Transcription
There's a trap that more and more Americans are falling victim to, and it has to do with the car landscape. The trap is called being car poor, and it's the reason why the average American now pays $745 a month for a new car, which represents nearly 20% of their entire income. That's double what the financial experts recommend, and it's creating this epidemic where people don't have the ability to actually build wealth.
Today, I'm going to break down the four hidden forces that are driving Americans into car poverty. And more importantly, I'll show you the exact strategy to avoid becoming another statistic.
To understand being car poor, let's first understand the concept of house poor, which is the more commonly referenced term, and I think it's the one that came first. Being house poor means that you own your home, but you're barely able to pay the mortgage, and any extra cash you make is going towards your house. You do think you're rich since you own a home, but you don't have enough discretionary income or extra cash flow to enjoy your life.
Being car poor these days is quite similar. The definition is simply overextending your budget in order to finance a car. Now, what that may look like in reality is that you make your paycheck, then you make your payment on your car, and then after that happens, you end up not having enough money to live comfortably or even reach your savings goals. Your car payments take up a disproportionate amount of your income. So much so that it creates a burden on your life.
Another situation of being car poor is when you are upside down or you have negative equity on a car. That just simply means you owe more money on a car than it's actually worth. When that happens, you're essentially trapped. You can't sell the car to get out from under the payment because the sale price wouldn't even cover what you owe. And in these situations, this forces you to keep making payments on a depreciating asset, and then the cycle continues.
As of early 2025, quote, "Analysts say nearly one in four vehicle trade-ins towards new car purchases with negative equity are underwater by $10,000 or more." That's crazy to me because this data is taken from just those people that are actually trading in their cars. I'm sure there's lots more cars that are on the road that are in the same situation but aren't being accounted for in this report.
The biggest difference here between house poor and car poor is that at least in the first scenario of being house poor, it's unlikely that your house will lose value over time. Cars, on the other hand, virtually all of them depreciate. So that means you are paying off a loan, usually with interest, on an asset that loses value.
Before I get into the specifics of why this is happening and the hidden forces behind all of this, I want to share some scary statistics with you about how dire the situation in America is right now. As of summer 2025, the total outstanding auto loan debt is now $1.642 trillion with the average new car payment being $745 a month and the average used car payment being $521 per month.
Now, think about that for a second. So if we're able to take the averages, so average car payments compared to average salaries, ideally we would see that the average car payment is not taking up too much of the average American salary. In fact, it really shouldn't if we were all being reasonable with our decisions. But I uh wrote this video, so I already know the disappointing facts, and I'm going to share those with you right now.
The average salary is $62,088 according to the Bureau of Labor Statistics if Q1 2025. And we already know that the average car payments of a used car are 521 a month and a new car is 745 a month. I took the average salary and plugged it into a federal income tax calculator. And I chose a zip code in Texas somewhere where I knew there would be no state income tax. And so that means the average worker will take home around $51,838 per year or around 4.3K per month after taxes.
If that person has a used car payment of $521, that will represent 12% of their monthly income, which seems reasonable, but when you consider you probably have to add in insurance, gas, maintenance, etc. We're probably closer to 16 to 20% of their take-home income on a used car.
On a new car, that percentage gets even more ridiculous. So, $745 per month. The average new car payment would then represent 17% of the average American's take-home pay. After adding in about $250 a month for insurance and gas, just transportation alone would represent 23% of that person's take-home pay.
Now, if you don't watch a lot of personal finance videos, the number to shoot for in terms of car affordability is that your transportation costs per month should probably not exceed more than 10% of your gross income. That's not always realistic, but that's what you want to shoot for.
Now, of course, I was using take-home pay in those examples, but if we were to compare the new car payment total with the average person's salary of $62,88 on a gross basis, the car payment still represents 19.2% of their gross income, which is still basically double what the affordability rules suggest.
Now, just when you thought that was bad, those are the car payment numbers for someone with a credit score of around 660 and up. So, these are prime or super prime customers. If you are someone with a credit score lower than 660, your payments are going to be higher and your interest rates may not be as good either.
So, what are these forces contributing to so many people becoming car poor? Is it their own decision or are there other factors?
The first thing that we need to understand is that it's way easier to fall into the trap of being car poor because car debt is unregulated compared to mortgages. When you get a mortgage, the bank scrutinizes every dollar that you earn and spend, and they'll typically only approve you for a mortgage where your total monthly housing payment, including taxes and insurance, doesn't exceed about 28 to 36% of your gross monthly income. So, let's use 28%. That means on a $100,000 salary, your maximum housing payment can be around $2,300 per month. And guess what? The bank is going to check your payubs, your existing debts, your credit score, your employment history, and your tax returns.
Now, let's say that same person walks into a car dealership wanting to buy a $60,000 Ford F-150. The dealer might just approve them right there on the spot with just a driver's license and proof of income. No one calculates whether a $900 monthly car payment plus insurance, gas, and maintenance makes sense alongside their other expenses. No one will ask you if you can actually afford it long term. And if the payment for some reason doesn't make sense for the buyer, the dealer will just stretch out the car loan term from, let's say, 5 years to six years or perhaps seven or even eight years, thus making the payment lower. And even worse, while your house will likely increase in value over 30 years, that $60,000 truck will be worth maybe $20,000 after 7 years of payments. Yet, car dealers will routinely offer you a 84-month loan, meaning that you could still owe money on your car even though the car is worth a lot less than what you owe. The mortgage industry learned hard lessons from 2008 and had to undergo a ton of regulation. But getting a car loan is still kind of like the wild west, meaning that people are overextending themselves because there are no regulations in place.
Another reason people are being driven into car poverty is our culture's obsession with using vehicles as status symbols. Unlike the mortgage payment, which is invisible to most people, your car is literally an advertisement of your perceived success. And if I've learned anything about life, it's that people will go to great lengths to impress people that they don't care about. If you pull up to a business meeting in a 15-year-old Honda Civic, some people might make false assumptions about how successful you are. If you pull up to the same meeting in a BMW 5 series, you might be perceived as successful, even if you are drowning in tons of debt just to be able to pay off that BMW. This pressure is especially intensified in professions like real estate or sales where the salesman has to drive clients around. But even at regular corporate jobs, you may feel the pressure to drive a nicer car than what other employees are driving and have parked in their parking lots.
Social media doesn't really help either, as I'm sure you already know, and the car industry knows this and will exploit it ruthlessly. They make advertisements on TV selling you an identity if you hop into said car, and they want you to tie your self-worth into the car that you are driving. The ads never show you the mundane of sitting in traffic or getting gas. Instead, it's all about the car giving you freedom, driving on your own terms, and in some cases, it's the thing that makes you happy. Just listen to the end of this Jeep commercial with Harrison Ford. So, choose, but choose wisely. Choose what makes you happy. My friends, my family, my work make me happy. This Jeep makes me happy even though my name is. The irony here is that the expensive car that might be meant to signal success often becomes the very thing that prevents people from building real wealth. So think about that the next time you're thinking about financing a new car that's a little bit outside of your comfort zone.
The third reason why people become car poor is that they just don't consider affordability rules at all. In fact, judging by the comment section in many of my car videos, some people are shocked to even learn that the 2410 rule is even a thing and that it's even possible. If you are trying to buy a car under reasonable conditions, you would stick to the 2410 or maybe even the 2510 rule is even okay. The 20 means that you're making a 20% down payment on the car. That's the first step. And having 20% on hand ensures that you are in a financially responsible position to actually take on this purchase. The four refers to the maximum term you should set. So four years is part of the original rule, but these days I think you can even stretch that to 5 years. The reason that the four is actually part of the original rule is that it's really just looking out for you in terms of the total amount of interest that you're going to pay. You can see here that on the left, if you are financing a car for 4 years that costs $30,000, your total interest paid will be $25.29. However, if you finance it for 6 years, the total interest you have to pay now is $ 38.29. And that's over $1,300 you're just throwing away to interest. And the last part of the 2410 rule is arguably the most important that we've covered a little bit today, which is that you should aim to keep your monthly car payment, including insurance and maintenance, under 10% of your gross monthly income. Note that this rule does not include fuel costs, although you should always try to factor that in a little bit as well.
Here's a table of incomes between 40K and $150,000 per year and how much of a car payment you can actually afford. An easy rule of thumb is to simply take your annual gross salary and divide it by 120 and you'll get the maximum monthly car payment that you can afford. You can also just feel free to take a screenshot of this, but just know that just because you can afford a certain car payment, you shouldn't be maxing it out just because you can. You want to be prudent with your decisions and this 10% rule helps you not overspend on a car. I know that not everybody is going to be realistically able to hit this. However, it's a general guideline that I think would help a lot of people just avoid being car poorer altogether.
According to Dave Ramsey, the best car is the one that you can pay off in full or you can pay off relatively quickly. And I think if more people did that, they would not get into these troublesome situations. So, just keep that in mind when you are looking for a new car.
Another reason why Americans are car poor is that the fact is that in America, you have to drive everywhere. Not many cities have a lot of great public transportation. So in America, the norm is to drive from point A to point B. In most states, you're going to have to drive no matter what you do. And so having a car is somewhat mandatory to the way of life here. If you live here in the United States, you just have to understand that the infrastructure of public transportation is not quite there as some of the other countries in the world, especially because everything in America is so spread apart and far away geographically and physically. So that's definitely one of the cons of living in the States, unless you live in a city with great public transportation like New York, and you can walk everywhere.
Now, given all of these factors, what should you do in order to avoid being car poor?
Number one, I think the first thing you should do is to always follow affordability rules religiously. If you really want to be serious about being financially successful, you need to make sure your car is not a large portion of your income.
The second thing is to buy a used car and let someone else take the depreciation hit. Famously, most cars will lose between 10 to 20% of their value the moment you drive it off the lot. So, if you buy a three-year-old used vehicle instead, you actually let the original owner basically absorb the massive depreciation. You're going to get significantly more car for less money. As long as you're willing to drive perhaps a lightly used car of 3 years old.
The third thing you should do is to separate your identity from your car. The car is simply a tool to get from point A to point B. It's not a reflection of who you are. I think that the wealthiest people understand this and the more that you can put your ego aside, the better financially you will be.
Number four, you should really calculate the total cost of ownership because you really want to be mindful of factoring in all of the costs including maintenance, fuel, depreciation, insurance, finance charges, etc. Even a $500 monthly payment could become $750 or $800 after you add everything up. And edmmonds.com has a really great tool called the total cost of ownership calculator. I will link it down below in case you want to check that out for your specific model. It will tell you what your monthly payment will roughly be.
Remember that the goal isn't to never enjoy nice things. It's just to make sure those nice things aren't preventing you from building real actual wealth.
If you enjoy this video, make sure to check out my video right here on how the car market is bankrupting Americans. It's one of my commentary videos and it has one of the most views on my channel. I'll see you guys in that video or a future video on the channel. Let me know your thoughts in the comments. I'd love to hear anything you have to say. All right, peace. [Music]