High interest rates, car prices lead to record loans, debt
(The Car Connection) -- New car shoppers continue to pay record levels, and many are funding their purchases with record-level loan amounts that teeter into delinquencies and eventually, negative equity, or owing more than the car is worth.
Recent reports from Edmunds and Bloomberg found that high interest rates coupled with high new car prices and cooling used car values have found many Americans upside down on their car loans.
"Even if the US economy avoids a recession this year, consumers will likely struggle to make payments on their auto loans, especially with the
The average new car interest rate rose to 6.5% in Q4 of 2022, up from 4.1% a year earlier, according to data from Edmunds. The confluence of high new car prices and higher interest rates means that borrowers owe more and are taking out longer, more expensive loans to finance their purchase.
The average term limit of a new car loan is 70 months, which has stayed relatively even for the past few years. The difference now is the monthly payment has ballooned to
The average price shoppers are paying for a new car reached
With supply finally catching up with demand, new car shoppers were estimated to spend "nearly
"Despite economic headwinds, the auto industry is on track to deliver year-over-year sales growth alongside record transaction prices and record consumer expenditures for the month of February," said
Now that supply constraints have loosened, more new cars mean that dealers won't be selling as many cars above MSRP as they did during the pandemic. In
Are 7-year car loans the new normal?
That might be down news for dealers, but good news for their financial arms. For now.
Consumers are requesting longer terms as a way of lowering their monthly payments,
Four to five years into that loan, the vehicle can be worth less than what is owed on the loan. So if an owner went to trade in for a new car, they would have to roll the old debt on the trade-in into the new car loan, further compounding the debt.
During the topsy-turvy pandemic world, when the constraints on new car prices let to recored used car prices, a shopper could trade in their car for a much higher value to offset the cost of a new car loan. For a brief time, owners were able to sell their gently used cars for more than they paid for them.
Those days are over. Used car prices have fallen 7.3% in
"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,"
* 2024 Subaru Outback gets
* 2024
* What's New for 2024: Mini
* Test drive: 2023 Cadillac XT6 SUV with Super Cruise excels on road trips
* 2024 Subaru Impreza costs
This means new car shoppers will either keep amassing debt, and increasing the risk of default, or stay in their current vehicles and stop buying new cars.
U.S. companies embark on record borrowing spree, despite paying highest rates since 2009
Fed signals it will raise interest rates more than expected
Advisor News
Annuity News
Health/Employee Benefits News
Life Insurance News