Record number of car buyers paying $1,000+ per month amid low vehicle inventory

Just when you thought the cost to get into a new car couldn't go any higher, it has — and it will likely continue to rise, car-buying experts at Edmunds said Monday.

The number of car buyers paying $1,000 or more a month to finance a new vehicle is creeping higher, closing in on nearly one-fifth of new-car buyers — an all-time high. The average monthly car payment has topped a whopping $730 recorded in the first quarter to now sit at $733, according to second-quarter vehicle transaction data from Edmunds.

“The double whammy of relentlessly high vehicle pricing and daunting borrowing costs is presenting significant challenges for shoppers in today’s car market,” said Ivan Drury, Edmunds’ director of insights. “The Federal Reserve’s recent pause in interest rate hikes, unfortunately, didn’t offer much relief for consumers, and hints at further raises later this year mean auto loan rates could even continue to increase.” 

Of course, it pays to shop for loans. According to LendingTree, there are credit unions that offer auto loans with an annual percentage rate (APR) starting as low as 4.25%.

High interest rates, short inventory

The high new-car prices are the result of a shortage of new-vehicle inventory across most automakers in recent months. That dearth has helped to support sky-high Manufacturer's Suggested Retail Prices with many dealerships charging above sticker price in recent years.

The new-car shortage started about two years ago with the tight supply of semiconductor chips used in many car parts. Just as that problem eased and parts started flowing back into new-car production, automakers were hit with a transportation problem. As the Free Press first reported last month, the railroads do not have enough rail cars to transport finished cars from the factories to the dealerships, exacerbating the problem of low inventory and high prices.

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Just last week, General Motors CEO Mary Barra talked about the problem at the annual Aspen Ideas Festival in Colorado saying, “One of the biggest issues I have right now is logistics," Barra said. "I have vehicles built that I can’t get on a truck or rail to get them to where it needs to go."

So here is the fallout of all that, along with the higher interest rates, according to Edmunds' second-quarter data:

• The share of consumers who financed a vehicle with a monthly payment of $1,000 or more reached a new peak of 17.1%, up from 12.2% a year earlier. In the second quarter of 2019, before the COVID-19 pandemic and the chips shortage, it was 4.3%.
• Average monthly payments reached a new record high of $733. That compares with $730 in the first quarter and $678 in the second quarter of 2022.
• The average APR ticked up a tenth of a percentage point to 7.1% from the first quarter. But in the year-ago period, it was 5%, making 7.1% the highest APR since the fourth quarter in 2007.
• The average amount financed dropped slightly from a year earlier, but remained above $40,000 for the fifth straight quarter at $40,356 in the quarter. That compares with the year-ago quarter of $40,602.

Not all loans look the same

Edmunds' Drury and its other analysts looked deeper into the rise in consumers willing to pay $1,000-plus in new-vehicle monthly payments. The finding was that "not all four-figure auto loans look the same." Still, paying that much for a new car is not a good idea for long-term finances, personal finance experts said.

Of the consumers who agreed to a $1,000 or more monthly payment, there are two groups, Edmunds said: 

• In the first, nearly 65% of those consumers signed up for an average loan-term range of 67 months and 84 months. Their average APR was between 8.5% and 9.6%. Edmunds analysts say these are consumers who are paying thousands of dollars toward interest compared with principle. They could find themselves owing more than the car is worth in the future.
• In the other group, about 16% of consumers, signed up for a loan term length between 31 months and 48 months and a 2% to 4.8% APR.

Edmunds analysts said the second group is likely made up of people taking advantage of subsidized finance offers, which typically consist of lower interest rates, but shorter-term loans. The shorter terms will save money in the long run. For example, on a typical $40,000 loan, consumers with a 2.9% APR over 36 months can expect to save $8,500 in finance charges compared with those with a 7.9% APR over 72 months, Edmunds said.

You better shop around

“There are better ways and worse ways to spend $1,000 per month on a car note,” Drury said. “Consumers who are paying large amounts of finance charges could be in jeopardy of falling into a negative equity trap, so it’s critical to come to the table with a comprehensive budget and a feel for the financing elements of a car purchase beyond the monthly payment, including the APR."

Consumers looking to replace their vehicle over the next few months, may have to put aside any expectations of the summer discounts that car buyers have come to expect, Drury said.

"But, on a positive note, trade-in values remain elevated compared to prepandemic times," Drury said. "So shop around to ensure you get top dollar for the asset you own.”

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Contact Jamie L. LaReau: jlareau@freepress.com. Follow her on Twitter @jlareauan. Read more on General Motors and sign up for our autos newsletter. Become a subscriber.