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How long will car payments remain high?
Anna del Villar
June 18, 2024
New car affordability improved in May. But, high prices, interest rates, and negative equity are keeping car payments near all-time highs.
By the numbers: The average monthly payment declined 1% to $752, only $43 less than the peak in December 2022, according to Cox Auto.
Key quote: “The improvement in affordability was a result of improving incentives, lower interest rates and ongoing income growth,” said Cox Automotive Chief Economist Jonathan Smoke.
The good news: According to Moody’s Analytics, incentives have risen 81% year-over-year.
These incentives can come in the form of straightforward discounts, sub-vented interest rate terms, trade-in allowances, and more.
Income growth has also grown 3.7% from a year ago. The average number of weeks of income to purchase a new car dropped to 37.1 weeks, down 6.2% from last year, says Cox Auto.
The bad news: Over 17% of car owners are paying more than $1,000 a month for their vehicle, according to Edmunds – and it’s been that way for a year.
The sharp decline in used car prices has accelerated depreciation for a lot of vehicles, leading to a rise in negative equity.
Car owners often have a bit of negative equity. One-third of trade-ins had it before the pandemic. But, the amount nowadays is raising red flags.
In Q1, 23% of customers with trade-ins had negative equity of more than $6,167 on average, according to Edmunds. The average vehicle payment with a trade-in was $736, with an average interest rate of 7.1% for 68 months. The rate for a trade-in with negative equity was $887, at a rate of 8.1%, for nearly 76 months.
What’s more: The Federal Reserve's attempts to curb inflation haven't been as effective as hoped. Interest rates are at multi-decade highs.
Yet, the estimated average auto loan rate declined in May by 22 basis points (BPs) to 9.98%, the lowest average rate in 11 months, says Cox. Still, the average buyer will now pay an additional $4,250 in interest over the life of their loan compared to 2021, according to Edmunds.
Why it matters: While there is some glimmer of hope with affordability thanks to rising incentives, lower average prices, and growing income, the overall market remains tight. Dealers will likely face continued pressure on their profits and will have to offer bigger discounts to attract consumers. Car buyers, on the other hand, still don't have meaningful relief on their monthly payments and likely won’t anytime soon. High interest rates and negative equity on trade-ins are major roadblocks for many consumers.
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