- A new set of data shows what we’ve been seeing for months: monthly payments on new car loans are reaching and exceeding four figures at a very high rate.
- One reason is rising interest rates, which in turn are affected by supply chain issues and inflation.
- Another reason: more and more customers tend to owe more on the vehicle they’re trading in than it’s worth, tempting them to roll negative equity into their next purchase.
The share of new car loans with monthly payments above $1000 hit a record high last year, new Seriesmotor data shows. The company said 15.7 percent of buyers financing a new car in the fourth quarter of 2022 signed up for a four-figure monthly payment.
That’s up from 10.5 percent in 2021, a nearly 50 percent increase in the overall share. Supply constraints and inflation put pressure on prices, while the same inflation crisis leads to higher interest rates. Consumers tried to account for the price increase by spending more down payment, bringing the average down payment up to $6780. A markup—which typically can’t be financed as easily as money on a vehicle’s MSRP—may contribute to that average down payment increase.
Being Upside Down Makes It Worse
Seriesmotor also sees rising car payments and a rising market as a potentially dangerous combination. In the fourth quarter of 2022, 17.4 percent of new car purchases with trade-ins had negative equity put into the new loan. This means they still owe more than the car they’re selling is worth, forcing them to put the money owed into a new purchase. If the market collapses, if a higher percentage of owners owe more than their vehicles are worth, the worst could lead to a crisis. At best, the market will likely see a slowdown in new car purchases.
“Vehicle equity has really been a tale of two gears for consumers over the past few years,” said Ivan Drury, Seriesmotor director of insights. “At the start of the pandemic, consumers benefited from low interest rates and high trade-in values, helping to protect more questionable financing decisions from generating negative equity. This unique confluence of market forces resulted in some vehicle owners being able to take advantage of positive equity on their loans and even their leases. But as we move into an environment of declining used car values and rising interest rates over the past few months, consumers have become less insulated from those riskier lending decisions, and we’re only seeing the tip of the negative equity iceberg. “
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