It’s no secret that the economy has been a bit all over the place the past few years. And while there are many reasons for this and many factors at play, one thing is for certain: a lot of people have seen their debt increase recently. In fact car loan debt is now at an all time high, with more people shelling out more and more money every month for their new car payments. So what’s going on?
Here’s why car loan debt is at an all time high right now.
How high is American car loan debt?
US auto loan debt is at around 1.552 trillion dollars, which is up about 1.84% from the previous year. This number sounds so large it’s hard to actually imagine how much debt this is, but for the 107 million Americans who have auto loans, this means that their payments are higher than ever before. The average monthly car loan payment is over $700, up from about $620 last year. On top of that, 2 out of every 13 people with a car loan today are paying over $1000 a month.
These high car payments make paying for a new car nearly impossible for most people with moderate incomes, and many analysts feel that new cars are becoming a luxury that only high income families can afford.
Reason #1: The interest rates are high.
One of the primary reasons for the high amount of auto loan debt is the high interest rates. In an effort to combat inflation, The Fed has been increasing interest rates steadily over the past two years, which has had complicated implications for the economy at large.
The Fed has the task of balancing interest rates in a way that encourages reasonable savings and reasonable investing. When rates are very high, spending is discouraged and saving and investing is encouraged. When rates are low, spending is encouraged and saving and investing are discouraged.
In order to get our economy back on track after the pandemic, The Fed lowered interest rates to encourage spending and revive the economy. But now it must slow the amount of spending to decrease demand and keep the value of the dollar steady. And all of this leads to now, where the prime rate (the benchmark interest rate for the economy) is particularly high. This high prime rate affects rates across the board, including mortgages, credit card rates, and auto loan rates.
This increase in car loan interest rates makes getting a new car all the more expensive, and makes it unattainable for some. These rate increases affect everyone, but they will affect those with lower credit scores the most. So if you need a new car and depend on a loan, you might be out of luck (and get yourself way in debt).
Reason #2: Car prices are high.
On top of the rising interest rates, cars are just more expensive in general right now. The average new car cost $49,075 at the end of 2022, which was an increase of $2,297 over the previous 12 months. So why such a jump?
Inflation is certainly part of the story, but there are many other factors that are causing this increase. The major factor is simple supply and demand. Auto manufacturers are still playing catchup from the pandemic which caused manufacturing to slow majorly. And there are still many people who are simply willing to shell out the money for a new car. Pickup trucks specifically have been selling particularly well, with Kelley Blue Book reporting that Ford sold more than 75,000 F-series trucks in December alone, with an average sticker price of $66,451. If people are willing to pay the price, manufacturers have no incentive to reduce prices. Automakers are still recording record high profits despite the fact that they are excluding millions of Americans from the car buying process. So even as we are moving past low supply levels, it seems unlikely that prices will lower.
Additionally, new cars just have nicer features than ever before. Car buyers have come to expect a certain high level of trim, safety features, and infotainment systems that all add to the base price of the car. Cars are also more powerful now than ever before, with more horsepower coming standard.
When you add on a few upgrades it’s easy to see how a new car price can tick up north of $50,000 very quickly.
What should I do if I want to buy a new car?
Unfortunately you might not have a ton of options if you have your heart set on a new set of wheels. If you can wait it out for a few months (or even a year) you may find better rates and reduced prices, but nothing is a guarantee. Some manufacturers are offering incentives and deals to encourage sales, but it might not be enough to make the sale worthwhile.
If you really need a new car, it’s important to make sure your personal finances are in good order (a good credit score is still your best bet to get a good car loan interest rate). But there are also some other steps you can take to keep your car payments reasonable.
- Get preapproved for a loan. This will help to give you more negotiating power when you step foot in the car dealership. You already know what interest rate you have been approved for, so you know what interest rate the dealer will have to beat if they want to finance with you.
- Do your research ahead of time to compare prices. Look around at different dealers to compare prices and see where you can get the best deal.
- Decide what features you need. Determining which features you can’t live without will also help to keep you in your budget. Skipping on the upgrades and addons is a great way to keep your monthly car payments more manageable.
- Get a cosigner. If your credit score isn’t great, a cosigner may help you to secure a better car loan APR than you would be able to secure on your own.
- Buy your leased car to get a good deal. You will be able to buy your leased car for the amount that is listed in your leased contract, so you might get the best deal that way.
While these steps may help to make your payments more manageable, it might make the most sense for you to wait on your new car purchase.
That’s why car loan debt is at an all time high (and what you can do to get the best deal possible).
If you are interested in buying your leased car, contact Auto Approve today to see how they can help!