Financing a new or used car has become more expensive than ever, according to research from Edmunds, as reported by CNBC.
Rising interest rates and elevated auto prices have contributed to a record high share of new car buyers with a monthly payment of over $1,000. For the first time, 15% of consumers who financed a new car in Q4 2022 committed to a monthly payment of $1,000 or more, up from 10.5% one year ago. The average price paid for a new car in December reached a record of $46,382, according to estimates from J.D. Power and LMC Automotive. Interest rates on new car loans also reached 6.5%, up from 4.1% a year earlier.
As the Federal Reserve continues to raise interest rates in an effort to combat persisting inflation, auto loan rates may increase further, though consumers with high credit scores may be able to secure better loan terms. “Elevated pricing coupled with repeated interest rate increases continue to inflate monthly loan payments,” said Thomas King, president of the data and analytics division at J.D. Power.
Ivan Drury, Edmunds’ director of insights, warns that many Americans are choosing more expensive SUVs and pickups with all the bells and whistles, which can cost 30% more than the base price. He advises car shoppers to ask themselves if they’re “buying too much car” and to consider if there is a “perfectly good substitute at about half the cost.”
Drury also warns that shelling out more to finance a car today puts car buyers at greater risk of going underwater on those loans down the road as used car values decline. “At the onset of the pandemic, consumers benefited from low interest rates and elevated trade-in values, helping shield even the more questionable financing decisions from resulting in negative equity,” he said. “But as we shifted toward an environment with diminished used car values and rising interest rates over the past few months, consumers have become less insulated from those riskier loan decisions, and we are only seeing the tip of the negative equity iceberg.”