Longer Loans, Higher Payments: New Car Financing Trends
The affordability of new cars has become a growing concern as the share of new car owners spending $1,000 or more on monthly payments reached a new record at 17.9% in Q4 2023. This trend reflects the increasing financial strain on consumers as the average monthly payments and down payments on new vehicles have surged to record highs. According to Jessica Caldwell, Edmunds’ Head of Insights, “On the surface, car financing appears to be following the harsh trend line of the past few years, with average monthly payments and down payments reaching all-time highs for new vehicles.”
The average cost of a new car has risen to approximately $48,000, making it unaffordable for many Americans. This soaring cost has prompted car buyers to take out longer loans in an attempt to make their monthly payments more manageable. In Q2 2023, the average loan term for a new car was 68.4 months, indicating a significant shift towards extended repayment periods. However, this approach comes with its own set of challenges, as Carl Tannenbaum, chief economist at Northern Trust, pointed out, “There’s been a bit of a stress and a spiral where cars get more expensive, some households have to take on ever-longer and ever-larger loans, and it does get harder for them to handle them.”
The share of new car owners spending $1,000 or more on monthly payments has been steadily rising, reaching 17.9% in Q4 2023, up from 17.5% in Q3 2023 and 15.7% in Q4 2022. This indicates a concerning trend where an increasing number of consumers are stretching their budgets to afford new cars. The average monthly payment for new vehicles has also increased to $739, up from the previous record of $736. This surge in monthly payments highlights the financial burden faced by car buyers, especially in the current economic landscape.
Moreover, the average down payment on new vehicles has surpassed $7,000 for the first time, further illustrating the financial strain on consumers. The combination of higher monthly payments and substantial down payments underscores the challenges of new car affordability. As a result, many consumers are resorting to longer loan terms in an attempt to manage their financial obligations.
The rising cost of new cars has contributed to an increase in auto loans and auto loan delinquency. As consumers grapple with the financial burden of high monthly payments and extended loan terms, the incidence of auto loan delinquency has seen an uptick. The combination of longer loan terms and higher monthly payments has made it increasingly challenging for some households to keep up with their financial commitments.
This trend has significant implications for the overall financial well-being of consumers and the stability of the auto lending market. Lenders and financial institutions are closely monitoring the situation, as the increase in auto loan delinquency can have ripple effects on the broader economy. It is imperative for consumers to carefully assess their financial capabilities and consider alternative options such as used cars or exploring different financing arrangements to mitigate the impact of rising new car costs.
In conclusion, the surge in new car payments and the associated increase in auto loan delinquency underscore the growing financial strain on consumers. The average cost of a new car, coupled with record-high monthly payments and down payments, has made new car ownership increasingly challenging for many Americans. As the industry navigates these challenges, it is essential for consumers to approach car financing with careful consideration and explore options that align with their financial circumstances.
The information provided is for general informational purposes only and should not be considered as financial advice.