During the last few years, Felipe Arévalo has noticed something worrying. He’s a community outreach coordinator for San Diego Financial Literacy, and when he goes through people’s budgets, he sees one cost that’s getting higher and higher: car payments.
“It’s getting them to put other things on hold, maybe saving, which is important,” he said. “Or being able to buy a house.”
Arévalo is witnessing first hand what new data from the California Policy Lab program. The average amount of a new auto loan in San Diego and Imperial counties has grown more than $10,000 since the start of the pandemic.
The price of used cars soared to historic levels during the pandemic, according to JD Powerand car loans boomed in response.
To cover these larger loans, consumers compensate by extending their loans over longer periods of time. But that means paying a lot more interest over time and a greater chance of owing more than the car is worth, especially as used car values drop.
The number of people who miss a monthly payment is still low, but the number is increasing. And those defaults are more likely with longer loans, said Hisham Foad, chairman of San Diego State University’s Department of Economics.
“The longer the amount you’re borrowing, the more likely something will happen that will cause you to default on the loan,” Foad said.
Foad said he expects people to start keeping their cars longer and to see an increase in car rentals.
If people are struggling to pay off loans, Arévalo said the first step is to talk to the lender, which may have programs to help.
Car owners should review their budgets for items they could cut back on, such as a streaming subscription.
And if it’s available to them, Arévalo said they might consider refinancing their loan. But he warns that right now they will be hit with higher interest rates.
He advises potential buyers to take a test drive before taking out one of these loans: start saving for what they expect to be their monthly payment.
“It will help with the down payment and also show you have the ability to take on that new debt,” she said. “Just because you get approved for a certain amount doesn’t mean your budget can handle it.”
For many, there is no choice but to buy a car because public transport does not reach their home or is not fast enough.
“Some neighborhoods will depend more on cars than others,” Arévalo said. “And sometimes picking up and moving to a place where you’re close to public transportation isn’t an option.”
Until public transportation improves in underserved areas of the county, more San Diego residents could find themselves under the burden of these larger, longer loans.
