Buyers are paying more than ever before for that new car, truck or utility vehicle, and they’re financing more than ever too.

A new report from Edmunds reveals according to third quarter data, the average amount financed is the highest ever at $41,347, up over $3,000 from the same period last year. The average interest rate on new vehicle loans is also up to 5.7% for the first time since Q3 2019. The last time this happened, sales dropped. 

Further, the average monthly vehicle payment remains more than $700, and 14.3% of buyers locked into a monthly payment over $1,000. That’s the highest percentage of buyers with four-digit payments ever recorded.

“High prices and rising interest rates are dealing consumers a one-two punch by catapulting monthly payments into a new realm,” said Jessica Caldwell, Edmunds’ executive director of insights. “With new vehicle purchases, automaker subsidies offer a bit of relief, but even those are far less generous than before. Consumers heading into the car market may be aware of high prices but also need to brace themselves for a different experience in the F&I office.”

Shorter terms mean better interest rates

One factor at work on the higher loan payments is that buyers are choosing shorter-term loans, which usually offer a more attractive interest rate from financial institutions or may be subsidized by the automakers. 

Edmunds data shows 9.3% of financed new car purchases had an average loan term of 48 months or less in Q3 2022, compared to 4.5% in Q3 2020 when low interest rates and longer loan terms were more attractive.

Edmunds pointed out the total cost of borrowing differential on a $40,000 car loan for 72 months at 5% APR versus 36 months at 1.9% APR. They note that jumping from 5% APR at 72 months to 1.9% APR at 36 months would push up the monthly payment by $500 to $1,144 but would save a consumer $5,200 in interest paid over the life of the loan.

“Most car shoppers tend to have tunnel vision when it comes to their monthly payments and their knee-jerk reaction is to stretch out their loan terms to make pricier purchases a bit more palatable, but that’s a huge risk to take when cars are already selling above MSRP and interest rates are so high,” said Ivan Drury, Edmunds’ director of insights. 

“Consumers who want to save where they can must think about the big picture when it comes to financing their car purchase. It might be a hard pill to swallow to agree to a much larger monthly payment, but if your ultimate goal is to save money and stay out of the red, you could save yourself thousands of dollars by taking this step — just make sure that the monthly payment you agree to is still within your means.”

Negative equity on the horizon?

Another reason buyers are turning to shorter-term loans is uncertainty in the economy. With many indicators pointing to recession, the current overheated jobs and services market that is keeping many buyers flush with cash could evaporate. 

If that happens, many buyers could find themselves with a payment they cannot afford on a vehicle in which they have negative equity. This is especially true if they paid a dealer a substantial markup over MSRP. 

In the past when economic uncertainty and high interest rates combined with low incentive rates, the combination has kept buyers out of the market. 

September sales up, annualized sales down

According to data from J.D. Power, new-vehicle retail sales for September 2022 are expected to increase year-over-year. New vehicle sales are projected at around 958,948 units, a 5.4% increase compared with September 2021.

However, total Q3 2022 sales are projected to reach 2,900,300 units, which represents a 4.2% decrease from the same quarter last year. Year-to-date, J.D. Power is projecting a 14.9% sales decrease compared with 2021. This is largely attributable to limited supply and heavy markups causing consumers to put off major purchases.

“Traditionally, September is a high-volume sales month as manufacturers implement promotions for Labor Day to clear out old model-year vehicles and start sales of the new model-year products,” explained Thomas King, president of the data and analytics division at J.D. Power. 

“This September, while holiday promotions were nearly nonexistent, modest improvements in vehicle production allowed manufacturers to tap pent-up consumer demand. The result is a retail sales pace that shows a modest increase from a year ago but still falls below its potential due to tight vehicle availability. Although rising interest rates are putting pressure on affordability, transaction prices still rose and consumers spent more money on new vehicles this month than any previous September on record.”

Inventory still low

September will likely be the 16th consecutive month in which dealer inventory ends below 1 million units. Dealerships are continuing to pre-sell vehicles in their delivery pipeline, with time on the lot measured in days. About 53% of vehicles are sold within 10 days of arriving at a dealership, while the average number of days a new vehicle is in a dealer’s possession before being sold is about 20 days.

“The lack of inventory, coupled with strong demand, continues to allow manufacturers to maintain a low level of discounting,” King said. “One of the factors contributing to the reduction in incentive spending is the absence of discounts on vehicles that are leased. This month, leasing will account for just 16% of retail sales. In September 2019, leases accounted for 29% of all new-vehicle retail sales.”

“In October, production constraints are expected to continue,” he added. “These constraints may result in a somewhat lumpy fourth quarter as partially built vehicles in storage are completed and released in batches to the retail channel. Higher interest rates will continue to put pressure on transaction prices and retailer profits. However, with 54% of vehicles still transacting above MSRP, there is still room for price compression without material damage to industry health.”