While inflation has been seeping into almost every sector of the economy, cars have been a strong source of pain for many amid some particularly drastic price increases.
Along with regular inflation, a global semiconductor shortage has severely limited the availability of new cars (one estimate found that global carmakers produced 8 million fewer cars than planned in 2022) while also hiking up the prices of many used models.
At one point last August, a lightly-used Toyota RAV4 one could drive off that day cost approximately $5,900 more than a new model one for which one had to be on a monthslong waitlist.
You Pay How Much In Those Car Payments?
A year of sometimes double-digit increases started to wane somewhat by 2023 -- in January, the Bureau of Labor Statistics reported a 0.2% increase in new car prices and a 1.9% drop in used car prices.
But months of rising prices mean that the monthly payments new buyers managed to lock in are still far from affordable for most. According to the monthly Cox Automotive/Moody's Analytics Vehicle Affordability Index, the average monthly payment across the country was $777 last December -- a record high and a 2.1% increase from a month ago.
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Average interest rates also rose by an average 53 basis points although there's hope that now that prices are evening out, this number will also start to stabilize.
"January is always a very light month for sales transactions, so I am not drawing any conclusions from the data we have seen so far other than to say the market's biggest problem is affordability driven by the high level of interest rates," Cox Automotive Chief Economist Jonathan Smoke says in a video accompanying the findings.
Many People Are Going Into Debt For Their Car
The $777 number also reflects the average car while those who either need or are tempted by something more expensive will be paying much more.
A separate report from auto resale platform Edmunds recently found that 15.7% of those financing their cars were paying more than $1,000 a month last quarter. That number was only at 10.5% in 2021 and 6.7% in 2020.
The average buyer put down a respective $6,780 and $3,921 for a new or used car to secure their financing arrangement. This number is significantly higher than the $5,921 and $3,552 they put down in 2021 as many wanted to lower monthly car payments by paying more upfront.
At the same time, a combination of shifting rates and disproportionately high prices at the time of purchase resulted in negative equity for 17.4% of new car buyers. While the best way to avoid such a situation is leasing or buying only the car that one can afford to pay for in full, this is also not an option for many amid ever-rising prices.
"This unique confluence of market forces resulted in some vehicle owners being able to take advantage of positive equity on their loans and even their leases," Edmunds Director of Insights Ivan Drury said in a press statement. "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."
