Financing a new or used car is more expensive than ever, new research shows.
Amid rising interest rates and elevated auto prices, the share of new car buyers with monthly payments of more than $1,000 hit a record high, according to Edmonds.
The average price paid for a new car in December hit a record $46,382, according to separate estimates from JD Power and LMC Automotive. In 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 hit 6.5%, up from 4.1% a year earlier, Edmonds data showed. As the Federal Reserve continues to raise interest rates to combat inflation, auto loan rates may rise even higher, although consumers with higher credit scores may be able to secure better loan terms.
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“Elevated pricing combined with recurring interest rate increases continue to drive up monthly loan payments,” Thomas King, president of JD Power’s data and analytics division, said in a statement.
Now, more consumers face monthly payments they may not be able to afford, according to Evan Drury, director of insights at Edmonds. Car buyers face “shock and awe” as monthly payments balloon due to high prices and rising rates, he said.
For the first time, only 15% of consumers taking out a new car loan in the fourth quarter of 2022 committed to monthly payments of $1,000 or more — the highest level on record — compared with 10.5% a year earlier, Edmonds found.
“Sticker shock doesn’t begin to describe it,” Dury said. “When you factor in financing, it’s very unclear.”
Many Americans are also opting for more expensive SUVs and pickups with all the bells and whistles, he added, which can cost up to 30% more than the original price.
“The base model, in theory, rarely hits the street,” Drury said, warning car shoppers to ask themselves if they’re “buying too many cars.”
“Can be a fairly good option at about half the cost,” he added.
It is the ‘tip of the negative equity iceberg’
A customer looks at a vehicle at a BMW dealership in Mountain View, California on December 14, 2022.
David Paul Morris | Bloomberg | Getty Images
Drury warned that shelling out more to finance cars today increases the risk of car buyers going underwater on those loans as used car prices continue to fall.
“Early in the pandemic, consumers benefited from lower interest rates and higher trade-in values, helping to avoid more questionable lending decisions that resulted in negative equity,” he said.
“But as we’ve moved into an environment of declining car prices and rising interest rates over the last few months, consumers have become less insulated from those risky loan decisions, and we’re only seeing the tip of the negative equity iceberg.”
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