A Surge in Drivers Shelling Out Over $1000 Monthly for New Vehicles
The percentage of new car owners paying $1,000 or more per month for their car payments has reached a new high. According to Edmunds, this figure rose to 17.9% in the fourth quarter of 2023, up from 17.5% in the third quarter and 15.7% in the fourth quarter of 2022. This increase is largely driven by luxury car sales.
Monthly payments and down payments for new cars have also hit record levels. The average monthly payment climbed to $739, surpassing the previous record of $736 from the last quarter and $717 from the fourth quarter of 2022. Down payments have also exceeded $7,000 for the first time.
Jessica Caldwell, Edmunds’ Head of Insights, mentioned that while car financing trends have been tough, with average monthly payments and down payments at all-time highs, there are signs of improvement. Incentives like low APRs with longer loan terms are slowly making a comeback as inventory levels improve.
Ivan Drury, Edmunds’ director of insights, noted that more reasonable loan terms with APRs below 4% are available, but they require some effort to find.
Given that the average cost of a new car is around $48,000, as reported by Cox Automotive, very few Americans can afford a new car without financial strain. A common guideline for car buying is the 20/4/10 rule: put down 20% of the purchase price, take out a four-year loan, and spend no more than 10% of your monthly take-home pay on the vehicle.
A MarketWatch report highlighted that even if you buy a $48,000 car and trade in your old one to reduce the price to $40,000 at a 7.5% interest rate for five years, the monthly payment would still be $801. To afford this, you would need an annual income of $96,100 if you want the payment to be 10% of your income.
So, how are people still buying new cars? Jonathan Smoke, Cox Automotive’s chief economist, explained that some people overspend and delay other expenses to get the car they want. Buyers also opt for longer loan terms to make monthly payments more manageable. In the second quarter of 2023, the average loan term for a new car was 68.4 months, according to Edmunds.
Carl Tannenbaum, chief economist at Northern Trust, pointed out that auto loans and delinquencies have increased. He explained that as cars become more expensive, some households take on larger and longer loans, making it harder for them to manage their finances.