Are you struggling with car prices? Find out why car payments are too high at the moment!
Car payments prices have increased in recent years, due to high prices and rising interest rates, and experts believe they will remain elevated for some time. According to Moody’s Analytics, the average monthly car loan payment was $760 in May, representing a 40% increase from the $535 average in May 2019. Edmunds, a car shopping site and industry data provider, reports that 17% of car owners pay over $1,000 per month.
“The idea you’re going to pay $700, $800 a month for the next six years, I mean, it just sounds crazy for a depreciating asset”, said Charlie Chesbrough, senior economist for Cox Automotive.
Negative Equity and Rising Payments
Many customers who bought cars at high prices during the Covid-19 pandemic are now struggling with it, they owe more on their loans than their cars are worth. According to Edmunds, 23% of customers with trade-ins had an average negative equity of over $6,167 in the beginning of the year. The sharp decline in used-car prices from pandemic highs has led to higher depreciation rates for many vehicles.
Having some negative equity when trading in a car is common, with about one-third of trade-ins carrying negative equity before the pandemic. However, the amount of negative equity now is alarming, says Ivan Drury, Senior Director of Insights at Edmunds. When consumers trade in cars with negative equity, they often add the remaining loan balance to their new car loan, resulting in higher payments and interest rates for longer periods.
In the first quarter of 2024, the average payment for a trade-in was $736, with an interest rate of 7.1% over 68 months. For those with negative equity, the average payment was $887, with an interest rate of 8.1% over nearly 76 months.
“You’re paying off a car from like 10 or 15 years ago. You’ve never actually paid off a vehicle. That means you’re constantly paying for something you don’t even own anymore”, Drury said.
Potential Relief for Car Buyers
Despite incentives – direct discounts, 0% interest for certain periods, or above-market trade-in allowances – increasing by 81% over the past year, according to Moody’s, it is uncertain when the Federal Reserve will lower interest rates, which affects the rates banks charge customers for auto loans. Even after they do, it typically takes about six months for these changes to affect auto loan rates. In addition to that, inflation continues to rise vehicle prices.
“Inflation has remained a little higher and stickier than we thought. So the Fed’s expected date of lowering interest or lowering the prime rate has been pushed out. The manufacturers lower the interest rate artificially using incentives. So you’ll see some relief there. However, real relief in the actual interest rate isn’t going to come until after this year”, said Mike Brisson, senior economist for Moody’s.