$1000-a-Month (or Higher) Car Payments Are Distressingly Common Right Now

• A new set of data shows what we’ve been seeing over several months: monthly payments on new-car loans are hitting and exceeding four figures at a distressingly high rate.
• One reason is rising interest rates, which in turn are affected by supply-chain issues and inflation.
• Another reason: a growing number of customers tend to owe more on the vehicle they’re trading in than it’s worth, tempting them to roll the negative equity into the next purchase.

The share of new-car loans with a monthly payment above $1000 hit a record high last year, new data from Edmunds shows. The company says 15.7 percent of buyers who financed a new car in the fourth quarter of 2022 signed on for four-figure monthly payments.

That’s up from 10.5 percent in 2021, a nearly 50 percent increase in the overall share. Supply constraints and inflation put upward pressure on prices, while that same inflationary crisis led to much higher interest rates. Consumers attempted to account for rising prices by spending more money upfront, bringing the average down payment up to $6780. Markups—which usually cannot be financed as easily as money toward a vehicle’s MSRP—likely contributed to that rising average down payment.

Being Upside Down Makes It Worse

Edmunds also sees rising car payments and an inflated market as a potentially dangerous combination. In the fourth quarter of 2022, 17.4 percent of new car purchases with a trade-in had negative equity rolled into the new loan. That means they still owed more than the car they traded in was worth, forcing them to roll the owed money into the new purchase. In the event of a market collapse, if a higher percentage of owners owe more than their vehicles are worth, that could at worst, cause a crisis. At best, the market would likely see a slowdown in new-car purchases.

“Vehicle equity is really a tale of two gears for consumers over the past few years,” said Ivan Drury, Edmunds director of insights. “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. This unique confluence of market forces resulted in some vehicle owners being able to take advantage of positive equity on their loans and even their leases. 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.”

Source: Motor - aranddriver.com