Just 18% of U.S. households had enough liquid assets to cover the cost of a new car, according to a Wall Street Journal analysis of 2016 data from the Fed’s triennial Survey of Consumer Finances, a proportion that hasn’t changed much in recent years.
Even a conservative car loan often won’t do it. The median-income U.S. household with a four-year loan, 20% down and a payment under 10% of gross income—a standard budget—could afford a car worth $18,390, excluding taxes, according to an analysis by personal-finance website Bankrate.com.
Tesla is likely to introduce a car with a battery capable of lasting for one million miles of driving. Having a car for long enough to come close to even a fraction of that distance could justify taking out a seven-year loan to fund the purchase but that misses the point. The aim is for those batteries to go into autonomous vehicles.
The terms of the loans being offered today have helped support automotive company margins but the broader challenge they face is falling demand for their products. This is now a global phenomenon. It is being influenced by the global slowdown in the short term but by technological advances in the medium term.
The success of companies like Lyft and Uber proves the use case for a rent versus ownership even if they have not solved for profitability. That more than anything represents a serious problem for automotive companies and not least because of the substantial capital requirement to completely retool their operations.
The problem with hooking people with poor credit on long-term loans is the risk of default rises because the term of the loan runs longer than the average economic cycle. Writing a seven-year loan today virtually ensures there will be a recession during the term of the loan. Auto loan default risk is not a problem on the scale of subprime mortgages because the term and size of the loans is smaller but it will be a significant social issue.