Americans are paying more for their gas —but they’re paying thousands more for new cars than even a couple of years ago, according to a Grid analysis of automotive finance data and market experts. And that’s driving household debt up.
The jump — an average $13,000 more in the overall cost of a new car since 2018 — is largely driven by skyrocketing sticker prices, data shows, but changes in consumer borrowing are also adding to the net cost of a new vehicle.
It’s difficult to say the new vehicle market is available to the average American.
Charlie Chesbrough, senior economist, Cox Automotive
A bunch of related bad economic news has hit car buyers pretty squarely: Rising inflation has pushed prices up, the Federal Reserve’s interest rate jumps have pushed auto lending rates higher, and supply chain issues have squeezed the availability of new cars, further driving prices up.
In response, buyers are borrowing more to buy a car and taking longer to pay it back. That’s adding even more cost to the purchase. While longer-term loans can help keep monthly payments within range of a household’s spending plan, the additional months of interest payments drive up the net cost of their purchase.
Grid compared the data for an average car purchase — average price, loan rate and term length — for 2018 and 2022, and found a net increase of nearly $13,000 in the cost of a new vehicle. Where does that extra cost come from?
Car prices are skyrocketing
The price of new cars and trucks had been rather steady in recent years but jumped by 11.4 percent in 2022, according to the Bureau of Labor Statistics. Prices for used vehicles increased by 7.1 percent.
That’s set an unfortunate record: For the first time, consumers paid more than $48,000 on average for a new car.
Parts shortages take most of the blame for driving sticker prices up, especially a shortage of microchips. On Wednesday, the Senate passed a package to increase funding for domestic chip production. Chiplessness is the biggest cause of shortages of new cars and trucks, said Charlie Chesbrough, senior economist and senior director of industry insights at Cox Automotive.
“When there were new cars, dealers would charge people, and people would pay, thousands of dollars over the MSRP simply because there weren’t enough cars on the market,” said Pamela Foohey, a law professor at Yeshiva University’s Cardozo School of Law, who has published papers on auto lending.
Auto loan rates are also rising
On Wednesday, the Federal Reserve hiked interest rates by three-quarters of a percentage point to combat inflation, making it the fourth increase in five months. Those bumps push auto loan rates up too, driving up the average monthly payment, said Chesbrough.
Many major automakers have increased auto loan rates. In May, for instance, Honda and Nissan increased rates on much of their lineups by 1 percent, beyond that month’s Fed rate hike of 0.5 percent, CarsDirect reported. A 1 percent increase could mean paying upward of an additional $800 in interest on a 2022 Honda Pilot, a popular vehicle, where the MSRP is $39,375 before the down payment, taxes and fees, the service said.
Buyers are borrowing more, longer
Consumers have had to borrow more to pay those higher prices and are managing the size of their monthly payments by stretching them out further. “What the lender’s doing is spreading out the cost of the car over a longer period of time, which overall will decrease someone’s monthly payment,” said Foohey. “But because interest compounds, paying more over a longer time means you pay more in general.”
American buyers are increasingly taking out car loans with terms of six years or longer, according to TransUnion. By the end of 2021, terms 84 months and longer accounted for 18 percent of new auto loans, the credit agency said.
“It leaves the borrower in a vulnerable situation for a very long time,” said Chesbrough. “It’s going to be a very long time before you have any serious equity because you’re extending your loan out over such a long period.”
Auto loans are driving up household debt
All of this — not to mention high gas prices — is restricting the ability of an increasing number of Americans from affording and maintaining a car, experts told Grid.
“It’s difficult to say the new vehicle market is available to the average American,” said Chesbrough. “It’s a luxury product that a minority of people can afford.”
Those willing or needing to take the plunge have driven up America’s car loan balances, which grew by $11 billion, according to the Federal Reserve Bank of New York. And that’s driving up Americans’ total household debt, though originations have subsided since last year’s record high.
Despite the growing debt, delinquency rates have remained relatively low since the covid pandemic began.
“Given what researchers know about people’s finances, in terms of what people will go without and what they will pay, people tend, on average, to pay their car loan as long as possible,” said Foohey.
“It’s the last thing people default on,” she said. “You can’t drive your house to work, but you can live in your car.”
Thanks to Lillian Barkley for copy editing this article.