In the third quarter, 25.5% of financed new-vehicle purchases had loan terms of 84 months or longer, a significant increase from 21.8% a year earlier, according to Edmunds. The average monthly payment for new vehicles also hit a record $787, up from $756 the previous year.
Joseph Yoon, a consumer insights analyst at Edmunds, noted that rising monthly payments are due to buyers borrowing more, with the average amount financed reaching $44,664, compared to $42,744 a year prior. The average transaction price for new cars was $50,089 in August, reflecting a 1.9% increase year-over-year.
As inflation continues to pressure consumer budgets, many are resorting to longer loan terms to afford their purchases. Jeremy Robb, chief economist for Cox Automotive, highlighted that consumer spending has outpaced income, raising concerns about sustainability if energy costs remain high. The average price for gasoline has risen to $4.36 per gallon, up from $3.13 a year ago.
Financing costs remain high, with the average annual percentage rate on new-car loans at 7%, unchanged from previous periods. Patrick Manzi, chief economist for the National Automobile Dealers Association, anticipates that borrowing costs will increase in the fourth quarter due to elevated bond yields.
Additionally, 21.2% of financed new-car purchases had monthly payments of $1,000 or more, with many borrowers extending their loans to 72 months or longer. This trend leads to higher interest costs over time, with the average interest paid over the life of a loan reaching $9,938.
The risk of negative equity is also growing, as nearly 30% of vehicles traded in the second quarter had negative equity, meaning owners owed more than their vehicles were worth. Yoon cautioned that longer loans could result in buyers remaining in a negative-equity position for most of the loan term