The number of Americans paying more than $1,000 a month on car payments has increased as interest rates on car loans surged, according to a recent report.
The percentage of drivers spending upward of $1,000 a month on payments jumped to an all-time high of 17.1% in the second quarter of 2023 compared to 16.8% in the first quarter, according to a report by Edmunds. The amount drivers spent on average also reached a new record high of $733 in the second quarter, up from $730 in the previous quarter.
The higher payments are tied to historically expensive financing terms. The average annual percentage rate (APR) rose to 7.1% in Q2, compared to 7.0% in Q1 and 5.0% in Q2 2022, according to the report.
Drivers also increased borrowing amounts to pay for more expensive vehicles. The average amount financed remained above $40,000 for the fifth straight quarter, averaging $40,356 in the second quarter, the report said.
"The double whammy of relentlessly high vehicle pricing and daunting borrowing costs is presenting significant challenges for shoppers in today's car market," Edmunds' director of insights Ivan Drury said. "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."
Shopping around for new auto insurance could help lower your costs. The Credible marketplace can help you compare multiple providers and find your personalized rate in minutes without affecting your credit score.
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Some Americans paying four figures on car notes could also be at risk of becoming underwater on their car payment, Edmunds warned. This is a real risk for 64.5% of consumers who signed up for an average loan-term range of between 67 and 84 months and an average APR of between 8.5% and 9.6%.
For some borrowers, the higher monthly note comes with significant savings, according to the report. Roughly 15% of these borrowers had loan terms varying between 31 and 48 months with a 2% to 4.8% APR. These consumers pay more monthly because they agreed to lower-rate financing at shorter terms, according to Edmunds.
"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.
"For those with plans to replace their vehicle over the next few months, you may have to reset any expectations of the summer discounts of old," Drury continued. "But, on a positive note, trade-in values remain elevated compared to pre-pandemic times, so shop around to ensure you get top dollar for the asset you own."
If you are struggling with your monthly car payments and want to save money, you could consider finding a new auto insurance provider to lower your premium. You can visit Credible to compare multiple car insurance providers at once and choose the one with the best rate for you.
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Better vehicle supply could push auto prices to normalize to pre-pandemic levels, according to a recent TransUnion and J.D. Power report.
"To a large extent, used vehicle values were elevated as a result of the scarcity brought on by pandemic-related supply chain and inventory issues," TransUnion Senior Vice President Satyan Merchant said in a statement. "As those issues have abated, and inventories have begun to return to more of a normal state, the value of those used vehicles have begun to decline."
Inventories of new vehicles on dealer lots or in transit rose to 1.96 million cars by the beginning of June, up by 73% year-over-year, the highest since April 2021, and double compared to the out-of-stock period in mid and late 2021, according to data from Cox Automotive.
Used car prices also dropped as supply improved and demand waned in June, according to a separate Cox Automotive report. The Manheim Used Vehicle Value Index (MUVVI) declined to 215.1 in June, ending the first half of 2023 down 10.3% from a year ago. Used car sales were down 4.0% in June compared to the previous month.
Shopping for auto insurance is one way to lower your spending on owning a car. Visit the Credible marketplace to compare multiple providers and find your personalized rate in minutes without affecting your credit score.
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