The average price of a new car is increasing. However, the average monthly payment on a new car loan has hardly changed.
How can this math work? Because loan terms are getting longer.
Prices rise faster than payments
The average list price for a new car in America crossed the $ 41,000 mark for the first time last month. It stood at $ 41,016, up 7% from June 2020. Yet, according to consumer credit reporting company Experian, the average monthly payment for a new car has only increased by 7%. $ during this period. In the meantime, the percentage of extended loans of 72 months or more has increased.
“Much of this happened as competition intensified among lenders and car prices gradually increased,” said the the Wall Street newspaper Remarks. “Longer payment terms were designed to make vehicles more affordable. “
No more new loans, for more new cars
Americans took out new auto loans quickly in 2021 – more new auto loans were taken in March than in any previous year. We use these loans to buy new cars. Experian reports that “New vehicles represent a larger share of the total financial market, going from 38.24% in the first quarter of 2020 to 43.20% in 2021. Meanwhile, the financing used has decreased from 61.76% to 56.80% over the same period.
The average car on American roads is now 12.1 years old, so some buyers feel comfortable taking a 6-year loan. But there are risks in committing for such a long period of time.
Know the risks
On the one hand, you will pay more over time. Unless you’re doing zero-interest financing, agreeing to make more payments over a longer period of time increases the amount you’ll pay in interest.
Buy smart: Know the true cost of financing
Experian did not provide data on the percentage of new interest-free loans. The company noted that “in the first quarter of 2021, subprime issuance fell to 17.75% in the first quarter of 2021, compared to 30.85% in the first quarter of 2020”.
A long-term loan on a depreciating asset like a car can also leave buyers upside down as they owe more than the car’s value. It becomes a risk if they have to sell it. It also means that if the car is destroyed in an accident, the insurance company’s payment might not cover the balance.