some other tax-advantaged instruments.
It's a huge stretch to pin that on the proliferation of credit.
Most people reading these comments aren't the average person. We live in a privileged bubble where we have the income that generates the possibility of being able to own property.
There are far more people living paycheck-to-paycheck with the "assistance" of a credit card than we would like to admit.[0] If there weren't, the Fed wouldn't have injected so much money into the economy during the pandemic. They did so because the average person doesn't have the savings to not work for a month, and because the US federal government doesn't have the savings to give out the money as funded by tax revenues.
[0]https://www.bankrate.com/finance/credit-cards/living-paychec...
Your retirement savings in the US has no fallback, except social security. So taking money out of it to buy a quickly depreciating liability like a car would be a really bad plan as most financial advisers would say. It feels tempting, and on paper you may even be a millionaire who happens to feel broke all the time, but like everything in life it simply depends.
> wouldn't it be better to take the money to buy the car from your savings and avoid paying interest?
We bought our car a few weeks before rates were raised. The interest on our car is 4%, the interest on our savings is now 5.5%. So it worked in our favour to finance when rates were extremely low.
Compared to when I bought my recent car, rates were hovering between 1-2% (2015-2017).
A large majority of Baby boomers in US reportedly do not have savings for retirement [1]. A large portion of the US living paycheck to paycheck. And many of those people do not have the savings to cover more than a $400 emergency. [2]
most people won’t have the liquidity to pay out of pocket. Thus why they reach for loan products. Either that or they forgo medical expenses or forgo other expenses.
[1] https://thehill.com/business/personal-finance/3991136-nearly...
[2] https://time.com/personal-finance/article/average-american-s...
For example, Toyota is currently financing Tundra's at 2.25% - which is well below market rate (~5%)
> If they do, wouldn't it be better to take the money to buy the car from your savings and avoid paying interest?
Despite being able to purchase our vehicles with cash, we tend to prefer financing for a few reasons.
* It keeps our working cash liquid. Vehicles are just about the easiest thing to finance, so we can put that liquid cash to work elsewhere without having to pull from less-liquid sources.
* We can get similar or better returns if we invest the financed cash elsewhere. For example, CDs are currently offering ~5% to 5.5% return. Combine that with a financing deal, and it's basically just "free" cash for financing vs buying outright.