The average American pays north of $700 a month for their new car, an amount that continues to climb as interest rates on auto loans skyrocket.
The typical interest rate on a new car loan rose to 8.95% in March, up from 5.66% in March 2022, according to Cox Automotive. For used cars, the rate hit 11.3% last month, up from 7.7% the year prior, according to Edmunds. A one percentage point increase on an auto loan adds roughly $20 a month to a car note and thousands of dollars extra over the life of a loan, automotive experts said.
The higher rates are causing more drivers — particularly those in their 20s and 30s — to fall behind on their car payments, a recent New York Federal Reserve study found.
Automakers have noticed the rising rates and are starting to offer incentives to buyers who have become leery of visiting dealerships, experts told CBS MoneyWatch. Most of today's cash back offers are for full-sized trucks but automakers are expected to roll out more discounts on a wider array of vehicles soon, said Sean Tucker, senior editor at automotive research firm Kelley Blue Book.
"The single best thing you can do is wait," Tucker said. "The more people stay off [car dealership] lots, the more you'll see discounts coming in."
Automotive experts said there's a couple reasons why auto-loan costs are climbing. The Federal Reserve is still raising its benchmark interest rate in its continued fight against inflation, which is simultaneously pushing auto rates higher. The Fed raised its funds rate from near zero at the start of last year to a range between 4.75 and 5% last month.
"The banking crisis has also just made credit harder to get, so qualifying for a car loan right now is more difficult," Keith Naughton, a reporter for Bloomberg News, told CBS News.
Buying a car became a more costly proposition in 2022 and data from Edmunds released this week suggests that trend has carried itself into 2023. The average car note grew to $765 a month in February, up from $689 one year prior, Cox Automotive said. That figure peaked last December at $789.
Meanwhile, nearly 17% of people who financed a new vehicle in the first three months of this year are paying $1,000 or more a month — a new all-time high, Edmunds said. That's up from 15% in January.
Those higher payments have contributed to the nation's ballooning auto loan debt. Americans owed about $1.5 trillion in auto loans at the end of 2022, up from $1.46 trillion at the end of 2021, according to Fed data. A Fed study released in February found that a growing percentage of young borrowers are falling 90 days or more behind on their car notes, with the rising interest rates cited as a contributing factor.
Higher interest rates and higher monthly payments also spell bad news for the auto industry, which is trying to revive sales this year after losing out on so many transactions during the semiconductor chip shortage, Naughton said.
Cox Automotive said it expects automakers to sell roughly 14 million new vehicles this year, about 3 million shy of what was typically sold annually before the pandemic.
