There is a crisis in the automobile sector in the United States, a country that in 95% of the regions requires a car to get to work and do the daily shopping.
New car buyers continue to pay record levels, and many are financing their purchases with record loan amounts, having trouble paying them off, adding negative equity, or owing more than the car is worth.
High interest rates coupled with high car prices and used car values have found many Americans upside down on their car loans.
“Even if the US economy avoids a recession this year, consumers will likely struggle to make payments on their auto loans, especially with the Federal Reserve planning to continue raising interest rates,” Bloomberg reported.
The average new car interest rate increased to 6.5% in the fourth quarter of 2022, from 4.1% a year earlier.
The confluence of high car prices and higher interest rates means borrowers owe more and are taking out longer, more expensive loans to finance their purchase.
The average term limit for a new car loan is 70 months, which has held up relatively well even in recent years.
The difference now is that the monthly payment has skyrocketed to $717 per month in Q4 2022, up from $659 a year ago.
Nearly 16% of new car borrowers pay more than $1,000 per month, a record, due to the double whammy of high car prices and high interest rates.
Median price shoppers are paying for a new car hit $46,229, which is a record for the month and up 4.8% from February 2022.
In December 2022, the average hit $47,362, which was a record for any month in history.
The median new car price has risen 20% since the start of the pandemic, with no sign of it cooling off any time soon
With supply finally catching up with demand, new car buyers are estimated to spend nearly $42.0 billion on new vehicles in the month, another February record.
“Despite economic headwinds, the automotive industry is on track to deliver year-over-year sales growth along with record transaction prices and record consumer spending for the month of February,” said Thomas King, president of data and analytics at JD Power.
Now that supply constraints have been loosened, more new cars mean dealers won’t be selling as many cars above MSRP as they did during the pandemic.
In July 2022, the number of vehicles sold above MSRP was 48%, compared to 31% now. JD Power estimates that dealerships make $3,820 on every new car sold, which is down more than 23% from a year ago.
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That might be news for dealers, but for now, it’s good news for your financial weapons.
Consumers request longer terms as a way to lower their monthly payments. In the third quarter of 2022, 20% of new car borrowers have committed to at least seven and 84 months of loans, according to Experian.
And used car borrowers got in on the action, with 11% of borrowers agreeing to a seven-year loan.
Four or five years after that loan, the vehicle may be worth less than what is owed on the loan. So, if an owner were to trade in a new car, he would have to roll over the old debt over the negotiation on the new car loan, further aggravating the debt.
During the pandemic world, when caps on new car prices allowed used car prices down, a buyer could trade in their car for a much higher value to offset the cost of a new car loan.
For a brief time, owners were able to sell their low-mileage cars for more than they paid for them.
those days are over
According to the Manheim Used Vehicle Value Index, used car prices have fallen 7.3% in February 2023 from the previous year.
New car buyers will continue to accumulate debt and increase the risk of default or stay in their current vehicles and stop buying new cars.
Source: Auto News, Car Connections, Bloomberg