Longer loans are taking over
Sticker shock is pushing more buyers to stretch their car loans to seven years or more just to make the monthly math work. Edmunds says 25.5% of financed new vehicles in the third quarter carried terms of at least 84 months, up from 21.8% a year ago. Edmunds' consumer insights analyst Joseph Yoon warned, "If you need 84 months just to make the payment fit, that's a potential warning light that the vehicle is out of your budget."
What is driving the bigger tabs? "Monthly payments are rising because buyers are borrowing significantly more money overall," Yoon said. According to Edmunds, buyers financed an all-time high of $44,664 on average for a new vehicle in Q3, versus $42,744 a year prior.
Payments and borrowing costs are not easing
Even with those longer terms, monthly obligations keep setting new highs. Edmunds reports the average payment reached $787 in Q3, compared with $756 a year earlier. For new-car loans, the average APR stood at 7% in the third quarter, holding steady from both the previous quarter and the same period a year ago.
Jeremy Robb of Cox Automotive noted that auto loan rates rose broadly last week. He linked the move in consumer loan rates to upward pressure on bond yields driven by persistent inflation and worries over rising government debt. Patrick Manzi, the National Automobile Dealers Association's chief economist, said the outlook is that "Since most auto loans are pegged to the five-year or 10-year Treasury note, we expect that borrowing costs will increase" in the fourth quarter.
Sticker shock is showing up in four-figure bills too. Edmunds says that in Q3, a record 21.2% of new-car loans carried monthly payments of $1,000 or more, up from 19.1% a year earlier. Among those buyers, 69% financed for 72 months or longer. The interest tab is growing as well, with the average total interest paid over a loan's life reaching a record $9,938 in Q3, up from $9,442 a year earlier.
Stretching a car loan lowers the payment and raises the total cost. Market Briefs covers household debt free every weekday.
Prices, fuel and the household squeeze
Prices remain sticky. Kelley Blue Book estimates the average price paid for a new car in August was $50,089, up 1.9% from a year earlier. Budgets are getting tighter too.
The U.S. Bureau of Economic Analysis reported Wednesday that consumer spending outpaced income in August. "The gap has widened for months, funded in large part by growth in financial assets rather than paychecks," Robb wrote in a weekly auto update, adding that maintaining that pace may be harder if energy costs stay high and the Middle East conflict remains unresolved.
Fuel is part of the pain. Since the Iran war began in late February, higher global oil prices have pushed U.S. gasoline costs higher. AAA says regular gas averaged $4.36 as of Monday. That is down from $4.47 a week earlier, but up from $3.13 a year ago.
The equity trap of long terms and what it means for your wallet
Longer loans make it harder to build ownership quickly and raise the risk of owing more than the vehicle's value if you sell or trade early. "In the first few years of an 84-month loan, almost every dollar of your monthly payment goes toward interest rather than the car's principal balance," Yoon said. "Combine that with standard depreciation, and you're much more likely to stay in a negative-equity position for the vast majority of the loan term."
That is showing up at the dealership. Edmunds reports that in the second quarter, nearly 30% of trade-ins applied to a new-car purchase were upside down. When that happens, buyers must either clear the leftover balance in cash or roll it into a fresh loan. Yoon's guidance for anyone eyeing a stretched term: "Consider buying used, choosing a cheaper trim with more needs than wants, or saving longer for a higher down payment."
Bottom line for your budget: prices are still high, loans are larger, and interest has not eased. Even if a longer term trims the sticker bite each month, it can keep you underwater longer and increase the total interest you pay.
Longer terms are how affordability problems get hidden rather than solved. Join Market Briefs free and do the math with us.
