by The rise of auto loans: what’s happening?
Since 2019, average monthly car payments have risen from 390 to 525 dollars. This is a significant increase, but lenders are not sounding the alarm. On the contrary, in April, approvals for new auto loans increased compared to March.
Why aren’t the big players worried? Sanjiv Yajnik, president of Capital One Auto, one of the largest auto finance lenders in the country, explained it this way:
“If you look at every quintile of people’s salary and income, the payment-to-income ratio has remained fairly stable.”
This means that, despite the increase in payments, the cost of the car has remained stable relative to incomes. The overall payment-to-income ratio holds steady at around 10%, and this applies to all income categories, not just the highest ones.
Consumers are being cautious
Yajnik notes:
“The consumer is cautious. They are responsible. It’s a much healthier way of doing things than the alternative, because it’s not discretionary spending.”
Data shows that 80% of customers financing cars are below the 15% payment-to-income threshold, which is considered a danger line. Of course, the price for maintaining a manageable monthly payment is longer loan terms.
Why is this bad for customers?
While lenders may not be panicking, this is not very good news for the rest. The industry generally considers so-called “perpetual loans” (typically 84 months, seven years or more) to be harmful to customers. This is because you can end up in a situation where your car is worth less than you owe on it (so-called “negative equity” or “being underwater”).
In simple terms, this means you have spent more on the loan and interest than you would get if you sold the car. You owe more than it is worth. And that is not good for your financial health.
More than half of buyers already have negative equity
The figures show how widespread this problem is. According to Cox Automotive, loans with terms over 6 years (72 months) reached a new all-time high in April at 29.7%, almost 470 basis points higher than a year ago. Negative equity is an even bigger warning sign. 58.5% of borrowers currently have negative equity on their auto loans. This figure has fallen slightly from a recent record but is still almost 540 basis points higher than a year ago (53.1%). In other words, more than half of car buyers already owe more on their car than it is worth.
The math of one loan
Let’s look at an example. Take a base car price of $30,000 and 9% annual interest. With a four-year loan, you will pay an average of $5,105 in interest. The total payout will be $35,105, and the monthly payment will be $731. If you choose a six-year loan to achieve a more manageable monthly payment of $525, the average amount of interest will rise to $7,818. Total payout: $37,818.
Seven years is a long time for car debt
Now consider an 84-month (seven-year) loan, which is becoming increasingly common. The monthly payment drops to an attractive $467, but that’s where the appeal ends. The average amount of interest would be $9,226, meaning you will spend $39,226 by the time you make the last payment.
Seven years looks acceptable on paper. But a lot can change in that time: a job, family, other circumstances. And all this time, your car is depreciating faster than you are paying it off. By the time you finally become the full owner, you may owe more than it is worth as a trade-in, trapping you in the same cycle again. Longer loans also increase the period during which maintenance costs begin to rise. And all those bills (fuel, insurance, other running costs) are outside your loan.
The situation in the US auto lending market shows an interesting paradox: on the one hand, a record number of borrowers find themselves in “negative equity,” and on the other, lenders remain calm because the payment-to-income ratio remains stable. However, for the average buyer, long loan terms carry significant risks related to car depreciation and rising maintenance costs. This creates a vicious cycle where buyers are forced to constantly refinance to stay behind the wheel, which in the long term can lead to financial difficulties.
