Cars have gotten expensive since the start of the pandemic — really expensive.
The average transaction price for a new car this summer was $47,716; that’s a nearly 30% jump compared to just five years earlier, according to Kelley Blue Book . And inflated list prices aren’t the only factor squeezing buyers. Interest rates on auto loans are also sticking around multi-year highs, with experts warning that it could take months for those rates to start coming down.
It’s a far from ideal time to be purchasing a new car, but some consumers simply can’t wait. As a result, more buyers are taking on lengthy car loans to get themselves into a new set of wheels, according to new research from Edmunds. The trend has experts worried.
Are consumers at risk of drowning in “underwater” loans?
The share of consumers taking out lengthy 84-month auto loans has risen significantly since the start of the year, from 15.8% in the first quarter of 2024 to 18.1% in the third quarter, according to a new analysis from Edmunds. The trend towards longer loan terms suggests that buyers are trying to obtain lower monthly payments on car loans they ultimately can't afford.
These longer loans risk putting more drivers into what experts call "underwater" loans or “negative equity,” when the market value of the car is lower than the remaining balance of the loan. This situation is more likely to happen with longer loan terms, where the car has more time to depreciate and the consumer is paying off the loan balance slower. It's a concerning trend for consumers in the automotive industry.
"Longer loan terms might make monthly payments more palatable for consumers, but the harsh reality is that most Americans don't want to keep their vehicle for seven years," said Ivan Drury, Edmunds' director of insights. "Simply put, longer loan terms put car owners at greater risk of rolling negative equity into their next auto loan."
Related: When can consumers expect car loan interest rates to drop?
Paying out now or later
Even among the majority of consumers who still take out shorter-term loans, the financial picture doesn’t look much better.
The share of new-vehicle shoppers taking on $1,000+ monthly payments remained at near-record levels in the third quarter of this year, with 17.4% of consumers taking out new auto loans spending $1,000 or more a month on their auto loans. The gloomy stat marked the sixth consecutive quarter that the share of $1,000+ monthly payments was above 17%.
Waiting for calmer waters
For many prospective car buyers, the best way to navigate the current car market is to simply wait. Of consumers who said they planned on buying a new car in the next 12 months, a majority of them — 62% — said that they held off on buying a new vehicle because of high interest rates.
"Q3 was unfortunately the same old story as the first half of 2024 in terms of auto financing conditions: Car shoppers found little relief from the elevated interest rates and high prices, which in turn hindered new-vehicle sales growth," said Jessica Caldwell, Edmunds' head of insights. "The Fed's decision to cut rates was a welcome update at the end of the quarter but, on its own, is unlikely to dramatically change the financial landscape for car buyers."
Final thoughts
If you’re in the market for a new car, it’s worth considering as a first step if you really need a new set of wheels right now. If not, you’re probably better off waiting for better deals and lower interest rates in 2025. But, if you must buy a car now, try to be honest about what your budget can accommodate instead of taking on long loan terms or expensive monthly payments.
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