Americans borrowed a record $211 billion to pay for their cars last quarter
Car loans are hitting a new gear in pressuring drivers' wallets.
Americans took out almost $211 billion in auto loans this past spring, notching a new record, according to the Federal Reserve Bank of New York.
The all-time high reflects the sheer amount of money people need to buy new cars now, with vehicle price tags averaging around $50,000.
This week's second-quarter auto-loan data is also a reminder of how far drivers have sped past the days when five-year car loans were typical and cheap new cars were easy to find.
A car loan is often the second-largest expense people pay, after their mortgage or rent. But the squeeze on drivers' wallets has intensified in recent years, powered by rising purchase prices and high interest rates.
Monthly car payments have grown, averaging $785 a month in July on new cars, compared to $751 a year ago, according to Edmunds data. The payments are also sticking around for longer, while a growing share of drivers are taking out loans that are worth more than their vehicle's value.
Even as loans have become more expensive, getting approved for one is not an issue for most Americans, because lender approval rates have remained "fairly resilient," said Jonathan Gregory, senior director for Cox Automotive's Economic and Industry Insights team.
"The cost has shown up in loan structure instead: longer terms, down payments that never fully retreated, and a persistently high share of borrowers starting underwater," Gregory said. "That's a slower, less visible squeeze on the household balance sheet than an approval crunch." As interest rates marched upward over the past few years, average down payments grew from around 10% of a vehicle's price to around 13% to 14% and "never came back down," he noted.
Car prices jumped during 2021's supply-chain crisis and have largely been stuck at a level many Americans struggle to afford. There's little indication that purchase-price pressures will relent soon. July inflation data showed prices for new cars increased 1.1%, while those for new trucks increased 0.5% year over year.
Here are three ways that Americans' auto loans have been reshaped in recent years - starting with the amount of money going toward these loans.
Larger loans
Cox's Gregory has theories about the second-quarter pop in auto financing: It could be attributed, at least partly, to more electric-vehicle and hybrid sales as gas prices increased, he said.
Hybrids and EVs are generally more expensive than gas-guzzling cars, with the average new EV sales price over $56,000 in June, according to Kelley Blue Book. It could also be a sign that even higher-end consumers are looking for more financing as they hold on to their cash for other uses.
Despite high prices on the car lot and elsewhere, new-car sales have been strong this year. Affluent consumers seem to be the engine that's powering the trend, economists say.
There is a seasonal "spring bounce" that occurs when people shop ahead of the summer, possibly flush with an income-tax refund. This spring, refunds were larger than normal because of the new tax law, Gregory noted - but that still doesn't fully explain the jump in loan amounts, in his view.
The second-quarter car-loan numbers reflect the high costs of cars, according to New York Fed researchers. They said the figures are not adjusted for inflation.
Other numbers show individual loan amounts are growing. The average loan for a new car to a driver with a prime credit score averaged over $46,000 in the first quarter, according to Experian (EXPGY) (UK:EXPN). That's up approximately $2,000 year over year.
Drivers don't shop for cars every year, noted Jessica Caldwell, head of insights at Edmunds. "Anyone in the market now is noticing a massive price differential" compared to when they last shopped, she said.
The cheap new car priced at $25,000 is "nearly gone," according to Edmunds research.
Yet many drivers can't afford to hold out, because they need wheels for work and life. That can lead to a "buy, then plan" approach - one where drivers think, "I'm just going to buy my car, and figure out the rest of my budget," Caldwell said.
The rise of longer loans
One big way drivers are trying to control their monthly costs is by stretching the terms of their loan, said Caldwell. The average loan term on a new car was 70.6 months in July. Last year, the average was 70.1 months, according to Edmunds data.
At this point, the once-standard five-year car loan seems far away, according to Experian data.
The number of 72- and 84-month car loans has been growing, Gregory said, while he number of 36-, 48- and 60-month loans has been shrinking.
The "clearest story" of car loans in recent years has been their lengthening terms, according to Gregory. "The industry's main tool for keeping payments manageable as prices rose has been stretching the loan, not lowering the price," he said.
Cars lose value the longer they stay on the road. One challenge for drivers has been the rise of "negative equity," which happens when the person owes more on the loan than the vehicle's value.
Dealertrack data showed 57% of auto loans started in July had an amount financed at signing that was above the vehicle's value, according to Gregory.
This can happen when a buyer trades in a car with negative equity, because it's likely that what they still owe gets rolled into the new loan. Some dealers say they'll pay the remainder, but they sometimes pass this cost on to the consumer.
Drivers may be done with a car - and its pricey loan terms - long before they can pay off the loan, Caldwell said. "It's a hard situation to get yourself out of," she said.
Sharper disparities in the loan market
The latest New York Fed debt report shows a larger share of auto-loan money is going to borrowers with top-tier credit scores. In a record-breaking quarter for car loans, 41% of the money went to borrowers with scores at least 760.
A person's credit score doesn't necessarily reflect their income; it measures their ability to pay debts on time. At a time when bills are going up, however, credit scores can offer a peek at what's happening at different income levels.
Over half of all new vehicles have been purchased by the country's top 20% of earners in recent months, according to an Oxford Economics note earlier this month.
Most of the new-car market has "been held up by the high end of the 'K' shape" said Gregory, referring to a "K-shaped economy" where wealthier consumers are doing the bulk of discretionary spending.
It's possible even the people with the best credit scores are looking to finance more because they are considering different ways to use their cash, Gregory noted.
"Lenders are fairly comfortable with the current macroeconomic conditions to keep lending money," he said. At the same time, there's been a continuing "retreat from subprime lending," he added.
Around 16% of the loans funded in July went to subprime borrowers, Gregory said. For four straight months, the share of loans to subprime borrowers has been shrinking - even though it's up year over year.
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