An increasing proportion of car buyers are extending their loan terms to make vehicle purchases more affordable, yet monthly payments continue climbing to record levels, according to recent industry data.
In the third quarter, 25.5% of financed new-vehicle purchases had loan terms of 84 months or longer, compared with 21.8% a year earlier, according to Edmunds. During the same period, the average monthly payment reached $787, up from $756 a year prior. The average amount financed for a new vehicle hit a record $44,664, up from $42,744 the previous year. Industry analysts have raised concerns about this trend, noting that extended loan terms may signal that vehicles are beyond buyers’ budgets. A record 21.2% of financed new-car purchases carried monthly payments of $1,000 or more in the third quarter, up from 19.1% a year earlier.
Multiple factors are contributing to the financial strain on car buyers. Consumer spending has outpaced income growth, with that gap historically funded by financial asset gains rather than wage increases. Inflationary pressures continue to squeeze household budgets, while gasoline prices have risen substantially since late February, with regular unleaded averaging $4.36 per gallon as of Monday. Financing costs have remained elevated as well, with the average annual percentage rate on new-car loans holding steady at 7% in the third quarter. Industry economists anticipate further increases in borrowing costs during the fourth quarter due to persistent upward pressure on bond yields.
Extending loan terms carries significant financial consequences for borrowers. The average amount of interest paid over the life of a loan reached a record $9,938 in the third quarter, up from $9,442 a year earlier. Early in an 84-month loan, nearly all monthly payments go toward interest rather than principal, and when combined with standard vehicle depreciation, borrowers often remain in negative-equity positions for most of the loan term. Nearly 30% of vehicles traded toward new-car purchases had negative equity in the second quarter, meaning owners owed more than the vehicles were worth.
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