Financing a new or used car is more expensive than ever, according to new research.
Amid rising interest rates and high auto prices, the share of new car buyers with a monthly payment of more than $1,000 has hit an all-time high, according to Edmunds.
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 that the market is cooling, sticker prices are up 2.5% from a year ago.
Meanwhile, the interest rate on new auto loans hit 6.5%, from 4.1% a year earlier, according to Edmunds data. As the Federal Reserve continues to raise interest rates to combat persistent inflation, auto loan rates may rise further, although consumers with higher credit scores may be able to secure better loan conditions.
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“High prices coupled with repeated increases in interest rates continue to inflate monthly loan payments,” Thomas King, president of the data and analytics division at JD Power, said in a statement.
Now, more and more consumers are faced with monthly payments they probably can’t afford, according to Edmunds chief analytics officer Ivan Drury. Car buyers are “shocked and scared” as high prices and rising rates drive up monthly payments, he said.
For the first time, just over 15% of consumers who financed a new car in Q4 2022 committed to a monthly payment of $1,000 or more – the highest level on record – compared to 10.5% a year ago, Edmunds found.
“Sticker shock doesn’t begin to describe it,” Drury said. “When you factor in the funding, it’s very shocking.”
Many Americans are also choosing more expensive SUVs and pickup trucks with all the bells and whistles, he added, which can cost 30% more than the base price.
“Basic models, while attractive in theory, rarely hit the streets,” Drury said, warning car buyers to consider whether they’re “buying too many cars.”
“There could be a perfectly good substitute at about half the cost,” he added.
This is the “tip of the negative equity iceberg”
A customer looks at a vehicle at a BMW dealership in Mountain View, Calif., Dec. 14, 2022.
David Paul Morris | Bloomberg | Getty Images
Paying more to finance a car today puts car buyers at greater risk of going underwater on those loans as used car values decline, Drury warned.
“Early on in the pandemic, consumers benefited from low interest rates and high exchange values, helping to protect even the most questionable financing decisions from having negative equity,” he said. declared.
“But as we head into an environment characterized by falling used car values and rising interest rates in recent months, consumers have become less insulated from these riskier lending decisions, and we are only seeing the tip of the iceberg of negative equity.”
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