The $1,000 Car-Loan Payment: Higher Prices, Interest Rates Push Up Monthly Costs

A growing share of people are paying much more. A record 12.7% of new-car buyers who signed up for a loan in June have a monthly payment of at least $1,000, according to Edmunds. That share is up from roughly 7% a year earlier, 5% in June 2019 and 2% in June 2010.

Average monthly payments on used cars are near a record, according to Edmunds, whose data on used cars go back to 2008. In June, they averaged $554, up 12% from a year ago.

In some ways, the car market mirrors the dynamics in the housing market, which has been upended by the pandemic and its lingering effects. Pandemic-related supply-chain problems created a shortage of new vehicles, which means sticker prices are much higher than they were two years ago. Interest payments are higher, too, thanks to the Federal Reserve’s rate-raising campaign against inflation.

Like many measurements, the expanding size of car payments presents a mixed view of the economy.

On one level, the increase in loan balances and monthly payment obligations points to ongoing strength of U.S. households to afford big-ticket expenses.

Consumers’ preference for SUVs, pickup trucks and other expensive types of vehicles are contributing to some of the increase in monthly costs. “It’s a go-big-or-go-home attitude when it comes to buying a car right now,” said Ivan Drury, senior manager of insights at Edmunds. Overall, car-loan delinquencies remain low.

Still, many buyers could find themselves struggling to pay for their vehicle, especially those who are forced to buy because of car breakdowns or other issues. Missed payments among consumers with low credit scores are starting to go up. Others will find themselves unable to buy.

Consumers whose leases are ending are finding that they often have little choice but to sign up for a costlier financing plan to get their next car, said Mr. Drury.

Most people getting new-car loans have high credit scores and a sizable amount of cash for a down payment, Mr. Drury said. On average, buyers in the second quarter put $6,333 down, up 27% from a year earlier. People with less income don’t tend to qualify for the incentive offers and financing deals that people with higher incomes often receive.

Abigail Roberts of Los Angeles had to buy a car last month after her old vehicle broke down. The 23-year-old was hoping for a maximum monthly payment of about $300. The best she could find was a 2019 Hyundai Elantra with monthly payments for six years at roughly $400.

Ms. Roberts withdrew half her savings and borrowed from a family member to scrape together a down payment.

The car loan “wasn’t exactly in my budget,” she said, but she didn’t have much choice. She’s nervous about keeping up with the payments: “It’s definitely worrisome.”

Car-loan originations are falling from last year’s record-setting levels, according to credit-reporting firm Equifax Inc. Some 6.3 million new- and used-car loans were originated during the first quarter of the year, a 5% decrease from the same year-ago period, Equifax said.

But those loans come with a bigger debt burden. Those first-quarter loan originations amounted to nearly $190 billion, up 11% year-over-year and a first-quarter record, according to Equifax.

Annual percentage rates on new-car loans that consumers signed up for last month averaged 5.2%, up from 4.4% in February before the Fed began raising rates, according to Edmunds. Most car loans have fixed interest rates.

To try to make costs more manageable, buyers are signing up for loans with longer repayment periods. Loan repayment periods vary, with consumers often opting for five- to six-year loans. A small but growing share of buyers are even taking out loans that exceed seven years.

By stretching out the loan, monthly payments are lower but buyers often end up paying more in interest over the life of the loan. They also are at greater risk of owing more on a car than it’s worth.

Write to AnnaMaria Andriotis at [email protected]