New car buyers are walking a financial tightrope

Consumers are trapped in an “unrelenting” financial squeeze—sky-high auto loan rates, scarce 0% financing offers, and a growing reliance on 84-month loans are making it tougher than ever to afford a new car.

According to newly released data compiled by Edmunds’ car experts, several key auto financing factors could signal trouble ahead for new vehicle sales.

Q3 by the numbers: 

• The average Q3 new car APR interest was 7.1%, marking the sixth consecutive quarter that rates have hovered around 7%.   

• 0% finance deals only accounted for 3% of new vehicle purchases — tempered by substantially fewer options and more “excellent” credit requirements for eligibility.    

• Consumers are signing up for longer loans to keep their payments lower. 84-month auto loan terms accounted for 18.1% of new car loans compared to 17.3% in Q2 and 15.8% in Q1.

Why it matters: Car buyers are taking on longer loans just to get behind the wheel, which could further complicate financial strains down the road. If they continue to struggle with affordability, the industry could face tough times ahead with fewer consumers able—or willing—to enter the market.

What’s more? Despite some optimism that the recent Sept. cut in interest rates by half a point might lure more buyers to the showrooms, most analysts are more pessimistic about what, if any, real impact the cuts will have immediately on auto sales. It’ll likely take a series of interest rate cuts over the coming year to have a true impact on the affordability of vehicles.

What they’re saying: “Q3 was unfortunately the same old story as the first half of 2024 in terms of auto financing conditions: Car shoppers found little relief from the elevated interest rates and high prices, which in turn hindered new vehicle sales growth,” said Jessica Caldwell, Edmunds’ head of insights. “The Fed’s decision to cut rates was a welcome update at the end of the quarter but, on its own, is unlikely to dramatically change the financial landscape for car buyers.”

Follow the money: Longer loan terms can make monthly payments easier to manage, but most Americans aren’t looking to hold onto their cars for seven years. The real risk is that these extended loans increase the chance of carrying negative equity into their next purchase — if they even keep up with their payments in the first place.

• The average American household can reasonably afford a $400/month car payment, according to industry experts.

• But for the sixth consecutive quarter, the share of car buyers paying a monthly car payment of $1,000 or more was above 17%. 

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