Record share of Americans are paying $1,000 or more on monthly car payments
A growing number of Americans are paying four figures each month on their car notes as auto loan rates have catapulted in recent months.
Nearly 15% of drivers who financed a new vehicle toward the end of 2022 are shelling out more than $1,000 a month, the highest percentage ever recorded, according to automotive research company Edmunds. About 5% of consumers who financed a used car during that same period are also paying north of $1,000, which is also a record, Edmunds said.
The chances of a pricier car note will hopefully motivate drivers to shop around and compare interest rates among banks, credit unions and dealerships, Edmunds director of insights Ivan Drury said. One percentage point increase adds roughly $20 a month to a car note and thousands of dollars extra over the life of a loan, Drury said.
"Most people were used to very low rates but now you must be aware of what your interest rate is," he told CBS MoneyWatch.
As the Federal Reserve continues to raise interest rates in its battle against inflation, rates on auto loans have spiked, Drury said. The average rate for both new and used automobiles is 6.5% and 10%, respectively, compared with 4.1% and 7.4% a year ago, Edmunds noted.
To be sure, the majority of drivers aren't paying four figures for their auto loans, but average monthly payment data from Edmunds suggests that many are headed in that direction. The average car note at the end of 2022 was $717 for new cars and $563 for used, compared with $525 and $389, respectively, five years prior.
Buying a car became a more costly proposition in 2022 as data from Edmunds and Kelley Blue Book revealed Americans paid record prices for a set of wheels, whether new or used. Prices soared in part because automakers couldn't pump out enough high-demand models, like electric vehicles and fully loaded SUVs.
Shortages in semiconductor chips and other car parts hobbled the auto industry last year, causing sales to drop 8% from 2021 figures. Automakers reported this week that they sold 13.9 million cars, trucks, SUVs and vans last year. Analysts now expect auto sales to grow by roughly 1 million to around 14.8 million this year as demand remains strong.
Chip shortage amid pandemic
The chip shortage began in spring 2020, when automakers were forced to close factories due to the coronavirus pandemic. Chip makers shifted production to digital devices to feed a boom in computer and gaming sales as people were stuck indoors. When auto plants eventually restarted, chip makers weren't making as many semiconductors for automobiles.
A third of drivers who purchased vehicles in 2022 settled for a used car or a model they didn't want because dealerships had limited supplies last year, respondents told a survey from auto insurance website Jerry. A quarter of drivers plan to shop for a vehicle in 2023, according to the survey, which was released this week.
While about half of survey respondents said they didn't plan on buying a new vehicle at all in 2023, some noted that lower interest rates could persuade them.
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Drury said one way to get a lower auto loan rate on a new car is by purchasing the vehicle automakers want to sell the most. Dealerships slap a slightly lower rate on the makes and models they're particularly interested in moving, he said.
Shoppers looking for a bargain on a used car should get a certified pre-owned vehicle because "they're the only place on the market you'll find incentivized interest rates," Drury said. Certified pre-owned cars are typically low-mileage, somewhat new vehicles that drivers return from a lease. That said, they're tougher to find these days because consumers and rental car companies aren't returning leased cars to dealerships as often as they did in years past, Drury said.
Still, if you can find something certified pre-owned, dealerships offer a much lower rate because "they see it as a gateway to buying a new car from them."
—With reporting by the Associated Press.