How Car Financing Became the Preferred Method of Purchase in the United States
Cars and trucks, once affordable with a simple payment plan, have grown increasingly expensive over the years. People are working harder than ever, but the typical large cash sums required to purchase a new or used vehicle can be a significant burden. As a result, financing has emerged as the most accessible option. This change in consumer behavior has led to an increase in longer loan terms, facilitating the purchase of vehicles without a prohibitive upfront cost.
The Evolution of Car Financing in the US
The history of car financing in the United States is longer and more complex than one might think. While the concept of financing a car has been around since the early days of the automobile industry, it has only recently become the most common method of purchase. In the 1950s, America had already begun to adopt a culture of purchasing without saving, contributing to the inflated prices we see today.
The Early Days of Financing
One of the earliest forms of financing was introduced by General Motors in 1919 with the establishment of GMAC (General Motors Acceptance Corporation), which now operates under the name Ally Financial. While GM saw the potential in financing, other major players, such as Ford Motor Company, were hesitant at first. Ford’s initial response was the layaway plan, where customers could make payments until they had enough to purchase a vehicle outright. This strategy was later supplemented by the creation of their own financing company.
The Shift in Consumer Behavior
Borrowing to purchase a car became more prevalent after World War II, when consumerism began to dominate American society. The aftermath of the war saw a period of affluence and optimism, leading to the birth of the Baby Boom generation. With increased disposable income and the desire to experience the American Dream, people started to focus on acquiring big-ticket items, including homes and vehicles, through loans.
Financing as a Solution to Financial Pressures
The American Dream of owning a home and a car became a reality for many through financing. Unlike past practices that required large down payments and short-term loans (50% down and terms of 6- to 12-months), loans in the post-war era were designed to be more accessible and flexible. This shift not only made vehicles more available to the general public but also allowed people to spread out the cost over a longer period, making the dream of car ownership more achievable.
The Current Landscape
Today, dealerships offer financing terms that range from 72 to 84 months, ensuring that monthly payments are more manageable. This extended period, however, means that the vehicle or truck becomes a part of your financial commitment for a longer time. While purchasing a car through financing has been a common practice in the U.S. for decades, it has become more prevalent as a result of societal and economic shifts.
Impact of Consumerism on Car Prices
Consumerism itself has played a significant role in driving up car prices. The culture of quick purchases without adequate saving has made it more challenging for individuals to accumulate the cash needed for a full payment. Consequently, the financial burden of car ownership has shifted from a one-time, large outlay to a more manageable, long-term commitment.
In conclusion, the evolution of car financing in the United States reflects broader economic and societal trends. From the early days of limited financing options to the current offering of extended loan terms, the shift towards financing as the most common method of purchase has transformed the way Americans acquire and own vehicles. This evolution is a testament to the changing needs and aspirations of a society that values instant gratification and long-term flexibility.