As drivers increasingly want brand new, tricked-out versions of vehicles, a record number are making $1,000 or more in monthly payments.
Auto buyers’ guide Edmunds reported this week that more than 15% of consumers who financed a new vehicle late last year committed to paying $1,000 or more a month – potentially straining household budgets in favor of Bigger and Better.
Troubled by the trend toward higher payments and loan terms that can stretch to 10 years, finance pundits blame social media posts that flaunt lavish splendor and a YOLO (you only live once) mentality.
“It used to be about keeping up with its neighbors, and now it’s trying to keep up with everyone on social media,” said Nicole Middendorf, a consultant at Prosperwell Financial in Minnetonka.
Edmunds reports that the trend towards higher payments is being fueled by rising interest rates and buyers’ appetites for newer, larger vehicles with all the upgrades. That can quickly send prices for a Chevrolet Silverado — the most popular vehicle sold in Minnesota last year — from around $40,000 to more than $60,000.
“The $1,000 payments aren’t people buying used Toyota Corollas,” said Greg McBride, chief financial analyst at Bankrate.com.
The trend towards higher monthly payments has continued for years. In the fourth quarter of 2020, just 6.7% of shoppers had monthly payments greater than $1,000. That rose to 10.5% of consumers in the last quarter of 2021 and 15.7% in 2022.
Buyers are forgoing base models in favor of upgrades like advanced driving and connectivity features.
“There is so much that consumers can become addicted to if they want it in their home and want it in their car,” said Ivan Drury, director of insights at Edmunds.
Other factors contributing to higher monthly payments are demand exceeding supply due to production delays, a drop in vehicle leasing, and fewer dealer incentives.
Tom Leonard, co-owner and president of Fury Motors, sees buyers facing reduced availability of the $30,000-$45,000 options they may have leased a few years ago – and they’re not interested in small cars.
“The popular vehicles, the four-wheel drives, the hybrids and crossovers – they are more expensive,” he said.
At the end of last year, the average monthly payment for a new car for nearly six years was $717, with a down payment of $6,780 and an average interest rate of 6.5% for a total of $40,833, according to Edmunds.
Even if gas prices fall, Edmunds reports that EVs are on the way for the top price. For example, the Ford Mustang Mach-E averages $57,988 above Ford’s overall average.
Even the used car market is seeing a surge in consumers committing to over $1,000 in monthly payments. A record 5.4% of consumers agreed to these payments in the fourth quarter, compared to 3.9% a year earlier and 1.5% at the end of 2020.
Consumers are investing more money in their purchases to offset rising costs, Edmunds reported. The average down payment for new and used vehicles hit record highs in the fourth quarter, rising to $6,780 and $3,921, respectively.
Buy high, sell low?
Analysts warn that the combination of more expensive vehicle financing and declining used car values could lead to problems down the road.
About 17% of trade-in new car sales had negative equity in the fourth quarter, according to Edmunds. The average amount owed on these reverse loans was approximately $5,300, which was then factored into the loan amount for the new vehicle.
The situation in Minnesota is likely to be more reserved.
At Walser Automotive’s 17 locations, senior director of finance Jennifer Parsons sees no noticeable increase in loan payments, which average around $500, even for large vehicles.
“Sometimes national market conditions here don’t have the same impact due to the high credit ratings of many consumers here,” Parsons said. “Minnesota has always been isolated from that because Minnesotans handle their money.”
Financial experts recommend buying with cash – or paying off a three to five-year loan and then driving the car for a few more years.
“The thing about car payments is that they’re a total budget buster. For paycheck-to-paycheck households, the culprit is often in the garage,” McBride said. “Higher-income households are also buying higher-priced vehicles and may be in the same situation when financing them.”
Aside from paying for an impaired asset, Prosperwell Financial’s Middendorf warns of other risks associated with a large vehicle payment: using credit cards to pay everyday bills, not saving for a home down payment or for retirement, or worse , feel emboldened to take on even more debt for family trips to Disney World.
She sees that her wealthy clients mostly avoid car loans.
“Nevertheless, there were years when we had 0% funding and wealthier people benefited from it,” Middendorf said. “Right now you’re not going to get 0% financing, so wealthier people are paying in cash.”