Latest / The Infographics Show Podcast / How Are Americans Affording $80,000 Trucks on a $70,000 Salary?

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How Are Americans Affording $80,000 Trucks on a $70,000 Salary? · The Infographics Show Podcast

• 0:11
  Speaker 1: Usually, when you think about a graveyard, you know, you
• 0:18
  Speaker 1: picture quiet rolling hills, maybe some old stone markers under
• 0:22
  Speaker 1: a willow tree or something. Right. Yeah, exactly. But so
• 0:25
  Speaker 1: while I was doing some personal research for this episode
• 0:28
  Speaker 1: of Beyond Infographics, I I actually came across an entirely
• 0:31
  Speaker 1: different kind of graveyard. And this one is located deep
• 0:33
  Speaker 1: in the heart of Texas. Oh, the truck lot. Yes.
• 0:36
  Speaker 1: It is this massive, I mean, multi-million dollar expanse just
• 0:40
  Speaker 1: packed end to end with endless rows of abandoned, dusty, $ 80, 000
• 0:46
  Speaker 1: luxury trucks.
• 0:47
  Speaker 2: Just sitting there.
• 0:47
  Speaker 1: Just sitting there, baking in the relentless sun. And, you know,
• 0:51
  Speaker 1: it's not some bizarre art installation. It's actually a physical
• 0:54
  Speaker 1: monument to America's skyrocketing auto loan debt. Which, by the way...
• 0:58
  Speaker 1: has now reached an astonishing $ 1. 713 trillion.
• 1:02
  Speaker 2: It's a striking visual. And honestly, it's a deeply unsettling
• 1:06
  Speaker 2: one when you really understand the mechanics behind it.
• 1:10
  Speaker 1: Totally.
• 1:10
  Speaker 2: Because we tend to think of auto repossessions as like
• 1:13
  Speaker 2: isolated incidents, you know, a guy down the street who
• 1:15
  Speaker 2: lost his job, maybe a few cars here and there.
• 1:17
  Speaker 2: But what you're describing in that Texas lot, that is systemic. Right.
• 1:21
  Speaker 2: It is the physical manifestation of a financial math problem
• 1:24
  Speaker 2: that has just, well, fundamentally broken down across the entire country.
• 1:29
  Speaker 1: Okay, so let's unpack this. Our mission for Beyond Infographics
• 1:32
  Speaker 1: today is to figure out the reality behind how everyday
• 1:35
  Speaker 1: Americans are supposedly affording these $ 80, 000 vehicles on $ 70, 000 salaries.
• 1:41
  Speaker 2: Yeah, the math doesn't work.
• 1:42
  Speaker 1: It really doesn't. We're going to look at the hidden
• 1:44
  Speaker 1: psychological traps waiting for you at the dealership, the data
• 1:48
  Speaker 1: behind who is actually defaulting, and most importantly, why this
• 1:52
  Speaker 1: looming debt crisis could seriously damage your financial future. even
• 1:56
  Speaker 1: if you drive a paid-off decade-old sedan or just take
• 1:58
  Speaker 1: the subway. Absolutely. And hey, real quick, if you enjoy
• 2:02
  Speaker 1: these kinds of personal insights and the journey we take
• 2:04
  Speaker 1: you on, please remember to drop a five-star rating for
• 2:07
  Speaker 1: Beyond Infographics. It really helps us out.
• 2:09
  Speaker 2: It really does. So to actually understand how we arrived
• 2:12
  Speaker 2: at a macro-level $ 1. 7 trillion debt crisis, we can't start
• 2:18
  Speaker 2: by looking at the national economy.
• 2:20
  Speaker 1: We have to go smaller.
• 2:21
  Speaker 2: Yeah, we have to zoom all the way in to
• 2:23
  Speaker 2: the micro-level. Like, The exact moment a buyer is sitting
• 2:26
  Speaker 2: across the table from a car dealer.
• 2:28
  Speaker 1: Right, in that little glass office.
• 2:29
  Speaker 3: Exactly.
• 2:30
  Speaker 2: And what's fascinating here is just the sheer velocity of
• 2:33
  Speaker 2: the price increases we've seen in a very short window.
• 2:36
  Speaker 2: Like since 2019, the average new car price has surged
• 2:40
  Speaker 2: by 35%.
• 2:40
  Speaker 1: Wow.
• 2:41
  Speaker 2: Yeah.
• 2:41
  Speaker 1: 35%. Yeah. It decisively breached the $ 50, 000 mark.
• 2:47
  Speaker 2: But if you look at trucks, which, you know, are
• 2:50
  Speaker 2: massively popular, especially as lifestyle vehicles.
• 2:53
  Speaker 1: Oh, yeah. Everyone wants a truck now. Right.
• 2:55
  Speaker 2: A new full-size pickup now averages over $ 67, 446.
• 3:01
  Speaker 1: Which is basically a down payment on a house. I mean,
• 3:04
  Speaker 1: in some parts of the Midwest, that is just the
• 3:05
  Speaker 1: price of a small house outright.
• 3:07
  Speaker 2: Pretty much.
• 3:08
  Speaker 1: Yeah. But nobody's walking in with a briefcase full of
• 3:11
  Speaker 1: cash to pay for these things. They're financing them. Exactly. Exactly.
• 3:15
  Speaker 2: And that is where the modern psychology of the dealership
• 3:18
  Speaker 2: comes into play. Because dealerships today rely heavily on what
• 3:21
  Speaker 2: we can call the monthly payment dial.
• 3:24
  Speaker 1: The monthly payment dial.
• 3:25
  Speaker 2: Yeah, I like that. Yeah. Because when you sit down
• 3:28
  Speaker 2: in that office, the dealer rarely negotiates the total price
• 3:33
  Speaker 2: of the vehicle with you anymore. The first question out
• 3:35
  Speaker 2: of their mouth is, what do you want to pay
• 3:37
  Speaker 2: every month? Oh, right.
• 3:39
  Speaker 1: To shift your focus. Exactly.
• 3:40
  Speaker 2: Exactly. It intentionally shifts the buyer's entire focus away from
• 3:44
  Speaker 2: the actual cost of the asset. They negotiate the monthly
• 3:48
  Speaker 2: payment by stretching the loan term out.
• 3:50
  Speaker 1: So in my research, I came up with this really
• 3:52
  Speaker 1: illuminating hypothetical about a guy, let's just call him Jake,
• 3:54
  Speaker 1: to sort of highlight how insidious this is.
• 3:57
  Speaker 2: Okay, let's hear about Jake.
• 3:59
  Speaker 1: So Jake walks onto the lot and he wants this beautiful,
• 4:02
  Speaker 1: fully loaded $ 80, 000 truck.
• 4:04
  Speaker 2: Naturally.
• 4:05
  Speaker 1: Naturally. But the dealer runs the numbers on a standard
• 4:08
  Speaker 1: five-year loan, which, you know, used to be the industry norm.
• 4:11
  Speaker 1: And the monthly payment comes out to almost $ 1, 200 a month.
• 4:15
  Speaker 2: Ouch. Right.
• 4:16
  Speaker 1: Jake panics. That is literally rent money. He physically cannot
• 4:21
  Speaker 1: stomach that hit to his checking account.
• 4:23
  Speaker 2: So what does the dealer do?
• 4:24
  Speaker 1: Well, the dealer says, don't worry. Let me talk to
• 4:26
  Speaker 1: my manager. We want to get you in this truck today.
• 4:29
  Speaker 2: A classic line.
• 4:30
  Speaker 1: Exactly. So the dealer comes back, turns that monthly payment dial,
• 4:35
  Speaker 1: and stretches the loan out from five years to seven years. Suddenly,
• 4:39
  Speaker 1: the payment drops to $ 900 a month.
• 4:42
  Speaker 2: And Jake feels great about it.
• 4:43
  Speaker 1: He does. He breathes this massive sigh of relief. He
• 4:46
  Speaker 1: actually feels like he outsmarted the dealer and won the negotiation.
• 4:50
  Speaker 2: But the reality is that relief is incredibly expensive because
• 4:55
  Speaker 2: by turning that dial and extending the loan by two
• 4:58
  Speaker 2: full years, Jake is now paying nearly $ 4, 753 more in
• 5:01
  Speaker 2: total interest. Just in interest. Over the life of the loan, yeah.
• 5:07
  Speaker 2: I mean, he didn't get a better truck. He didn't
• 5:10
  Speaker 2: negotiate a lower purchase price. He literally just bought time.
• 5:13
  Speaker 3: Wow.
• 5:14
  Speaker 2: He discounted his future financial pain for immediate relief today.
• 5:18
  Speaker 2: And the statistics show this behavior is becoming the standard. Like,
• 5:22
  Speaker 2: a record 23.9% of all buyers are taking on loans
• 5:25
  Speaker 2: of 84 months or longer.
• 5:27
  Speaker 1: That is seven years of payments. That's insane.
• 5:31
  Speaker 2: It is. Meanwhile... The average down payments people are bringing
• 5:35
  Speaker 2: to the table have shrunk to just 11.6%.
• 5:38
  Speaker 1: You know, it sounds like this monthly payment dial is
• 5:41
  Speaker 1: actually just a financial treadmill. Like the dealer lowers the
• 5:44
  Speaker 1: incline so you feel like you're running easier, but they've
• 5:47
  Speaker 1: secretly added two more miles to your run.
• 5:50
  Speaker 2: That is a perfect analogy.
• 5:52
  Speaker 1: You're exhausted, you are running for much longer, and you
• 5:55
  Speaker 1: are paying so much more in the end just to
• 5:57
  Speaker 1: get to the exact same destination.
• 5:59
  Speaker 2: You're running longer and the machine is charging you by
• 6:02
  Speaker 2: the minute. And this actually leads us directly into the
• 6:06
  Speaker 2: second major trap.
• 6:07
  Speaker 1: Okay, what's that?
• 6:08
  Speaker 2: Because when you stretch these loans over seven years, it
• 6:10
  Speaker 2: creates a fatal math problem when you mix it with
• 6:13
  Speaker 2: an asset that rapidly depreciates.
• 6:15
  Speaker 1: Right, because cars are not houses. I mean, they lose
• 6:18
  Speaker 1: value the literal second you drive them off the lot.
• 6:21
  Speaker 2: Precisely. So when you bring a tiny down payment to
• 6:23
  Speaker 2: the table and sign a seven-year loan, your loan balance
• 6:27
  Speaker 2: stays very high for a very long time.
• 6:30
  Speaker 1: While the truck's value drops.
• 6:31
  Speaker 2: While the value of the truck plummets almost immediately. So
• 6:35
  Speaker 2: if we connect this to the bigger picture, this creates
• 6:38
  Speaker 2: a massive systemic issue when these buyers inevitably want to
• 6:42
  Speaker 2: trade in their vehicle for a new one before that
• 6:45
  Speaker 2: seven-year loan is fully paid off.
• 6:46
  Speaker 1: Which people do all the time.
• 6:48
  Speaker 2: All the time. And looking at the data from the
• 6:50
  Speaker 2: third quarter of 2026, nearly three in 10 trade-ins, so
• 6:53
  Speaker 2: that's 29.1%, are currently underwater.
• 6:58
  Speaker 1: Just so we're clear, meaning they owe significantly more to
• 7:01
  Speaker 1: the bank than the dealership is willing to give them
• 7:03
  Speaker 1: for the trade in value of the car.
• 7:05
  Speaker 2: Yes. And we aren't just talking about being upside down
• 7:08
  Speaker 2: by a few hundred bucks here.
• 7:09
  Speaker 1: How bad is it?
• 7:11
  Speaker 2: The average negative equity has hit $ 7, 107.
• 7:14
  Speaker 1: Oh, my God.
• 7:17
  Speaker 2: Yeah, that is the highest level we have seen in
• 7:19
  Speaker 2: at least a decade. And it's a full $ 1, 800 higher
• 7:23
  Speaker 2: than it was before the pandemic.
• 7:25
  Speaker 1: So what is the mechanism here? Because if I walk
• 7:28
  Speaker 1: in and owe seven grand more than my car is worth,
• 7:31
  Speaker 1: I feel like a rational person would say, well, I
• 7:32
  Speaker 1: guess I'm not buying a new car today. I'll just
• 7:34
  Speaker 1: keep driving my current one until it's paid off. Right.
• 7:38
  Speaker 2: A rational person might do that. But dealerships are in
• 7:40
  Speaker 2: the business of moving metal. They do not want you
• 7:42
  Speaker 2: to walk away.
• 7:44
  Speaker 1: So what do they do?
• 7:45
  Speaker 2: They offer to take that $ 7, 000 anchor of negative equity
• 7:49
  Speaker 2: and simply roll it into the new loan for the
• 7:51
  Speaker 2: new car.
• 7:52
  Speaker 1: Wait. You are essentially taking out a loan to pay
• 7:56
  Speaker 1: off your old loan. stacked on top of the loan
• 7:58
  Speaker 1: for the new car.
• 7:59
  Speaker 2: That's exactly what's happening.
• 8:01
  Speaker 1: Wait, financing a new car plus rolling over $ 7, 000 in
• 8:03
  Speaker 1: old debt. Let me just do the math on what
• 8:06
  Speaker 1: that actually looks like for the consumer.
• 8:08
  Speaker 2: It's not pretty.
• 8:08
  Speaker 1: Because in my research, buyers who are rolling over negative
• 8:12
  Speaker 1: equity are now financing an average of over $ 57, 000 at
• 8:15
  Speaker 1: an 8.1% APR. Yep. If they're financing that much at
• 8:20
  Speaker 1: over 8% over another seven years, that means they aren't
• 8:23
  Speaker 1: just paying for the car. They're paying over $ 16, 000 in
• 8:27
  Speaker 1: pure interest alone over the life of that new loan.
• 8:30
  Speaker 2: It's staggering.
• 8:31
  Speaker 1: That pushes their monthly payment near $ 1, 000.
• 8:34
  Speaker 2: It averages out to exactly $ 952 a month. Actually, I
• 8:38
  Speaker 2: was reading this insight from an industry analyst named Jessica Caldwell. Oh, yeah.
• 8:43
  Speaker 2: And she noted that consumers owing a grand or two
• 8:45
  Speaker 2: more than their cars are worth, you know, it isn't
• 8:47
  Speaker 2: the end of the world. It happens.
• 8:48
  Speaker 1: Sure, sure.
• 8:49
  Speaker 2: But seeing such a notable share of individuals affected at
• 8:52
  Speaker 2: the $ 10, 000 or even $ 15, 000 level of negative equity is
• 8:56
  Speaker 2: just nothing short of alarming.
• 8:58
  Speaker 1: I mean, you're basically financing ghost cars at that point.
• 9:02
  Speaker 1: Cars you don't even own anymore.
• 9:04
  Speaker 2: Exactly. You're paying interest on a car you traded in
• 9:06
  Speaker 2: and you'll be paying it for the next decade.
• 9:09
  Speaker 1: But wait, I have to push back here for a second.
• 9:11
  Speaker 2: Okay. Go for it.
• 9:12
  Speaker 1: Because I was looking through some Cox Automotive data while
• 9:14
  Speaker 1: prepping for this, and they reported that income growth was
• 9:17
  Speaker 1: actually resuming and that new vehicle affordability was, quote unquote,
• 9:21
  Speaker 1: holding steady.
• 9:22
  Speaker 2: Ah, yes. The holding steady narrative.
• 9:25
  Speaker 3: Right.
• 9:26
  Speaker 1: So how do we square that circle? If affordability is
• 9:29
  Speaker 1: supposedly holding steady, but almost a third of people are
• 9:32
  Speaker 1: rolling over massive amounts of negative equity, are people just
• 9:35
  Speaker 1: spending their entire paychecks on their driveways?
• 9:38
  Speaker 2: Well, that is the illusion of affordability at work.
• 9:40
  Speaker 1: What do you mean?
• 9:41
  Speaker 2: When industry reports say affordability is holding steady, they're often
• 9:44
  Speaker 2: just looking at median incomes versus average car payments in
• 9:47
  Speaker 2: this sterile vacuum. It just means the ratio didn't get
• 9:51
  Speaker 2: exponentially worse that specific month.
• 9:53
  Speaker 1: Oh, I see.
• 9:54
  Speaker 2: But if we look at the true affordability threshold for
• 9:57
  Speaker 2: a real household budget, the numbers are terrifying. A healthy
• 10:00
  Speaker 2: rule of thumb is a 17.5% after-tax income threshold for
• 10:06
  Speaker 2: all transportation costs.
• 10:09
  Speaker 1: Okay, 17.5%. That includes the loan, insurance, gas, maintenance?
• 10:13
  Speaker 2: Yes, everything.
• 10:14
  Speaker 1: Okay.
• 10:14
  Speaker 2: And that seems reasonable, right?
• 10:15
  Speaker 1: Yeah, that seems totally reasonable. It is.
• 10:17
  Speaker 3: But if we apply that, a household making $ 100, 000 a
• 10:21
  Speaker 3: year is currently spending a shocking 24% of their take-home
• 10:25
  Speaker 3: pay just to drive and maintain two average-used cars.
• 10:30
  Speaker 2: 24%? 24%.
• 10:31
  Speaker 1: On a six-figure salary? Yep. And they aren't even driving
• 10:36
  Speaker 1: brand new luxury trucks. They're driving used cars.
• 10:38
  Speaker 2: Exactly. And it gets exponentially worse as you go down
• 10:40
  Speaker 2: the income ladder.
• 10:41
  Speaker 1: I can imagine.
• 10:42
  Speaker 2: Like a middle income household making $ 64, 000 a year spends
• 10:46
  Speaker 2: 38% of their take home pay to drive those same
• 10:50
  Speaker 2: two average used cars.
• 10:51
  Speaker 1: That's nearly 40% of their money vanishing into gas tanks
• 10:54
  Speaker 1: and auto loans.
• 10:56
  Speaker 2: The baseline reality is that affordability is a complete illusion.
• 10:59
  Speaker 2: Consumers are entirely over leveraged and the whole system is
• 11:03
  Speaker 2: just running on fumes.
• 11:04
  Speaker 1: Well, if you're spending nearly 40% of your income on transportation,
• 11:08
  Speaker 1: the logical next step in my mind is a massive
• 11:10
  Speaker 1: wave of defaults.
• 11:11
  Speaker 2: You'd think so.
• 11:12
  Speaker 1: Right. You are one unexpected medical bill or, you know,
• 11:16
  Speaker 1: one broken water heater away from completely missing your car payment. Exactly.
• 11:20
  Speaker 1: But you'd assume that rolling over 15 grand in negative
• 11:22
  Speaker 1: equity at 8% interest would cause an immediate catastrophic wave
• 11:26
  Speaker 1: of bankruptcies. But when you look at the macro data,
• 11:34
  Speaker 1: The system hasn't entirely collapsed yet. Why?
• 11:37
  Speaker 2: That is the multi-trillion dollar question. And to answer it,
• 11:41
  Speaker 2: we have to look really closely at the delinquency data.
• 11:43
  Speaker 1: Okay.
• 11:44
  Speaker 2: Because the headline numbers do look bad. The 60-plus day
• 11:47
  Speaker 2: delinquency rate hit 1.68% overall, which is the highest since 2008. Wow.
• 11:54
  Speaker 2: And for subprime borrowers, you know, the riskiest loans, it
• 11:57
  Speaker 2: hit a massive 6%.
• 11:59
  Speaker 1: Which sounds like a tidal wave of people going broke.
• 12:02
  Speaker 2: It does. But a nuanced analysis of the Federal Reserve
• 12:05
  Speaker 2: data reveals that this headline number is actually masking what's
• 12:08
  Speaker 2: really happening.
• 12:09
  Speaker 1: Okay, how so?
• 12:10
  Speaker 2: The surge in the delinquency rate is not primarily a
• 12:13
  Speaker 2: wave of newly broke borrowers entering the system.
• 12:16
  Speaker 1: Wait, then where are these massive delinquency numbers coming from?
• 12:19
  Speaker 2: We have to introduce this economic concept called stock versus flow.
• 12:23
  Speaker 1: Stock versus flow. Okay.
• 12:25
  Speaker 2: Imagine a bathtub. The flow is the new water pouring
• 12:29
  Speaker 2: in from the faucet. In this case, those are the
• 12:31
  Speaker 2: newly delinquent borrowers who just missed their first payment.
• 12:34
  Speaker 1: Got it.
• 12:35
  Speaker 2: The stock is the water already sitting in the tub.
• 12:38
  Speaker 2: So the existing delinquent loans that just haven't been resolved.
• 12:41
  Speaker 1: Okay, I'm with you.
• 12:42
  Speaker 2: Right now, the flow of newly struggling consumers has actually
• 12:46
  Speaker 2: been relatively stable. The bathtub is overflowing because the drain
• 12:50
  Speaker 2: is plugged.
• 12:51
  Speaker 1: Oh, I see.
• 12:52
  Speaker 2: The delinquency rate is artificially high because of the stock
• 12:55
  Speaker 2: of existing delinquents and a group the industry calls re-defaulters.
• 13:00
  Speaker 1: Redefaulters. Meaning people who default multiple times.
• 13:04
  Speaker 2: Exactly. These are people who fall behind on their payments,
• 13:07
  Speaker 2: and instead of taking the car, the lender grants them
• 13:10
  Speaker 2: some kind of leniency or forbearance.
• 13:12
  Speaker 1: Oh, like they did during the pandemic.
• 13:14
  Speaker 2: Yes, it became a massive habit for lenders then. So
• 13:17
  Speaker 2: the borrower temporarily returns to good standing on paper, but
• 13:21
  Speaker 2: because their fundamental financial situation hasn't actually changed, they immediately
• 13:25
  Speaker 2: fall behind again.
• 13:27
  Speaker 1: And the lenders just let it happen.
• 13:29
  Speaker 2: Yeah, lenders are actively keeping these loans in a state
• 13:31
  Speaker 2: of default for much longer periods before finally charging them
• 13:35
  Speaker 2: off or sending the tow truck to repossess the car.
• 13:38
  Speaker 1: See, here's where it gets really interesting to me. Why
• 13:41
  Speaker 1: on earth would lenders keep these ghost defaults on the books?
• 13:45
  Speaker 1: Is it just a game of financial hot potato?
• 13:48
  Speaker 2: It absolutely is.
• 13:49
  Speaker 1: Because think about it. If they actually send the tow
• 13:52
  Speaker 1: truck to repossess the car, they have to take it
• 13:54
  Speaker 1: to auction. And we just established... that the car is
• 13:58
  Speaker 1: heavily depreciated and underwater. Right. So if the lender sells
• 14:02
  Speaker 1: the car at auction, they have to officially admit on
• 14:05
  Speaker 1: their balance sheets that this depreciating asset does not cover
• 14:09
  Speaker 1: the massive loan balance they're owed.
• 14:12
  Speaker 2: Exactly.
• 14:13
  Speaker 1: That turns the remaining debt into an unsecured deficiency balance
• 14:16
  Speaker 1: that they will probably never, ever collect. So by simply
• 14:20
  Speaker 1: not repossessing the truck, they can just pretend the loan
• 14:23
  Speaker 1: is still a performing asset on a spreadsheet.
• 14:26
  Speaker 2: You've diagnosed the exact pathology of the current market. Lenders
• 14:29
  Speaker 2: are delaying the inevitable because realizing the loss destroys their
• 14:33
  Speaker 2: balance sheets.
• 14:34
  Speaker 1: That's terrifying. It is.
• 14:36
  Speaker 2: And eventually reality catches up. You cannot pretend a bad
• 14:39
  Speaker 2: loan is a good asset forever. And we just saw
• 14:42
  Speaker 2: this happen with a major buy here, pay here subprime
• 14:44
  Speaker 2: lender called Tricolor Holdings.
• 14:46
  Speaker 1: Oh, right. And for those who haven't dealt with them,
• 14:49
  Speaker 1: buy here, pay here lots are essentially acting as both
• 14:52
  Speaker 1: the car dealer and the bank for high risk buyers, right?
• 14:55
  Speaker 2: That's right.
• 14:55
  Speaker 1: They aren't relying on Chase or Bank of America to
• 14:58
  Speaker 1: fund the loan. They fund it themselves. Exactly.
• 15:00
  Speaker 2: Their entire business model is selling financing to desperate people.
• 15:05
  Speaker 2: The car is really just the vehicle for the loan.
• 15:07
  Speaker 3: Wow.
• 15:08
  Speaker 2: And Tricolor recently declared bankruptcy because the math simply collapsed.
• 15:12
  Speaker 2: They kept rolling over these bad loans, playing hot potato
• 15:16
  Speaker 2: with ghost defaults, but their repossessions eventually hit a rate
• 15:19
  Speaker 2: that was 16.6 times the industry average. 16.6 times. Yes.
• 15:27
  Speaker 2: You can only delay the inevitable for so long before
• 15:29
  Speaker 2: the music stops. And when Tricolor finally had to start
• 15:33
  Speaker 2: collecting the cars, the losses were completely insurmountable.
• 15:37
  Speaker 1: So this brings us to the most crucial point of
• 15:39
  Speaker 1: our discussion today. This is the whole so what factor.
• 15:42
  Speaker 2: Right.
• 15:43
  Speaker 1: Why should you, the listener, care about any of this?
• 15:46
  Speaker 1: Maybe you drive a paid off 2012 Honda Civic. Maybe
• 15:50
  Speaker 1: you walk to work. Exactly. Why do you care if
• 15:53
  Speaker 1: some guy named Jake is underwater on a seven-year loan
• 15:56
  Speaker 1: for an $ 80, 000 truck. Or if a buy-here-pay-here lot in
• 15:59
  Speaker 1: Texas goes bankrupt.
• 16:02
  Speaker 2: Well, you care because Jake's debt isn't just sitting in
• 16:04
  Speaker 2: a dusty file cabinet at the local dealership. This debt
• 16:08
  Speaker 2: doesn't stay local. It has been weaponized on Wall Street. Oh, man.
• 16:12
  Speaker 1: So Wall Street is scooping these auto loans up and
• 16:15
  Speaker 1: packaging them into securities just like they did with home mortgages.
• 16:19
  Speaker 2: That is exactly what is happening. Through something called subprime
• 16:22
  Speaker 2: auto ABS, or asset-backed securities.
• 16:25
  Speaker 1: Okay, how does that work?
• 16:26
  Speaker 2: It works like this. Lenders take thousands of these high-risk
• 16:29
  Speaker 2: negative equity 84-month auto loans and pool them together into
• 16:32
  Speaker 2: a massive financial package.
• 16:34
  Speaker 1: Right.
• 16:35
  Speaker 2: They then sell that package as bonds to global investors.
• 16:38
  Speaker 2: The lender gets an immediate payout, removing the risk from
• 16:41
  Speaker 2: their immediate books, and the investors get a slice of
• 16:44
  Speaker 2: the monthly payments Jake and everyone else are making.
• 16:47
  Speaker 1: This sounds terrifyingly familiar. I mean, the mechanics are virtually
• 16:51
  Speaker 1: identical to the lead up to the 2008 housing crisis.
• 16:55
  Speaker 2: They really are. Wall Street is taking high risk subprime debt,
• 16:59
  Speaker 2: packaging it up and selling it as a safe yield
• 17:02
  Speaker 2: to investors who are just desperate for returns.
• 17:05
  Speaker 1: And the risk?
• 17:07
  Speaker 2: The underwriting standards have become so detached from reality that
• 17:10
  Speaker 2: Wall Street models are currently assuming that up to 42%
• 17:14
  Speaker 2: of the customers in these subprime pools could default, and
• 17:17
  Speaker 2: their bottom line would supposedly remain unaffected.
• 17:20
  Speaker 1: Wait, 42%? How can any financial model assume nearly half
• 17:25
  Speaker 1: the people will stop paying and call that a safe investment?
• 17:28
  Speaker 2: Because of a process called tranching and credit enhancements.
• 17:31
  Speaker 1: Tranching, right?
• 17:32
  Speaker 2: Yeah. Wall Street basically structures the bond like a waterfall.
• 17:36
  Speaker 2: The safest investors at the top get paid first, and
• 17:38
  Speaker 2: the riskier investors at the bottom agree to take the
• 17:40
  Speaker 2: first losses.
• 17:41
  Speaker 1: So the rating agencies just stamp it as safe. Exactly.
• 17:45
  Speaker 2: By structuring it this way, rating agencies stamp the top
• 17:48
  Speaker 2: tiers as AAA safe, even though the underlying water feeding
• 17:52
  Speaker 2: the waterfall is entirely toxic.
• 17:54
  Speaker 1: So what does this all mean for the listener? I mean,
• 17:57
  Speaker 1: in 2008, when the housing bubble burst, you at least
• 17:59
  Speaker 1: had a physical piece of land.
• 18:01
  Speaker 2: Right. The houses still existed.
• 18:03
  Speaker 1: Land doesn't go anywhere. It might take a decade or two,
• 18:05
  Speaker 1: but it eventually recovers its value. But with cars, the
• 18:09
  Speaker 1: underlying asset backing these trillions in Wall Street securities is
• 18:14
  Speaker 1: literally a hunk of metal that is rusting in a
• 18:16
  Speaker 1: driveway and depreciating by the mile.
• 18:19
  Speaker 3: Yep.
• 18:19
  Speaker 2: It only goes down in value.
• 18:21
  Speaker 1: So if these bonds burst, who is left holding the bag?
• 18:25
  Speaker 1: Does the average person's retirement fund take the hit for
• 18:28
  Speaker 1: someone else's 84-month truck loan?
• 18:31
  Speaker 2: Unfortunately, yes. This is the direct connection to the listener.
• 18:34
  Speaker 2: Pension funds and retirement accounts are heavily invested in these
• 18:38
  Speaker 2: private credit markets in a search for yield.
• 18:40
  Speaker 1: Really? Pension funds?
• 18:42
  Speaker 2: Oh, yeah. For example, some of the data I reviewed
• 18:45
  Speaker 2: points out that the Arizona state retirement system currently has
• 18:48
  Speaker 2: 15% of its portfolio in private credit and another 7%
• 18:52
  Speaker 2: specifically in distressed debt.
• 18:56
  Speaker 1: Wow.
• 18:56
  Speaker 2: And CalPERS, the massive California public employee retirement system, has
• 19:01
  Speaker 2: passed a 5% investment in these private credit spaces.
• 19:04
  Speaker 1: That's a huge amount of money. It is.
• 19:07
  Speaker 2: If the subprime auto ABS market collapses because those trucks
• 19:11
  Speaker 2: in that Texas graveyard aren't worth the paper the loans
• 19:14
  Speaker 2: are printed on, the shockwaves won't just hit big banks.
• 19:17
  Speaker 1: They'll hit normal people.
• 19:18
  Speaker 2: They will hit the retirement funds of teachers, firefighters, and
• 19:22
  Speaker 2: everyday people who thought their money was safely tucked away.
• 19:24
  Speaker 2: It is a systemic risk masking itself as a consumer
• 19:28
  Speaker 2: choice problem.
• 19:29
  Speaker 1: That is just incredibly sobering. I mean, it transforms this
• 19:32
  Speaker 1: from a story about a guy making a bad budgeting
• 19:35
  Speaker 1: decision at a car lot to a story about systemic
• 19:38
  Speaker 1: global financial fragility.
• 19:40
  Speaker 2: It really is vital information to understand, because once you
• 19:44
  Speaker 2: see the heavy machinery operating behind the illusion of affordability,
• 19:48
  Speaker 2: you can make better, more difficult decisions. choices to protect yourself.
• 19:52
  Speaker 1: Which is exactly where we should pivot for the end
• 19:54
  Speaker 1: of this episode. Let's talk about the individual. How does
• 19:57
  Speaker 1: the listener protect themselves from getting sucked into this machine?
• 20:00
  Speaker 2: Good question.
• 20:02
  Speaker 1: Based on all the research we've unpacked today, the first
• 20:04
  Speaker 1: and most vital piece of actionable advice is to buy
• 20:08
  Speaker 1: for the job you actually do, Not the aesthetic you want.
• 20:11
  Speaker 2: A hundred percent.
• 20:13
  Speaker 1: Because the data shows that only about one-third of truck
• 20:15
  Speaker 1: owners actually use their trucks for towing or hauling on
• 20:17
  Speaker 1: a regular basis.
• 20:18
  Speaker 2: Right. A truck is a specialized piece of heavy equipment,
• 20:21
  Speaker 2: and you pay a massive premium for that capability. AAA
• 20:25
  Speaker 2: data shows that a half-ton pickup costs $ 82, 500 over five
• 20:30
  Speaker 2: years just to own and operate.
• 20:31
  Speaker 1: That's just wild.
• 20:32
  Speaker 2: It breaks down to about $ 1. 10 for every single mile
• 20:34
  Speaker 2: you drive. That is $ 35, 000 more expensive than owning a
• 20:39
  Speaker 2: standard sedan over the same five-year period.
• 20:42
  Speaker 1: So if you don't need the tool, do not pay
• 20:45
  Speaker 1: the tool tax.
• 20:45
  Speaker 2: Exactly.
• 20:46
  Speaker 1: And when you do eventually have to go to the dealership,
• 20:49
  Speaker 1: you have to dictate the terms of the conversation. Do
• 20:51
  Speaker 1: not let them touch the monthly payment dial.
• 20:54
  Speaker 2: Never.
• 20:54
  Speaker 1: Negotiate the total out-the-door price of the vehicle first. Keep
• 20:58
  Speaker 1: the loan short, five years maximum, ideally less.
• 21:01
  Speaker 2: And put real money down.
• 21:02
  Speaker 1: Yes, put real actual money down so you aren't immediately
• 21:05
  Speaker 1: underwater the second you pull off the lot. And most importantly,
• 21:09
  Speaker 1: keep the car after it is paid off.
• 21:11
  Speaker 2: That's the real key.
• 21:12
  Speaker 1: The real financial value of a vehicle is extracted in
• 21:15
  Speaker 1: those years where you are driving it without sending a
• 21:17
  Speaker 1: check to a bank every single month.
• 21:19
  Speaker 2: Because those are the years where you actually build wealth
• 21:22
  Speaker 2: rather than just endlessly treading water on the dealership's financial treadmill.
• 21:26
  Speaker 1: Absolutely. Well, we have covered a massive amount of ground
• 21:30
  Speaker 1: today on Beyond Infographics, from the micro-level psychology of a
• 21:34
  Speaker 1: car dealership to the mechanics of ghost defaults, all the
• 21:38
  Speaker 1: way up to the macro-level risks sitting inside state pension funds.
• 21:41
  Speaker 2: We have. But, you know, this actually raises an important question,
• 21:45
  Speaker 2: one that looks even further down the road, past the
• 21:47
  Speaker 2: current immediate crisis.
• 21:49
  Speaker 1: Oh, yeah.
• 21:50
  Speaker 2: We have talked a lot about the math of the
• 21:52
  Speaker 2: loans and the depreciation of the metal, but what happens
• 21:54
  Speaker 2: to the underlying collateral when the fundamental technology of the
• 21:58
  Speaker 2: vehicle changes?
• 21:59
  Speaker 1: Wait, what do you mean?
• 22:00
  Speaker 2: Well, think about the massive shift happening right now with
• 22:03
  Speaker 2: self-driving technology and the transition to electric vehicles over the
• 22:06
  Speaker 2: next decade.
• 22:07
  Speaker 1: Right. It's moving fast.
• 22:08
  Speaker 2: As those technologies mature and become the new standard, what
• 22:12
  Speaker 2: happens to the residual value of these massive traditional gas-powered
• 22:16
  Speaker 2: trucks when they reach year six or seven of an
• 22:18
  Speaker 2: 84-month loan? Oh, wow.
• 22:20
  Speaker 1: I hadn't even thought of that.
• 22:22
  Speaker 2: Will the physical collateral backing billions of dollars in Wall
• 22:24
  Speaker 2: Street securities become entirely technologically obsolete before those loans are
• 22:29
  Speaker 2: even fully paid off?
• 22:30
  Speaker 1: That is a terrifying thought to leave off on, but
• 22:33
  Speaker 1: a perfect one. Thanks again for tuning into this episode
• 22:36
  Speaker 1: of Beyond Infographics. And remember to leave us that five-star
• 22:39
  Speaker 1: rating if you learned something new today. See you next time.