The proportion of car buyers with monthly payments above 1,000 dollars is a record high
Financing a new or used car is more expensive than ever, new research shows.
Amid rising interest rates and high car prices, the share of new car buyers with a monthly payment of more than $1,000 jumped to a record high, according to Edmunds. For the first time, just over 15% of consumers financing a new car in the fourth quarter of 2022 committed to a monthly payment of $1,000 or more — the highest level on record — compared with 10.5% a year ago, Edmunds found.
The average price paid for a new car in December set a record $46,382, according to a separate estimate from JD Power and LMC Automotive. Although there are signs the market is cooling, sticker prices are up 2.5% from a year ago.
At the same time, the interest rate on new car loans reached 6.5%, up from 4.1% a year earlier, Edmunds data shows. As the Federal Reserve continues to raise interest rates to combat persistent inflation, auto loan rates could tick even higher, although consumers with higher credit scores may be able to secure better loan terms.
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“High prices combined with repeated rate hikes continue to inflate monthly loan payments,” Thomas King, president of data and analytics at JD Power, said in a statement.
Now, more consumers are facing monthly payments they likely can’t afford, according to Ivan Drury, Edmunds’ director of insights. Car buyers are being hit with “shock and awe” as high prices and rising prices send monthly payments skyrocketing, he said.
“Sticker shock doesn’t begin to describe it,” Drury said. “When you factor in the funding, it’s very jarring.”
Many Americans are also opting for more expensive SUVs and pickup trucks with all the bells and whistles, he added, which can cost 30% more than the base price.
“Base models, while tempting in theory, rarely hit the street,” Drury said, warning car buyers to ask themselves if they are “buying too much car.”
“It could be a perfect replacement at about half the price,” he added.
It’s the “tip of the negative equity iceberg”
A customer looks at a vehicle at a BMW dealership in Mountain View, Calif., on Dec. 14, 2022.
David Paul Morris | Bloomberg | Getty Images
Forking out more to finance a car today puts car buyers at greater risk of defaulting on those loans down the road as used car values drop, Drury warned.
“At the beginning of the pandemic, consumers benefited from low interest rates and elevated trade-in values, helping to protect even the more questionable financing decisions from resulting in negative equity,” he said.
“However, as we shifted to an environment of declining used car values and rising interest rates in recent months, consumers have become less insulated from the riskier lending decisions, and we are only seeing the tip of the negative equity iceberg.”
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