A growing share of new-vehicle purchases are financed through extended loan terms, with 25.5% of financed new cars in the third quarter carrying 84-month or longer loan periods, up from 21.8% a year prior, according to data from Edmunds. This trend reflects broader affordability challenges as both vehicle prices and monthly payments continue to climb.
The average amount financed for a new vehicle reached $44,664 in the third quarter, representing a significant increase from $42,744 a year earlier. Despite buyers stretching their loans over longer periods, the average monthly payment still rose to a record $787, up from $756. The average transaction price for a new car was $50,089 in August, up 1.9% year-over-year, according to Kelley Blue Book data.
Analysts characterize the trend as a potential warning signal. An Edmunds analyst noted that requiring an 84-month loan term to make payments manageable suggests a vehicle may be outside a buyer’s true budget, and recommended considering used vehicles, less expensive trims, or saving for a larger down payment. The shift comes amid ongoing inflationary pressures squeezing consumer budgets, with consumer spending having outpaced income in August according to government data released this week.
Extending loan terms carries financial consequences. Borrowers typically pay substantially more interest over the life of the loan, with average interest paid reaching a record $9,938 in the third quarter, up from $9,442 a year earlier. Additionally, with more of early payments going toward interest rather than principal, borrowers build equity slowly and face higher risk of owing more than the vehicle is worth if they sell or trade it in before the loan is paid off. Nearly 30% of vehicles traded in the second quarter carried negative equity, meaning owners owed more than the vehicle’s value.
Financing costs have provided limited relief. The average annual percentage rate on new-car loans remained at 7% in the third quarter, unchanged from the prior year, while bond yields and broader market pressures are expected to increase auto loan interest rates further in coming months. A record 21.2% of financed new-car purchases had monthly payments exceeding $1,000 in the third quarter, with 69% of those buyers financing their vehicles for 72 months or longer.
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