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Helping clients establish and stick to personal budgets may not be the most glamorous part of an advisor’s job, but it’s one of the easier endeavors an advisors deal with. More importantly, budgeting can be rewarding for advisors in more ways than one.
There’s the element of helping clients avoid financial regret. Alone, that’s a big deal. Then there’s capitalist part of the equation. A well-budgeted client is likely to have more capital left over to invest and it’s possible that cash will flow to the advisor.
With that in mind, it’s worth a small expenditure in time for advisors to talk car-buying habits with clients. Two data points confirm the sound reasoning behind that statement. First, outstanding auto loan debt in the U.S. currently resides at a record $1.5 trillion. That’s in excess of the market capitalization of Amazon (NASDAQ: AMZN).
Second, the number of $1,000-plus per month auto loan payments is also at a record high. That’s a lot of cash out the door every month for a depreciating asset.
Car Chat Is Worth Having
Obviously, there comes a time in every car’s life when the cost of keeping it operational outweighs the cost of buying or leasing a newer version. Advisors should not talk clients out of upgrading if the client is already throwing money away on repairs or is close to doing so.
On the other hand, some folks just like new cars and frequently trade in and out increasingly expensive vehicles as lease terms expire. Some clients can afford to do this. Other cannot and are straining their bank accounts to “keep up with the Joneses.” Data confirm this is becoming a pricier endeavor.
“In 2023, the average monthly loan payment for a new vehicle is $725, up from $650 in 2022, according to Experian. The average monthly payment for a used vehicle is $516 in 2023, up 2% from the year prior,” reports Emily Lorsch for CNBC.
Compounding the woes of clients that legitimately need a new car is the point that the number sub-$30,000 automobiles being produced is declining. Rapidly. There are myriad reasons why this is happening. Obviously, manufacturers (and lenders) make more money on more expensive vehicles. Commodities prices are high. Demand is surprisingly robust for luxury vehicles despite concerns about the strength of the economy.
Reminder that Credit Scores Matter
Many clients know this. Plenty do not. But it should be implicit that their credit scores are vital in terms of what they’ll pay on auto loans and this ripe territory for advisors to add value.
The aforementioned CNBC article notes that the typical borrower serviced by Chase Auto has a credit score in the 700 range, though the lender goes as low as 620. Toyota Financial borrowers have an average credit score of 744, though that’s arguably skewed higher by Lexus leases and purchases.
Point is if a client has, say, a 660 credit score – that’s not alarmingly bad – and a car with 50,000 miles on it, it might be best to advise them to stretch the life of the current vehicle rather than stretching their bank account and risking their financial future with a new, likely expensive, automotive loan.