As of May, the average car payment in the United States stands at a steep $760 per month, marking a significant increase from the $535 average seen just a few years ago. This surge can be attributed to a combination of high vehicle prices and soaring interest rates. Despite a slight decrease from the peak of $795 in December 2022, the burden on consumers remains considerable. Furthermore, a striking 17% of car owners are now facing monthly payments exceeding $1,000, underscoring the financial strain many Americans are currently enduring.
Many individuals who purchased cars during the height of the Covid-19 pandemic are now grappling with negative equity, where their outstanding loan balance surpasses the vehicle’s actual worth. In fact, a record 23% of customers with trade-ins find themselves in this predicament, with an average negative equity of over $6,000. This dire situation can be largely attributed to the sharp decline in used-car prices, resulting in unprecedented levels of vehicle depreciation. Consumers are frequently forced to roll over their negative equity into new loans, leading to extended payment periods, higher interest rates, and an endless cycle of debt.
The repercussions of trading in a car with negative equity can be long-lasting and damaging. Increased monthly payments, coupled with higher interest rates, often prolong the repayment period for consumers. As a result, many find themselves continuously indebted for vehicles they no longer own, perpetuating a cycle of financial burden and limited mobility. Edmunds Senior Director of Insights Ivan Drury aptly captures this struggle, stating, “You’re paying off a car from like 10 or 15 years ago. You’ve never actually paid off a vehicle. That means you’re constantly paying for something you don’t even own anymore.”
Despite the bleak outlook, there is some relief in the form of rising incentives for car buyers. Incentives have surged by 81% over the past year, offering discounts, interest rate subvention, and favorable trade-in allowances. However, the impact of these incentives on auto loan rates may be delayed, as any changes by the Federal Reserve typically take approximately six months to manifest. While the Federal Reserve does not directly set auto loan rates, its policies on federal fund borrowing rates indirectly influence the rates banks charge consumers, contributing to the current high price environment.
Looking ahead, the future of car payments remains uncertain. Structural changes within the auto market, combined with inflationary pressures, suggest that high prices and payments may persist for years to come. Despite the potential for short-term relief through incentives, a long-term solution to alleviate the burden on consumers has yet to materialize. As industry experts caution, the prospect of enduring exorbitant car payments may become an unfortunate reality for many individuals in the foreseeable future.