The average used car loan is already over 12 percent interest

There’s, any old financial advisor will tell you, good debt — which is just mortgage and undergraduate student debt — and bad debt — which is more or less credit card debt you’ve accumulated spending on clothes and other full nonsense. Good Debt will theoretically increase future earnings, as the value of your home will likely increase, and getting a college degree should land you a better-paying job. Bad Debt will do the opposite because you’ve built it up buying clothes and other stupid crap, most likely at high interest.

Then there is car debt, which is hotly debated as bad debt, or possibly good debt, or possibly both. The pro-car debt is good camp generally argues that since cars are a necessity for work in most of America, borrowing money to buy a car is simply out of the question and also helps you make money by keeps you busy. The car debt is bad camp generally argues that it’s a bad idea to borrow money to pay for a depreciating asset, which is what a car turns into as soon as you drive it out of the parking lot.

This also applies to taking out a loan, whether it is to buy new or used. However, interest rates on new cars tend to be lower than on used cars because for the lender, a new car offers less risk – when they have to repossess your car because you’ve stopped paying your loan, a new car is likely to worth more than a used car at auction.

Anyway, that’s a lot of throat clearing to present the following nugget in history c New York Times today for the used car market. The story is about how the used car boom ends and how Carvana and CarMax suffer as a result of what we’ve covered in this space before. The story also said analysts estimate that about 36 million used cars will be sold in the U.S. in 2023, while just under half of that number will be sold new.

Then came the nugget in question, emphasis mine:

The Federal Reserve’s campaign to raise interest rates to fight inflation has made it harder and more expensive to buy cars. In December, the average interest rate on used car loans was 12.37 percentup from less than 10 percent a year earlier, according to Cox Automotive.

Another way to tell if a debt is bad or good is if the interest rate is totally psychotic or basically good. The dividing line for many financial advisors, for example, is 7 percent, which means you should aggressively pay off any debt you have with an interest rate above 7 percent and simply make your regular monthly payment on debt with a lower interest rate of 7 percent.

That’s because historically, 7 percent has been roughly the average annual gain in the S&P 500 after accounting for inflation. So instead of aggressively paying down debt that’s worth less than that, you’d be better off investing your extra cash. (Others argue for a more conservative threshold of 6 percent(but to be clear, none of this is investment advice.)

I can also say with some certainty that 12.37% is absolute garbage, not a good interest rate in most economic environments, from a consumer perspective. And Cox, through NOWsays it’s simple average, which means many used car buyers are taking out loans at even higher interest rates. Many of these people probably have very little choice in the matter, such is the Faustian bargain that is car ownership for America’s poor with public transportation garbage collectors.

For those of you who have some choice, I implore you to read these loan documents before you sign them, and not just look at, say, the amount of the monthly payment, which may seem small and/or reasonable enough, which they want you to think. Also consider the total cost of the loan because all these used cars here with double digit interest rates are stressing me out. Think that one day, maybe, with a decent enough interest rate, a car payment doesn’t have to be a fact of life for you.