American car owners face a wall of bad debt to finance vehicles they can't afford — especially pandemic buyers who took out huge loans to buy overpriced used vehicles that are now depreciating in value. While inflation is rising sharply and is poised to get even higher if the Fed forced to lower ratesit turns out Americans can't afford ensure neither do these cars.
Used car and truck prices have come down significantly since their sharp rise between 2020 and 2022, but there is still a long way to go to reach pre-2020 levels. Meanwhile, the number of defaulted loans has increased (defined as being at least 90 days past due), and the average borrower is facing a loan balance of approximately $23,945 according to TransUnion.
CPI: used cars and trucks in the average of American cities
The powerful cocktail of high interest rates And high inflation makes car ownership itself unaffordable – but that's radically arrange car insurance bonuses also:
The data source: U.S. Bureau of Labor Statistics
Traditional media and Keynesian economists love to claim that high prices cause inflation, but they do it in reverse. The rise in prices is above all an effect of inflation, because your purchasing power is diluted.
While rising prices and inflation can become a vicious cycle in which the former helps feed the latter once it starts, prices are higher to begin with because your dollar is buying less than before. This includes not only food, gas, and gold, but also insurance for things you already own, like your car and car. your house. If the cost of repairing damage or replacing a totaled car is significantly higher than it was a year ago (or five years ago), insurers must charge you more to make up for the increase.
There is also the problem of fewer mechanics in the job market to maintain and repair vehicles. The shortage of qualified mechanics and technicians is compounded by the growing popularity of EV that many mechanics are not properly trained or experienced enough to repair. Machine shops, already struggling with higher prices, are under pressure to offer higher wages in order to get (and keep) good help.
As even good old gas cars now rely on software to operate, an increasing number of repair jobs need to be carried out. referred to resellers or require expensive software troubleshooting, which adds delays to the repair process. All of these factors are currently conspiring to continue to push car insurance premiums even higher.
When gas, repairs, insurance, and debt itself become too expensive for Americans to own a car, it spells a dire economic scenario. The Fed is screwed if he raises interest rates, and he's screwed if he doesn't: he can raise rates to control inflation and lower prices (sending indebted car owners with variable rate loans in default and making fixed-rate loans unaffordable for Americans whose cars are aging and broken. Or it could lower rates to encourage Americans to take on more debt and let inflation run amok, sending the price of car insurance – and car ownership in general – further into the stratosphere.
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