More Americans Than Ever Have Monthly Auto Payments Over $1,000

Higher interest rates are translating to record car payments among Americans borrowing money to purchase new vehicles.

Actions from policymakers at the Federal Reserve to tame inflationary pressures have led to the fastest increase of the target federal funds rate in decades, impacting interest rates across the economy and raising the cost of borrowing money for consumers and businesses. The average annual percentage rate on new financed vehicles increased from 5.7% in the third quarter to 6.5% in the fourth quarter, according to data from the car review website Edmunds, while the rate for used financed vehicles increased from 9% to 10%.

“At the onset of the pandemic, consumers benefited from low interest rates and elevated trade-in values, helping shield even the more questionable financing decisions from resulting in negative equity,” Edmunds Director of Insights Ivan Drury said. “But as we shifted toward an environment with diminished used car values and rising interest rates over the past few months, consumers have become less insulated from those riskier loan decisions, and we are only seeing the tip of the negative equity iceberg.”

Negative equity, which occurs when a debtor owes more money than an asset is worth, applied to 17.4% of new vehicle sales in the fourth quarter, marking an increase from 14.9% of sales in the third quarter. “Rapidly rising interest rates created an even greater barrier to entry for consumers who rely on financing,” added Drury, “which is the vast majority of car shoppers.”

Although the typical monthly car payment was $717 in the fourth quarter, constituting an increase from $659 in the previous quarter, the share of consumers paying $1,000 or more each month reached 15.7%, the highest reading on record. Average down payments surged to $6,780 from $5,921 over the same period as more consumers sought to avoid high rates.

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