Americans could be looking at even more steeper expenses in the future, experts say, as car payments average well over $700 per month for new vehicles - a new record high.
The Fed remained hesitant to raise interest rates in September, but car shoppers still face the consequences of the 11 rate hikes enacted since March 2022. The central bank's rate hikes have also caused higher auto loan interest rates to skyrocket, hindering vehicle affordability.
In the third quarter, the average auto loan interest rate for new vehicles was 7.4%. That is the highest level since 2007 and up from an average of 5.7% a year ago.
The average monthly car payment in the third quarter was $736 per month, up 33% from the previous year when the average was $703 per month.
Jessica Caldwell, head of Edmunds' insights, said benchmark interest rates are expected to remain high before the end of the year. In fact, interest rates are not the only reason to think car payments will continue to be extremely high in the months ahead.
If the UAW strike lasts for several weeks and creates a inventory crunch, retailers and manufacturers may try to raise the prices on their dwindling supply of vehicles. The supply of new vehicles has improved in recent years, which generally means that buyers have more leverage to negotiate prices at the dealership. While monthly payments have been a major issue in the past, higher financing costs have also had a significant impact on vehicle affordability.
The Fed hoped to cause car prices to decrease, but that has only really materialized in the used vehicle market. The average price of a new car in August was $48,451 compared to a year ago, according to Kelley Blue Book.
While car prices are unchanged, you may have to pay thousands more in interest if you take out a new car loan now compared to a year ago.
The fear that interest rates will remain high until 2024 is a worrying sign for consumers who intend to finance a new car purchase. If car supply improves, discounts and incentives could come back.
Average used car payments have increased by just $2 in the past 12 months, up from $565 to $567, according to Edmunds.
Cox Automotive data shows that used car prices have been down about 6% in the past year, partly because of the high financing costs that have reduced demand. Average used car loan rates rose to 11.2 percent in the third quarter, up from 9% a year ago. The increase in loan rates has resulted in a slightly higher average car payment for a used vehicle than it was a year ago.
The used vehicle industry is experiencing ongoing inventory issues. In response to pandemic-era supply shortages, fewer new cars were produced and sold from 2020 to 2022. There's a very limited supply of used cars - 28% less than in 2019, said iSeeCars.com. Plan to pay up if you want to buy a gently used vehicle.
The average cost of a 3-year-old vehicle in 2029 is $32,493, an increase from $23,048 in 2029.
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