The Rising Cost of Car Payments: A Warning for Buyers

Car payments are on the rise, and it’s becoming increasingly common for new car buyers to pay over $1,000 per month for their vehicles. In fact, a staggering 17.1 percent of buyers in the second quarter of 2023 are facing this financial burden. This is the highest percentage ever recorded, surpassing last quarter’s record of 16.8 percent. Additionally, the annual percentage rate (APR) of 7.1 percent is the highest it has been since the fourth quarter of 2007. These alarming statistics suggest that many buyers may soon find themselves at a significant disadvantage.

According to Ivan Drury, the director of insights at Edmunds, “The double whammy of relentlessly high vehicle pricing and daunting borrowing costs is presenting significant challenges for shoppers in today’s car market.” Unfortunately, the recent pause in interest rate hikes by the Federal Reserve did not offer much relief for consumers. In fact, there are hints that interest rates may continue to increase later this year, further exacerbating the situation.

While some buyers are using high car payments to their advantage, the majority are at risk of owing more than their cars are worth. Edmunds’ data reveals that 64.5 percent of new car owners have loan terms ranging from 67 to 84 months, with an average APR between 8.5 and 9.6 percent. This means that a significant portion of their monthly payments goes towards interest rather than paying down the principal amount borrowed.

This situation puts buyers in jeopardy of falling into a negative equity trap, where they owe more on their cars than they are worth. To avoid this, Drury emphasizes the importance of coming to the table with a comprehensive budget and understanding the financing elements beyond just the monthly payment, including the APR. He advises buyers to be cautious and realistic about their expectations for summer discounts, as the current market conditions may not allow for significant savings.

The implications of these rising car payments are far-reaching. More vehicle owners find themselves with loan terms that haven’t been this unfavorable since just before the great recession of 2008. This not only puts a strain on their finances but also limits their ability to replace their vehicles in the near future.

So, what can buyers do to navigate this challenging landscape? Here are a few tips:

1. Research and compare financing options: Take the time to shop around and compare interest rates, loan terms, and financing offers from different lenders. This will help you find the best deal and potentially save thousands of dollars over the course of your loan.

2. Consider a shorter loan term: While longer loan terms may seem appealing due to lower monthly payments, they often come with higher interest rates. Opting for a shorter loan term can help you pay off your car faster and save on interest charges.

3. Save for a larger down payment: Putting more money down upfront can help reduce the amount you need to borrow and lower your monthly payments. It can also improve your chances of getting approved for a loan with a lower interest rate.

4. Negotiate the purchase price: Don’t be afraid to negotiate the price of the car. Dealerships often have room for negotiation, especially if you’re a well-informed buyer. Lowering the purchase price can help reduce the amount you need to finance and ultimately lower your monthly payments.

5. Consider alternative transportation options: If the cost of car ownership is becoming unmanageable, it may be worth exploring alternative transportation options such as public transit, carpooling, or ridesharing services. This can help reduce your monthly expenses and alleviate some of the financial burden.

In conclusion, the rising cost of car payments is a cause for concern for new car buyers. With a significant percentage of buyers paying over $1,000 per month and unfavorable loan terms, many are at risk of falling into a negative equity trap. It’s crucial for buyers to approach car purchases with a comprehensive budget and a clear understanding of the financing elements involved. By researching financing options, considering shorter loan terms, saving for a larger down payment, negotiating the purchase price, and exploring alternative transportation options, buyers can navigate this challenging landscape and make informed decisions that align with their financial goals.