Everyone is still feeling the ripple effects of inflation, which has increased costs across the board. As GOBankingRates has recently reported, the Federal Reserve raised interest rates 11 times since March 2022 alone, which hasn’t helped the cost of monthly auto loan payments for consumers.
According to automotive information guide Edmunds, a record number of people are paying in excess of $1,000 per month for their auto loan payments. The percentage of auto buyers whose payment rose above $1,000 per month in the third quarter of 2023 has jumped to 17.5%, an increase of 0.4% from 17.1% in the second quarter.
Demand and High Interest Rates Cause Higher Monthly Payments
Demand and prices for both new and used vehicles surged from the onset of the COVID-19 pandemic largely due to a global chip shortage. Concurrently, the Federal Reserve raised interest rates an unprecedented number of times since the pandemic began in an effort to quell stubbornly high inflation.
The combination of these two factors led to auto buyers paying an average interest rate of 7.4% for new vehicles in Q3 of 2023 (up three percentage points since Q2) while the rate for used vehicles jumped two percentage points to 11.2% since Q2, the highest since 2007, per Edmunds.
“Spiked interest rates remain the biggest impediment to affordability in both the new and used car markets today,” explained Jessica Caldwell, Edmunds’ Head of Insights. “And while the Federal Reserve held off on raising the federal funds rate in their most recent session, the expectation is rates will remain high or even increase slightly through the end of the year, which may help tame inflation in the long run but is inflating monthly payments for now.”
Additionally, 64.5% of buyers with payments in excess of $1,000 per month hold long-term loans ranging from 67 to 84 months. Not only are some people taking auto loans for as long as seven years, but they’re also paying thousands of dollars in interest across the loan term. Only a select group of 15.6% have shorter-term loans ranging from 31 to 48 months, resulting in higher monthly payments but less interest.
“The largest segment of consumers financing a new car today has a 7.9% APR,” said Ivan Drury, Edmunds’ Director of Insights. “That’s a far cry from those spring 2020 pandemic deals of 0% financing for 84 months that drove significant sales of large trucks and SUVs.”
Tips To Reduce Auto Costs
Here are some tips to reduce your overall auto costs while auto loan interest rates remain high:
Keep Your Car if You Already Fully Own One: If you already own your car outright and no longer have an auto loan payment each month, consider keeping it rather than trading it in for something newer or nicer.
Consider Purchasing a Used Vehicle Over a New Vehicle: While it’s always nice to get yourself into a brand-new set of wheels, consider purchasing an older, less expensive vehicle that may have a little more wear and tear and a few more miles on the odometer.
Rent Your Car on a Car-Sharing Platform: To recoup some of your monthly auto expenses and offset the higher costs, consider renting out your vehicle on a car-sharing platform such as Turo or Getaround to earn some extra cash when not driving your vehicle.
Sell Your Car if You Have More Than One: If you’re part of a family or couple that has more than one vehicle, consider selling one car and sharing another to eliminate a monthly auto loan payment and reduce monthly care costs overall.
Use Public Transit Options if Possible: If you live in an area with accessible public transit, consider taking a train, subway, ferry, or bus to get to your destination instead of purchasing a car for your transportation needs. If you don’t live near public transit, consider walking, riding a bike or using an electric scooter when possible.
The cost of purchasing a vehicle in today’s market has reached new heights thanks to perpetually high inflation, demand for vehicles, a global chip shortage and interest rate hikes. The Federal Reserve continues to maintain higher interest rates across the board with no sign of dropping, which continues to keep auto loan rates very high. Whether it’s the purchase of a new or used vehicle, it’s unclear when the cost of auto purchases will decrease.
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This article originally appeared on GOBankingRates.com: New Car Market: $1,000 a Month Car Payments Are Becoming the New Normal; How Much Should You Be Paying?