WASHINGTON, DC — More Americans are taking out longer car loans just to make a new vehicle fit their monthly budget, and the trend is now showing up in record-setting numbers. Edmunds said 25.5% of financed new-vehicle purchases in the third quarter carried loan terms of 84 months or longer, up from 21.8% a year earlier.
At the same time, the average monthly payment climbed to a record $787, compared with $756 a year earlier. Edmunds consumer insights analyst Joseph Yoon said the pressure comes from buyers borrowing more overall, even before interest is added.
Borrowing More Is Driving the Larger Payments
Edmunds said the average amount financed for a new vehicle reached a record $44,664 in the third quarter, up from $42,744 a year earlier. That increase helps explain why payments keep rising even when buyers stretch out repayment periods.
The average transaction price for a new car also remained elevated. Kelley Blue Book said the typical new-vehicle purchase price was $50,089 in August, up 1.9% from the same month a year earlier. Those higher prices leave many shoppers with fewer choices if they want to stay near a target payment.
Yoon warned that needing 84 months just to make the numbers work can be a sign the vehicle is beyond what a buyer can comfortably afford. He suggested considering a used vehicle, a lower trim level or a larger down payment instead.
Inflation and Higher Living Costs Are Squeezing Budgets
The longer loan terms are showing up as households continue to feel the effects of inflation and other cost pressures. Consumer spending exceeded income in August, according to data from the U.S. Bureau of Economic Analysis released Wednesday.
Jeremy Robb, chief economist for Cox Automotive, said the gap between spending and income has widened for months and has been supported in part by gains in financial assets rather than paychecks. He said that balance could become harder to maintain if energy costs stay elevated and the conflict in the Middle East remains unresolved.
For many buyers, that leaves little room to absorb a car payment that is already near the edge of affordability. The result is a market in which shoppers are not necessarily buying less expensive vehicles, but are financing them for much longer periods.
Gasoline and Interest Rates Are Offering Little Relief
Higher fuel costs are adding to the strain. AAA said the average price of regular unleaded gasoline was $4.36 a gallon on Monday, down from $4.47 a week earlier but well above $3.13 a year ago.
Financing has not eased much either. Edmunds said the average annual percentage rate on new-car loans was 7% in the third quarter, unchanged from the previous quarter and from a year earlier. Robb said auto loan rates increased across the board last week as bond yields remained elevated.
Those bond yields matter because car loans are often tied to the five-year or 10-year Treasury note. Patrick Manzi, chief economist for the National Automobile Dealers Association, said higher Treasury yields are expected to push borrowing costs higher in the fourth quarter.
Four-Figure Car Payments Are Becoming More Common
Edmunds said 21.2% of financed new-car purchases in the third quarter carried monthly payments of $1,000 or more, up from 19.1% a year earlier. Among those buyers, 69% financed their vehicles for 72 months or longer.
That matters because stretching the term does not make the car cheaper. It only spreads the cost over more months, while increasing the total amount paid over time.
For households already balancing rent, groceries, insurance and fuel, a four-figure car payment can crowd out other spending. The data show that more buyers are choosing that route anyway, often because shorter terms would push the monthly bill too high.
Longer Loans Mean More Interest and Slower Equity Building
The tradeoff for a longer loan is a higher lifetime cost. Edmunds said the average interest paid over the life of a loan hit a record $9,938 in the third quarter, up from $9,442 a year earlier.
Longer terms also slow down equity building, which can leave owners owing more than the car is worth if they try to sell or trade it in too soon. Yoon said that in the first few years of an 84-month loan, almost every dollar of a payment can go toward interest rather than principal.
Edmunds said nearly 30% of vehicles traded in toward a new-car purchase had negative equity in the second quarter. In those cases, buyers either have to pay off the remaining balance or roll it into the next loan, which can make the new purchase even more expensive.
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