Car Owners Strain as More Loan Payments Soar to $1,000

(Bloomberg) — The percentage of US consumers paying at least $1,000 a month for their cars soared to a record, adding to concerns that borrowers may be getting in over their heads.

Most Read from Bloomberg

Almost 16% of consumers who financed a new car in the fourth quarter have monthly payments reaching that level, up from 10.5% a year earlier, according to data collected by Edmunds.com Inc., a provider of data on the automotive industry. The share of auto owners paying that much was just 6.7% in the fourth quarter of 2020.

Used-car prices have been softening over the past few months, and banks are warning of trouble ahead in auto loans — a potential wave of missed loan payments, followed by repossessions — should consumers owe more than their cars are worth. In the meantime, auto debt continues to climb and the average new-car price has soared to a record of almost $50,000.

Wall Street is holding its breath as the threat of a recession looms, which has the potential to hurt both borrowers and lenders. Outstanding US auto loans rose to $1.52 trillion in the third quarter of 2022, up from $1.44 trillion a year earlier, while remaining slightly lower than student-loan debt and far below mortgage debt, which totaled almost $11.7 trillion, according to the Federal Reserve Bank of New York.

The pandemic was a boom time for the sale of both used and new cars, “but as we shifted toward an environment with diminished used-car values and rising interest rates over the past few months, consumers have become less insulated from those riskier loan decisions, and we are only seeing the tip of the negative-equity iceberg,” Ivan Drury, director of insights at Edmunds, said in a statement.

The average annual percentage rate for new vehicles rose to 6.5% in the fourth quarter from 5.7% in the previous three months and 4.1% a year earlier, according to Edmunds. That’s prompting some shoppers to have second thoughts about pre-ordered vehicles and increasing the number of vehicles sitting in showrooms.

“For the first time in a year and a half to two years, customers are backing out of some pre-sold vehicles and there are cars hitting the lot that aren’t pre-sold,” David Christ, head of Toyota Motor Corp. brand sales in the US, said in an interview, citing higher borrowing costs. “Interest rates for new cars have gone up significantly.”

Auto buyers are more vulnerable than many other borrowers to falling victim to predatory lending practices. On Wednesday, New York Attorney General Letitia James and the US Consumer Financial Protection Bureau sued Credit Acceptance Corp., accusing the subprime auto lender of luring thousands of low-income individuals into unaffordable high-interest car loans. The company said in a statement that “the complaint is without merit” and it will “vigorously defend ourselves in this matter.”

Mark Cohen, a Vanderbilt University professor who has studied bias in the auto-lending industry, said he’s less concerned about $1,000 car-loan payments and more worried about the type of borrower taking on debt with such obligations.

“The $1,000-a-month payment is not necessarily a problem by itself,” he said in an email. “What matters is who is paying that amount. For the median household currently earning about $70,000 annually, that would be roughly 17% of their monthly income,” while the “typical payment-to-income ratio is closer to the 4%-to-6% range for most car buyers.”