Auto Loans and Car Repair Costs Analysis

The cost of owning a car, including depreciation, maintenance, and repair, is a significant financial burden for consumers, exacerbated by high auto loan debt.

### The State of the U.S. Auto Industry: From Car Buying to Maintenance and Repair
* 🚗  A car is one of the biggest purchases a person will make in their lifetime, with more than 100 million Americans having an auto loan and auto loan debt in the U.S. currently at **$1.5 trillion, a record high**.
* 💸  Cars start losing value right away, with the average depreciation being about **10% as soon as you drive them off the lot**. Luxury cars lose value the fastest, sedans lose value **faster than SUVs**, and cars from brands with strong reputations for quality and reliability **depreciate more slowly**.
* 📈  In 2020, used vehicle values increased due to factors like reduced new car supply, leading to a "**pandemic price bump**." While this has somewhat normalized, cars are still holding on to about **60% of their value after three years**, a **10% increase from pre-pandemic times**.
* 🔒  The auto loan industry has faced criticism for alleged discriminatory and illegal practices, such as **charging minority borrowers higher rates**. The lack of transparency, especially in **dealer markups**, has been a common concern among consumers.
* 🛠️  The cost of vehicle repair is rising due to factors like **heavier and more complex vehicles**, **new technology**, and a **shortage of skilled technicians**. Repair costs have been increasing at a rate **higher than the overall inflation**.
* 🔋  While EVs are expected to have lower maintenance and repair costs in the long term due to **fewer moving parts**, the high costs seen today are often attributed to the **luxury nature of current EV models** and the challenges of **servicing new technology**.
* 🏷️  The average transaction price of new cars is **almost 30% higher than pre-pandemic levels**, making it difficult for many consumers to afford a new vehicle.
* 🏦  The Federal Reserve's interest rate hikes have led to higher auto loan interest rates, with the average rate for a loan on a new vehicle reaching a **15-year high of 6.58%** in the first quarter of 2023.
* 🛡️  To protect themselves in the auto market, consumers are advised to **shop around for loans**, **check their credit scores**, and **seek transparency in the lending process**. Voting for policies that protect consumers is seen as a **key long-term solution**.

A car is one of the
biggest purchases a person will make in their
lifetime. But unlike a house, a car
starts losing value right away. More than 100 million
Americans have an auto loan, and auto loan debt
in the U.S. is currently at $1.5
trillion, a record high. If cars are to be
affordable, they must also be affordable to
maintain, and they must be affordable to repair. A car is one of the
biggest purchases a person will make in their
lifetime. But unlike a house, a car starts
losing value right away, literally as you drive it
off the lot. You can keep it spotless
inside and out, give it regular maintenance, and
protect it against every ding, dent, and scratch,
and it'll still lose value. Depreciation, the
rate at which that happens, is one of those
numbers everyone in the automotive world thinks
about.

Consumers, automakers, and the massive used car market, which makes up somewhere around 40 million sales each year, more than double the sales of new cars. But in 2020, something strange started happening, turning the car market upside down. Used vehicles were actually increasing for about two years, which we've never seen anything like that for the market. A lot of those trends have abated since, but those odd times led to lasting changes in the post-pandemic world. There are fewer cars to go around, and prices for both new and used vehicles are still high. That is unlikely to change for a while. Car buyers want their cars to hold value because it will help them get their money back if they decide to sell it at some point, whether they're trading it for a new one or not. In addition, a lot of car purchases are financed.

which means if the resale
value of the car dips too low, a buyer could end up
paying more for the car than it is worth. That is what it means to
be underwater on a loan. Similarly, automakers
want their cars to hold as much value as possible,
in part because they know customers care about
that. Depreciation also affects how automakers
charge for leases, which are an effective way of
drawing in new customers but are expensive to run
for automakers. Every car depreciates
differently. Luxury cars lose value
the fastest, sedans lose value faster than SUVs,
and cars from brands with strong reputations for
quality and reliability depreciate more slowly. But on average, cars lose
about 10% of their value as soon as you drive them
off the lot. There are a few reasons
for this. One is that we like new
cars. We just like being in a
brand new car and it's not

brand new once you take it off the lot. The 10% loss in value corresponds almost exactly with another specific number. And that number, say some insiders, is the primary reason a vehicle's value drops that much in the first day of ownership. Incentives. Most new cars are sold with incentives at one point or another when first purchased by a consumer. An incentive is a discount on a vehicle provided by a manufacturer or dealer to induce people to buy it. Prior to the pandemic, the average incentive on a vehicle was about 10%. That means on average, new vehicles were sold for about 90% of their MSRP or manufacturer's suggested retail price. And so that car you bought seems to drop by 10% in value the moment you drive it off the lot. What is actually happening is that the market is pricing in the probability you received a 10% discount or incentive on that vehicle, even if

you didn't. It's kind of a messy part
of how we do things, because we can't go back
and see what the average transaction price is. But
we know historically what MSRP is on a year make
model combination. And so we can go see the
value of that car against its original MSRP. Another factor, when you
sell your car, chances are you are often selling or
trading it back in at a dealership. The dealer is
going to offer you the wholesale price on the
vehicle, what the vehicle would fetch at a
wholesale market like a dealer auction. Those prices are always
lower than the retail price. What the dealer
would sell it to another consumer for, as there
are additional costs and margin that need to be
absorbed. That lower wholesale value also
makes up part of the depreciation consumers
see and feel. Higher priced cars have
higher markups or

variants, so there is an
even bigger gap between their retail price and
wholesale value. But there is a third
reason why cars lose value so quickly. An economist
named George Akerlof won a Nobel Prize for coming up
with this idea. Akerlof's famous paper is
called The Market for lemons, and the idea
works like this. In any market, there are
information asymmetries. This means sellers know
more about the product they are selling than
potential buyers do. If you have a car and it's
like three days old or three months old and you
sell it, why would you do that? If the car was a
good car, you're probably doing it because the car
is a lemon. From that first day drop,
a car's value slides further about another 10%
throughout the first year. In the second and third
year, it drops again and again. Estimates of how
much can vary depending on

who you talk to and what
they are measuring. Again, a car will fetch
less money on a wholesale market than it will on a
retail market, and maybe during a transaction
between a private buyer and seller. In normal
times, a steady supply of new vehicles year after
year is enough to drive the value of any given
car down. Add to that the normal
wear and tear that comes with ownership. It's like your tires wear
out, you may get dings in your door over time. You know, maybe there's a
crack in your windshield. Maybe your kid spills
juice in the back seat and the you know, the
upholstery is messed up and all of that's just
wear and tear on a car, which means that it's not
worth what it originally was or to put it back in
that state, someone would have to invest money to
recondition the car back. After about three years,
vehicles, on average,

historically held about 50% of their value. Three years is a kind of benchmark for the used car market, because that is the typical term for a lease, and leased vehicles are a large source of vehicles for the used market. There are exceptions to this, of course. Exotic cars, collector cars, limited editions. Any car that is highly valuable won't depreciate normally and can even appreciate. It is rare for a car to appreciate or increase in value, but those are some that do. You know if you like enough to buy it a new, you might actually sell it for profit. Some OEMs are trying to fight that. I think Tesla just had in their agreement and they just pull it back again. So you cannot resell their Cybertruck for a year. At one point, Tesla even threatened to sue resellers for $50,000.

It reportedly removed the
clause from its user agreement in mid-November
2023, just days before the truck's release, and then
reinstated it when Cybertrucks started
popping up for sale on the internet. This was also
true of exotics like the Ford GT. Ford sued
wrestler and actor John Cena for reselling his
Ford GT less than a year after purchasing during
the Covid-19 pandemic. As people stayed away from
public transportation and flying, used car values
skyrocketed by somewhere around 30%. Take your $10,000 used
car, but by the end of that year, it was
$13,000. So people were buying
cars, driving them for a year, and then selling
them for profit. It's still your economy
101: strong demand, short supply, prices went up. It was just to the
extreme that we've never seen before. On top of it all,
production shutdowns and

supply chain and chip shortages limited the number of cars in the marketplace. Automakers weren't leasing or selling cars into fleets, such as rental agencies. The few cars they were selling were higher-priced vehicles that help maximize profits. There were no incentives. New vehicle supply didn't meet demand, though, which drove customers into the used market. Even rental companies, which had sold off a lot of their fleets at the beginning of the pandemic, were buying used cars at auction to satisfy their own customers. We had two very distinct periods of vehicle appreciation, which is unheard of. You know, we had prices that moved up into the spring and early summer in 2021, and then they kind of went sideways. And then we got to August, September, and they moved up again. And so we ended that year with vehicle prices and values that were much, much higher than what

anyone was used to. Fewer new cars in 2020
means fewer used cars in 2023 and 2024. That pandemic price bump
has evened out a bit, but cars are holding on to
about 60% of their value after three years, a 10%
increase from pre-pandemic times. We expect some normal,
more normal seasonality, more normal depreciation,
but the baseline for prices is going to be
elevated. So we've reset prices at a
high level. A lot of the goods and
materials that go into producing a car are still
sitting at high levels, even though inflation is
coming down. We're not in a period of
deflation. It's highly unlikely that
we're going to go back to having lower car
values. The Federal Reserve has
raised interest rates in order to rein in
inflation, and that has made borrowing more
expensive. In the second

quarter of 2023, almost
80% of new cars were financed, and more than
30% of used ones. Incentives have increased,
some from the lows they're in, but not nearly enough
to offset. The average new car price
right now is almost 30% higher than it was
pre-pandemic time periods. New vehicle production and
sales are also about 2 million units below the
record 17.6 million units hit in 2016. That year, the average
transaction price was around $34,077. Average transaction
prices in October 2023 were around $48,126. A lot of analysts think
that as long as prices stay that high, it will
be hard to hit those record volume numbers. And that might be just
fine for automakers. A lot of the OEMs have
said publicly they don't want to sell that level
of new cars. You know, that they're
they're trying to be

smarter about producing
and over-producing cars, and having to over-
incentivize cars to keep their profits high. But this means that there
will be fewer cars available. A new car
might only be sold once, but a used car can be,
and often is, sold several times. Constraining the
supply of new cars puts a cycle in motion, where
the supply of used cars is constrained over and over
again. One of the perhaps hidden
benefits of depreciation is that it creates a pool
of cheap, used cars for buyers who can't afford
anything else. The price of a new car in
October 2023 was close to $50,000. That is luxury
territory. It took almost 39 weeks,
with a median American income, to purchase a new
vehicle. That is down from a
record high of more than 41 weeks in December
2022, but still higher than the roughly 33 weeks
in October 2019.

It's the most important factor out there in the marketplace for people. I think there's a lot of consumers that need a replacement car that have been trying to do everything they can to not do that, because they don't want to finance the car, and they don't have, you know, $25,000 or whatever to go just pay for it outright. There is a market out there for an OEM that wants to build a more basic product that's new and maybe decontented a little bit, too. And whoever wants to go after that, I think somebody probably will. I think they'll do really well because that's what consumers need and want. Whether it's a sports car you're excited to rev up for a nice weekend drive or a safe minivan filled with entertainment features for your children, cars are everywhere. There are more than 275 million vehicles on the

road in the United
States. People, they equate cars
here with freedom. There is this way in
which it gives us an ability to explore and 
see and expand our lives. But in recent years,
owning a car has gotten expressive, really
expensive. More than 100 million
that have an auto loan and auto loan debt in the
U.S. is currently at $1.5 trillion, a record high. Outside of purchasing
your first home, a new car or an auto is the second
largest purchase for most people. Given the
transaction prices and vehicle prices today,
financing is required buy these vehicles. In 2023, 
the average monthly auto loan amount for a new
vehicle is $725, up from $650 in 2022. The average monthly
payment for a used vehicle is $516 in 2023, up 2%
from the prior year. Meanwhile, consumers
don't typically cast their

car buying experience in a positive light. It was a very quick process, and I did feel like they just wanted me to sign at the bottom line as quickly as possible. For years, complaints and lawsuits have been popping up left and right against lenders for alleged discriminatory and illegal practices. It undermines my trust. Our number one priority is to our consumers. And so we have put a variety of processes in place to ensure that is the case. So what's happening in the auto loan industry and what can consumers do to make sure they're protected? Just like any other loan, an auto loan is a lump sum of money you're given to purchase a car, money you're borrowing and have to pay back over time. Once you've been approved for a loan, often including a down payment, you can drive your new or used car out of the lot, but it's only yours as long as you make monthly payments, with interest.

of course. Take 32-year-old Sean Miller, for example. In 2019, he bought a new car for just more than $48,000. He put down about $10,000, locked in a 3.89% interest rate for a 72-month term, and now makes monthly payments of about $590. By the time the loan is paid off, he'll have paid nearly $5,000 in interest. And then there's a caveat. Until you fully pay back the loan, the lender holds the title and can repossess the car at any time if you fall behind on your payments. Noelle Saldana was at work when her husband called to say their 2011 Acura had been stolen right in front of their East Orange apartment building, with their one-year-old daughter, Hannah, in the back seat. It's got back to working.

I got a little behind in
my payments. Repo guys going into your
driveway the middle of the night and taking your
car. That's one way they have these switches that
can turn the cars off. There are direct and
indirect lenders. A direct lender would be
your local bank, credit union, or an online
lender. Once you're approved for a loan
through a direct lender, you can then head to the
dealership and shop around for your car, just like a
cash buyer would. As for indirect, that's
when you go to a dealer and they provide you with
financing options as you're buying a car. For example, you might be
at a Subaru dealer and you just picked out the
perfect car for your family. The dealer sends
your financial information to Chase. Chase checks
your credit and other financial factors, and
provides the dealer with an interest rate and loan
terms.

Then the dealer presents you with their interest rate and terms, and if you agree, you sign and get to drive away with your new car. It's more of an all-in-one process. And about 80% of auto loans are estimated to be indirect. Now, regardless of if you're choosing a newer used car, or direct or indirect lending, one of the most important factors that will determine the interest rate and loan terms you're offered is how confident the lender is in your ability to pay back that loan. They look at your assets, liabilities, income, expenses, and most importantly, your credit score. Our primary goal is to put customers in financial products that they can afford. Chase Auto tells us they serve as consumers with a credit score of 620 and higher, with the average credit score typically in the 700 range. Toyota Financial Services holds primarily a prime

credit portfolio, meaning they service those with very high credit scores. They tell us the average is 744. But we do support a larger spread of business, and those with maybe lower FICOs may come to the table with larger down payments to help that affordability. Toyota is currently the market leader for auto loans and leases. In 2022, 5.3% of total auto financing came from Toyota Financial Services, 4.4% came from Capital One Auto Finance. The partnership that we have with the divisions is what makes us extremely successful. We've got a concentration and a focus on our customers and our guests and our dealership partners. According to Toyota, the company's financial services business consists primarily of providing financing to their own dealers and their customers. The business also provides mainly retail installment credit and leasing sales revenue for the financial services business. For fiscal year ending in March 2023 increased by

nearly 21% to ¥2,809.6
billion from 2022, which is about $19.8 billion. That's compared to its
much larger automotive operations business that
saw an 18% increase in sales revenue in 2023
from the year prior. The Japanese automaker is
the largest in the world. The industry is going
strong. We're continuing to
recover. Consumers are out there buying vehicles. The demand is there and
the lending is there. They are losing their 
jobs, and these firms are going to go out of
business and he's — global chip shortage still
hampering car production – the rate of inflation
soaring to its highest level in over 30 years. More than half of auto
financing is by non-bank finance companies, such
as the financing arms of automakers. These lenders
typically rely on short-term funding markets for
their own financing. So with volatile markets,
especially the case of

short-term funding markets drying up during the global financial crisis, the past couple of decades have kept auto lenders on their toes, to say the least. We went from a time of easy credit to now a time where we're more credit constrained, and because of the risk of inflation, even more credit constrained, right. Because of the interest rates that have gone way up, that is a huge problem. In the first quarter of 2023, the average interest rate for a loan on a new vehicle reached 6.58%, up from 4.1% in 2022. That's an about 15-year high. Average car prices are also at a high. That's partly due to supply chain shortages, higher demand, and inflation. That also means Americans take on larger loans at a higher interest rate. In the past ten years, outstanding loan debt has doubled, and auto loan debt in the U.S.

is at a record high. Younger Americans are
also more in trouble than they've ever been in. In 2022, $20 billion in
Gen Z and millennial debt had fallen into serious
delinquencies. I'm paying a ton of money
right now for a car that I don't really need. I've
been struggling and struggling to sell it. If
I were to sell it today, it would probably be at a
$10,000 to $15,000 loss. Miller rented his car out
until someone crashed it. He's tried to sell it,
but hasn't received an offer that makes
financial sense. It's going to be at least
another 3 or 4 years of owning the car before I'm
able to pay off the loan. This is something that
right now is preventing me from being able to save
up in order to start a family. He's not alone with his
concerns, and these

changes are hitting lower income consumers. Those with credit scores below 620 the hardest. The Fed's interest rate hikes are squeezing them out of the market. What we're seeing is another manifestation of what we saw during the subprime crisis, which is that lower income people lost their homes and lower income people are having difficulty getting cars, getting mortgages. And they're also at higher risk of default. Being priced out of the market is just one reason Americans have a bone to pick with the auto loan industry. Besides the notoriously unpleasant car-buying experience, there's also been more complaints and lawsuits related to alleged discriminatory and illegal practices by auto lenders than we have time to get into. A lot of the auto sales people that I've seen personally, not to say all, but definitely a lot of them are doing it very much in a rushed way in order to get a high markup on a car, in order

to get a great
commission, but not with the interests of the
buyer, not with their financial livelihood, and
not with their family in mind. Remember that indirect
lending example I gave you earlier with Subaru and
Chase, the bank? Or in that example,
Chase, provides an interest rate and loan
terms, and then the dealer or Subaru presents you
with their interest rate in terms, that's often
with the markup. The consumer never sees
how much the finance company has said is the
minimum interest rate and loan term that they will
accept. Let's say, for example,
Toyota Finance says that they want the minimum
interest rate to be 7%. The dealer can bump it up
to 9%, and the consumer never knows about that
transaction. It violates all of our
norms about fairness and about the way markets
work. It's a convenience. The dealer is providing
offering a service. By arranging financing,
that markup becomes profit.

for the dealer and is
sometimes shared with the lender. Chase and many financial
institutions do put limits on how much of a premium
a dealer can add to the rate that we offer.
Putting limits ensures consistency of
experience. Um, across a variety of distributors. Chase auto did not provide
us with what its current caps are. Caps on markups
vary based on state and lender, but are typically
around 2.5 percentage points. Lack of
transparency is just one, but a common reason some
consumers feel they're being treated unfairly. One of the more recent
controversies was this one. The Massachusetts
attorney general reached a $7.6 million settlement
with Toyota motor Credit Corporation to resolve
allegations of illegal auto loan collection
practices. The lawsuit claims Toyota failed to
give certain consumers sufficient information
about the calculation methods for deficiencies
left on their auto loans

after their cars were repossessed. I can't comment on that
settlement. We stand firmly that our
practices are very fair to these specific
settlements and fines. I really can't comment
because of the specificity of the state allegations
and what might be behind it. Back in 2016, a different
settlement, that time for $21.9 million to settle
allegations that Toyota discriminated against
Black and Asian borrowers by charging them higher
rates than white borrowers. Toyota is not alone. I think probably all the
major car manufacturers have been hit with
lawsuits like this because of the discretionary
decision making when it comes to the markups. Toyota wouldn't comment on
that settlement either. Or this report, spanning
the entire industry by a former senior economist
at the Federal Reserve Bank of Chicago. It claims Black, Hispanic
and Asian borrowers often pay hundreds and
sometimes thousands of extra dollars in loan
payments relative to their

white counterparts. Do you have any insight
into why that might be? No, that is something I
cannot comment on. All of our risk-based
pricing is based off of Fico score and credit
worthiness of the customer. We don't even
collect that type of data. That report is not nearly
the only one with such claims. According to this
research paper, minority borrowers pay 70 basis
point higher interest rates, but default less
than non-minorities. These researchers say
each year, more than 80,000 minorities are
unable to get loans that they would have been
approved for if they were white. Whenever people have
subjective decision making, that's where the
lack of transparency is very problematic. We spend a lot of time
making sure that we understand and are
providing affordable lending products to all
consumers, regardless of their background. A class action lawsuit was
filed in 2017 alleging

Chase Auto violated the Fair Debt Collection Practices Act and state law by illegally repossessing consumers' vehicles from April 2013 to 2018. In 2018, Chase Auto, its parent company JP Morgan Chase, and debt collector Repossessed Incorporated agreed to pay $3.25 million to settle the case. What has Chase Auto done since then, and have business operations changed to prevent future allegations? We undergo a variety of tests of our systems and processes to ensure that they are compliant with all rules and regulations. And there have been a series of exams and reviews of our process, and we feel confident that we are compliant with applicable law and regulations. For the first time in more than a decade, in 2022, the FTC proposed a rule addressing unfair and deceptive financing practices by auto dealers. The proposed measures include banning bait

switch claims, fraudulent
junk fees, surprise junk fees, and requiring full
upfront disclosure of costs and conditions. I've dealt with predatory
lending. Multiple members of my
family have also dealt with predatory lending
and some very sketchy situations, and it's
really in our best interest to have some
rules in place to make sure that these
unscrupulous auto lenders aren't taking advantage
of people. But in July 2023, the U.S. House Appropriations
Committee backed a government spending bill
containing language that blocks the FTC from
implementing its proposed new rules. So what does
that mean for consumers? It means new legislation
is probably not around the corner. In the meantime,
consumer advocates say more programs are needed
to protect Americans buying cars, and that
increasing transparency is key. My mother always knew how
much bananas cost at every grocery store and went to
the store that had the

cheapest price. When it
comes to cars, we don't have that ability. Do you believe a consumer
should be able to see the rate directly from Chase,
regardless of whether or not they're getting
pre-approved at home prior to going to the
dealership, or if they're sitting in the
dealership, and that's the first time that they're
trying to get an auto loan? Yes. I think that
transparency is critical. And so if a consumer goes
to Chase.com, they can see the rate, they can see
the terms, and they should be able to see the rates
and the term at the dealership or whatever
they get their financial loan from. Until we see changes in
the industry, Americans need to look out for
themselves. Before getting an auto
loan, experts recommend shopping around, check
your credit score, get pre-approved online, go
to your local credit union.

and bank, and find out
what types of deals you might be able to get
before signing anything. Right now, we're finding
that the lowest interest rates are with the credit
unions. Average rates within
credit unions are closer to the 6% range, whereas
the banks are closer to 7% and 8%. You now have digital
marketplaces online. There's a wide range of
resources now that are available to help
customers understand the competitiveness of the
interest rates, the terms that they're getting. Arm
yourself with the best information possible. In 2020, Toyota launched
Smartpath, a digital retail tool that lets
customers shop for cars and apply for financing
online. This concept of living
room to showroom so that when customers and guests
are online researching what kind of vehicle they
want, they can have a similar and transparent
process. If you have the means,
drive to a second, third

or maybe fourth dealer to
compare rates and terms and stay away from buy
here, pay here dealers. They typically offer the
highest interest rates, sometimes for up to 20%. Do your research, ask
questions, and don't give up. Even if it's been
exhausting and mentally draining day, we all know
the feeling of nerves to see one more, but don't
let that push you to sign on the dotted line. If
you're not ready, tell the dealer you need more time
and you'll come back. Finally, vote. There are tremendous
problems and tremendous solutions, and those
solutions are only going to happen if the
politicians who are making decisions about federal
law, in particular, are willing to take consumers
into account. Until we can get
politicians to commit to protecting consumers,
we're not going to have solutions. Customers definitely are
getting sticker shock. The cost of vehicle repair
is rising and there are

several factors causing this heavier, more complex vehicles. New materials and manufacturing methods, a worsening shortage of talented technicians, and pandemic-induced supply shortages. We're at this, you know, almost inflection point where a perfect storm may be a kind of analogy you could use, where all of these different variables are kind of coming together at once to drive repair costs higher. The newest segments, such as EVs, are reputedly especially expensive to fix. News reports describe new EV owners shocked by repair bills, but some say there's reason to be optimistic. If cars are to be affordable, they must also be affordable to maintain, and they must be affordable to repair, or else we're going to have fewer vehicle sales. So I think the automakers are going to be motivated to drive those costs down. We have four technicians and two trainees right

now. David Goldsmith has been
in the car repair business for more than 40 years. He owns Urban Classics, a
shop in Brooklyn. He says he's seen repair
costs rise, especially over the last few years. Customers are struggling
to pay the invoices that we give them. I mean,
I've had to cut back on our, you know, our
profitability is not up. His impressions match
data. Repair costs are rising
relative to the overall rate of inflation. From November 2013 to
November 2023, motor vehicle maintenance and
repair increased 4.1% per year, an overall change
of 49.8%. Meanwhile, all items in
the Consumer Price Index increased 2.8% per year,
or 31.7% overall. The increase has been
especially sharp since the pandemic. Ryan Mandell is
director of claims performance for Mitchell,
a software provider serving the automotive
industry, primarily the

collision repair and auto
insurance sectors. He says the annual rate
of increase in the cost of repair was between 3.5%
and 5% prior to the pandemic, but since then,
it's shot up. In 2022, the number
jumped to about 10%, which appears to have held
steady since then. For the full calendar
year 2023, the average repairable estimate was
$4,721. Mandell says that number
will continue to increase as the data matures over
the next 3 to 4 months. I'm working harder than
I've ever worked, and the margins because all my
expenses are so high. Labor costs me more,
insurance costs me more. Health insurance, all the
professional services that we get. Everything costs
more. An important distinction
to make here: maintenance versus repair. Maintenance usually
involves checking, replacing, or replenishing
something expected to wear.

down or deplete over time. Your tires, wiper blades,
oil transmission fluid. Repair is fixing
something that is broken that can be due to a
product defect, a clumsy hand, or what is often
the case, a crash. Matt Moore is a
researcher for the Highway Loss Data Institute, a
division of the Insurance Institute for Highway
Safety. It's an organization
funded by the insurance industry to crash test
vehicles and do other research around
collisions and vehicle safety. Moore says
several factors could be to blame. It could be
that vehicles are more expensive to repair. It could be that crashes
are more severe, cars are a lot heavier than they
used to be, and a lot more powerful. Between 1985
and 2022, on average, vehicle weights increased
by about 33%. Meanwhile, average
horsepower increased by over 100%. If vehicles are heavier
when they're getting into

crashes and or they are
going faster when they get in the crashes; you're
going to have more energy in the crash. More energy
in the crash means more damage to the vehicle,
more damage to the vehicle, higher repair
costs. Meanwhile, in recent
years, speeding and traffic crashes have
increased. At the same time, the
proliferation of what are collectively called
active safety technology, such as automatic
emergency braking, have reduced the number of low
speed accidents. A lot of these features
don't work or don't work as well at higher speeds. That has led to mean
shifting, where the overall data set has
become skewed toward more severe crashes simply
because less severe, lower speed crashes are not
happening as often. Cars are also loaded with
a lot more stuff, which means a lot more can go
wrong. About 17% of the
registered vehicles in the

U.S. are turbocharged, a tweak that squeezes more power out of an engine. In recent years, automakers have used it to make engines smaller and more efficient. It adds a lot of extra parts: the turbocharger, plus additional exhaust pipes and additional cooling system, and so on. The number of all-wheel drive vehicles has skyrocketed. In the 1980s, about 10% of them came equipped with it. In 2022, 66% did. All of these systems increase complexity and weight on an automobile, partly to compensate for the increased weight, but also to maximize fuel efficiency, performance, or maneuverability. A lot of automakers have increasingly used lighter weight materials. Aluminum is one. It is more brittle than steel, so it cracks in a crash instead of bending and deforming, that disperses the crash's energy better. But because cracks are harder to repair than

say, a dent, aluminum
panels usually need to be replaced. New
manufacturing methods like mega casting or giga
casting allow automakers to dramatically reduce
the number of parts on a vehicle. A part of a car that might have been
made up of 50 or 60 sheet metal pieces can now be
made with just 2 or 3 very large ones. But again,
that means when something breaks, a much larger
piece needs to be fixed or replaced. Change doesn't
stop there. Automobiles have entirely
new types of technology in them. Your average regular car
now is basically a rolling network of
computers. That's been kind of slowly
developing for decades now. But really, we saw
in the last ten years the technology and vehicles
changed dramatically to where you now had many
different not just, you know, single safety
systems, but many different safety
components that were being

added to these vehicles
to help protect drivers and to reduce accident
frequency. It adds up quickly. You know, we had a guy in
with a Dodge pickup or a Jeep the other day, and
his lights are going crazy on the dashboard. And he had to decline the
repair because it was a radar built into a
little sensor on his grill that got cracked. And it was $1,500 just
for part. And you potentially have
to recalibrate these systems again, even if
they haven't been damaged. So we've seen that really
ramping up significantly since 2015. The incidence of the
presence of these different operations if
you look at the average cost of doing just a
series of scans of the computer system on a
vehicle, you're talking about an average of about
$160 per claim. When you talk about
calibrations, that's more like $500 per claim.

Over there in the corner, there, we've got scan tools $10,000, $12,000, $9,000, and then the training that's involved, of course, we've got to send send our guys out for training. I have guys that come to me that have been out of the business for five years, and they go like, whoa, where'd this come from? Finding enough talented technicians is one of Goldsmith's biggest challenges. The Covid-19 pandemic exacerbated a long-standing shortage. In 2019, the average labor rate was under $50 an hour in the U.S. At the end of 2023, it was close to $60. Most of those increases came in 2022 and 2023. Well, when the pandemic hit, all hell broke loose. A lot of a lot of people, like, in a lot of industries, a lot of the older guys, uh, and some

gals, they just said, I'm done. You know, I've worked, you know, 20, 30 years in the business. The pressure is too much. The volume of miles traveled shrink drastically during the peak Covid months. You saw really the volume in repair facilities dry up. And so a lot of technicians left this industry, and we look for industries and sort of collision repair outside that going industry and to attract and talent to attract local talent, especially shops need to pay more to be able to get that to be the employer of choice, and that's really driven a lot of these labor rate increases, along with just the overall general economic environment. Goldsmith pays some path techs six-figure salaries, and he is trying to train his own techs rather than try to attract those at the skill level he would ideally like to have. They deserve it.

They, every penny of it. I wish I could pay them
more. They're highly trained and hard to come
by. The pandemic also drove up
the cost of parts. Mitchell tracks a
CPI-like basket of the most commonly replaced
collision parts. In one analysis, the
prices of those parts rose from 0% to 4% annually
from 2017 to 2021. Disruptions at ports,
especially in eastern China, spiked the cost of
ocean-going cargo. The average cost of
moving a 40-foot container went from $1,200 to
almost $12,000. In 2022, Mitchell saw
almost a 17% increase in the average cost of
aftermarket parts, compared with the usual
annual inflation rate of 0% to 4%. The OEM version of those
parts has increased a little more steadily,
around 10% to 12% in 2022, or about 14% or 15% in
2023.

One of the great promises
of EVs is that their simplicity compared with
gas-burning cars means they ought to cost less
to maintain and repair. But they have come under
scrutiny lately, as some owners describe being
saddled with pricey repair bills, some totaling half
the value of the vehicle. In spite of these horror
stories, many industry insiders say the total
cost of owning a car should fall as EVs become
more popular. They use fewer moving
parts, there's no oil to change, there are
extremely simple transmissions. Wildly
expensive EV repair bills may have less to do with
EVs themselves, and more to do with the fact that
the ones on the market today are, one,
essentially luxury vehicles, and two, are
made by either startups or relatively young
companies that do not have mature supply chains and
service networks. It's very difficult to
paint electric vehicles

with a broad brush. There are Nissan Leafs,
which are electric vehicles, which are
relatively small and relatively inexpensive. And then at the other end
of the spectrum, you have the Lucid Air, which is a
cost in excess of $100,000, and some
versions of that vehicle make 1,111 horsepower. Some EV models have a
nearly identical ICE counterpart. The Highway
Loss Data Institute compared the costs of
repairing those and found that EVs were just 2%
more expensive. When you look at the
total EV fleet versus the ICE fleet, there is at
first about a 35% difference in repair
costs. But when you drill down and compare the cost
of repairing, say, a Kia Soul and Kia Soul EV,
that difference almost disappears. What is left,
Mendell says, is the cost of managing an EV's high
voltage battery. That includes ensuring it
is protected, assessing it

for damage and keeping
technicians safe from the voltage. There can be
several hours additional labor involved, including
battery removal. For example, urethane
clear coats that seal paint jobs are baked at
very high temperatures, which is hazardous to
batteries. For some EVs, battery
removal could require up to five hours of labor. But a lot of this comes
down to the fact that EVs are marketed as the
vehicle of the future, and as such, often target
higher-end buyers. In addition to their still
new and rapidly evolving batteries, motors, and
other unique tech, they're also loaded with a lot of
the features often found in premium and luxury
vehicles. The EVs are really at the
forefront of that complexity revolution. The EV industry is in
a nascent stage, so it's early. We're doing lots
of learning. I think once it settles
down, and there's lots of

learning that occurs in
the dealerships, in the manufacturing plants, in
the design houses. I think EVs are going to be a
really terrific proposition for people
long term.

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Cars start losing value as soon as they're driven off the lot, with the auto loan debt in the U.

The depreciation is influenced by incentives offered on new vehicles, the difference in wholesale and retail prices, and the concept of "The Market for Lemons," leading to a rapid 10% drop in value within the first year.

Despite efforts to maintain and protect cars, their value continues to decline over the first few years of ownership.

The Unprecedented Shift in Car Value and Pricing

Car values typically depreciate, but during the pandemic, used car prices skyrocketed by around 30%, driven by high demand and low supply.

This led to a significant increase in the average transaction price for both new and used cars, with prices currently almost 30% higher than pre-pandemic levels.

The Federal Reserve's interest rate hikes and decreased production have contributed to the ongoing high prices, with analysts predicting that hitting record volume numbers will be challenging for the industry.

The Impact of Car Production and Auto Loans

Car over-production leads to fewer available new cars, driving up prices and the need for auto financing.

The high cost of new cars has resulted in a record-high auto loan debt in the US, with the average monthly payments for both new and used vehicles increasing.

The auto loan industry has faced complaints and lawsuits for discriminatory practices, undermining consumer trust and protection.

The Impact of Auto Loans on Consumers and the Industry

Auto loan interest rates have reached a 15-year high, leading to larger loans at higher rates, contributing to record-high auto loan debt in the U.

The rising cost of car ownership is causing financial strain for many Americans, with younger generations facing serious delinquencies and struggling to sell their vehicles.

Lower income consumers, especially those with credit scores below 620, are being squeezed out of the market by the Federal Reserve's interest rate hikes, similar to what was seen during the subprime crisis.

Unfair Auto Lending Practices and Ongoing Challenges

Dealers often markup interest rates without the consumer's knowledge, leading to unfair treatment.

Major car manufacturers, including Toyota and Chase Auto, have faced multimillion-dollar settlements due to discriminatory lending practices.

The FTC's proposed rules to address deceptive financing practices by auto dealers face opposition, delaying potential consumer protection.

Transparency in Auto Loan Rates and Rising Vehicle Repair Costs

Chase should provide transparent auto loan rates to consumers, whether online or at the dealership, to empower them in their financial decisions.

Shopping around, comparing rates, and getting pre-approved from credit unions can help consumers secure the best auto loan deals.

Vehicle repair costs are on the rise, outpacing the overall inflation rate, driven by factors like complex vehicles, supply shortages, and EV maintenance expenses, but efforts to drive these costs down are expected in the future.

Factors Contributing to the Increased Cost of Vehicle Repairs

Vehicle repair costs are rising due to several factors, including the increased severity of crashes caused by heavier and more powerful cars, as well as the proliferation of active safety technology.

The use of turbocharged engines, all-wheel drive vehicles, and lighter weight materials has also added complexity and cost to repairs.

The integration of advanced technology and computer systems in modern vehicles has significantly driven up the expense of repairs, including the need for expensive part replacements and recalibrations.

The shortage of skilled technicians and the surge in labor rates have further contributed to the overall increase in vehicle repair costs.

The Impact of the Pandemic on the Automotive Repair Industry

The pandemic caused a drastic decrease in repair facility volume, leading to a shortage of technicians and driving up labor rates.

The cost of aftermarket parts and EV repair bills significantly increased in 2022, far beyond the usual inflation rate.

EVs, despite promises of lower maintenance costs, are currently facing expensive repair bills, partly due to their luxury status and immature supply chains.