Even Buying a Car Requires an Arm, Leg, and Kidney

Is this the worst time for Americans interested in buying a car? Surging interest rates, record-high automobile prices, trillion-dollar auto loans, and $4 gasoline are some of the latest features in today's market. This new reality has forced motorists to accept dealership financing offers with unfriendly terms and conditions.

Are You Buying a Car?

Various data sources point to the same thing: If you want to save some money, it might be better to take the bus or invest in a good pair of shoes. Or maybe a jetpack is hiding somewhere at Tesla Motors or SpaceX.

What isn't expensive these days? A trip to the supermarket requires a payday loan. Home prices are at or near record highs. The return on investment for a four-year college degree is putrid. Add a car to the growing list of affordability issues.

The average price of a new vehicle sold in September was above $50,000, according to Kelley Blue Book. Bankrate estimates the current interest rate on a 60-month new car loan sits firmly above 7%. Edmunds says the average monthly payment on a financed new automobile reached a record $787 in the third quarter. The New York Federal Reserve reported that auto loan debt surpassed $1.71 trillion in the second quarter.

Put simply, buying a new car now costs about 30% more than it did in 2020.

These are not the numbers the typical motorist wants to see. So, what will dealerships have to do to put Johnny and Susie in a car together? Drivers have apparently found a band-aid solution to current trends: stretching out the course of a loan.

According to Edmunds, a record 26% of new-car buyers took out a seven-year loan in the third quarter, up from 22% the same quarter a year earlier. Here is the kicker: The longer the loan, the more consumers are paying in interest. The firm noted that borrowers paid almost $10,000 in interest over the loan’s lifespan. That’s a new record!

Ivan Drury, Edmunds’ director of insights, offered words of wisdom:

“For some shoppers, a longer loan term may be the only way to get the vehicle they need, but it’s important to understand the trade-off.

"Stretching out a loan shouldn’t be a way to talk yourself into a vehicle that doesn’t make sense for your budget when you look at the total cost. When buyers are already financing nearly $45,000 and taking on another nearly $10,000 in interest, it’s critical to think beyond whether the monthly payment works today and consider what you’re committing to over the full life of the loan.”

Demand Is Strong

Economists have often referenced consumer resilience since the pandemic. Despite inflation ostensibly becoming the new normal, borrowing costs surging, and consumer sentiment near a record low, shoppers are still spending and keeping the economy afloat. Call it the wealth effect or a strong labor market, but people are still opening their wallets and buying new vehicles.

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New-vehicle sales surged almost 5% year-over-year in September to more than 1.3 million units. Full-year sales are projected at almost 16 million units, according to Cox Automotive, near recent averages.

Experts ascribed it to adaptation. "They’re allocating more of their household budgets to their vehicles, stretching out their loan terms, and becoming more proactive about shopping around for financing to find ways to make the numbers work," Jessica Caldwell, Edmunds' head of insights, said in a news release.

Young Drivers, Where Art Thou?

Buying a car is one of the biggest decision anyone will make in his or her lifetime. It ranks alongside buying a home or going to college. Like the US real estate market or the current state of higher education, however, young Americans scoff at even getting licenses. Some contend it is because of the cost (vehicle, insurance, gas, maintenance, etc.), and others argue that it is all Uber’s fault. Either way, the more expensive car ownership becomes, the further out of reach it will be for Gen Z, Gen Alpha, and Gen Beta.

Time to hail a cab.