(CNN) Have you managed to buy the car, but can you afford to keep paying it off?
Along with rising car prices, loan rates are the most expensive they have been in more than 15 years, with the average monthly payment for a new car at an all-time high, new data from the website of Edmunds automobiles.
The result of rising prices and interest rates is that Americans are taking much longer to pay off their car loans, which include crossovers, SUVs and pickup trucks, and more buyers are being pushed out of the market. car
“The reality is you get a narrower and narrower buying group that can actually afford to buy new vehicles,” said Jonathan Smoke, Cox Automotive’s chief economist.
The average annual percentage rate (APR) for financing a new car rose from 4.5% in March 2022 to 7% a year later. Even after falling slightly from February, this is the highest lending rate since 2008, according to Edmunds data released this month.
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High loan rates mean that monthly payments also increase. In March, the average monthly payment to finance a new car hit $730, the highest on record, according to Edmunds. The average payment to finance a used car is now $556 per month, up $147 from June 2020.
More new car owners pay up to $1,000 a month. In January 2019, new car payments over $1,000 per month accounted for about 5% of sales. By March 2023, just four years later, four-figure monthly payments had risen to 17% of the new car market.
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Some of the buyers with high monthly payments are people with short-term loans (usually three or four years) with a high monthly payment and a large down payment. The number of such short-term loans has grown over the past two years, but the prohibitive upfront cost means they are still only a small part of the market, Edmunds chief information officer Ivan Drury said. Most $1,000 per month car loans are taken out by people who choose long-term, high-interest loans.
Rising car prices and the increasing difficulty of qualifying for lower interest rates have forced buyers to put up with a higher monthly bill for a longer period of time (up to seven years) for a lower down payment .
In 2004, only 1% of auto loans lasted six to seven years. Now these long-term loans are 30% of the market. Only 5% of loans are paid off in two and a half or three years.
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Although buyers who opt for longer loans pay less money upfront, interest rates catch up over time. For example, a buyer taking out a 70-month loan for a $28,700 used car at today’s average loan rate could pay 38% more in interest alone. Conversely, a buyer who only takes out a two-and-a-half- to three-year loan could pay a small fraction of that.
“The pressure is more extreme on consumers with lower credit, because not only do they face the movement of interest rates and inflation and vehicle prices, but they may also pay a premium because their credit is not as good,” said Smoke.
Despite these challenges, the latest sales data shows that the market continues to recover from the post-pandemic supply chain crisis. New vehicle sales in the first quarter of 2023 grew 5.7% over the first quarter of 2022, according to data from Cox Automotive.
However, most of that sales growth has come from higher-income households, Smoke said.
It would take the median household income 43 weeks to pay off the average new vehicle, according to Cox Automotive’s Vehicle Affordability Index in February.
Subprime loans, offered to consumers with lower credit scores, accounted for about 15% of the market in March 2020. By the end of 2022, subprime loans were down to about 5% of auto loans , according to data from Cox Automotive.
“Effectively, you’ve lost about 10% of the previous buying group because they’ve been priced out of the market,” Smoke said.
