The reason for high car payments today.

The cost of car payments has increased significantly in recent years due to both high prices and high interest rates. Although some relief may be provided in the near future, experts predict that prices may remain high for an extended period.

The average monthly auto loan payment was $760 in May, according to Moody's Analytics. Although this is a decrease from the peak of $795 in December 2022, it is still a 40% increase from the $535 average payment in May 2019.

Inflation breakdown for May 2024 is presented in a single chart. The Federal Reserve maintains interest rates. First-time homeowners may be caught off guard by maintenance costs.

According to Edmunds, a car shopping site and industry data provider, 17% of car owners are paying more than $1,000 a month, which is slightly below the record of 17.9% in the fourth quarter of 2023 but still above 17% for a year.

According to Charlie Chesbrough, senior economist for Cox Automotive, which owns Autotrader and Kelley Blue Book, and provides services to the auto industry, the notion of paying $700 to $800 a month for a depreciating asset for the next six years sounds absurd.

'Underwater' trade-ins are bumping up payments

In the first quarter, a record number of customers who bought vehicles during the Covid-19 pandemic are now "underwater" with negative equity of more than $6,167 on average, according to Edmunds.

The decline in used-car prices following the pandemic has resulted in higher depreciation rates for many vehicles.

One-third of car owners had negative equity on their vehicles before the pandemic, according to Edmunds Senior Director of Insights Ivan Drury.

When a consumer trades in a vehicle with negative equity, they typically roll that balance owed into their new auto loan, which increases their payments, interest rates, and loan term.

In the first quarter of 2024, the average payment with a trade-in was $736, with an average interest rate of 7.1% for 68 months. The rate for a trade-in with negative equity was $887, at a rate of 8.1%, for nearly 76 months.

Drury stated that steep payments on a new car can create a vicious cycle that burdens consumers for much of their lives.

"Drury stated that you are still paying off a car that is at least 10 or 15 years old, even though you no longer own it."

When and how car buyers may see pricing relief

According to Moody's, incentives for car shoppers have increased by 81% over the past year.

Discounts, interest rate subventions, and trade-in allowances are some of the incentives that car dealers offer to customers.

The Federal Reserve has not yet announced when they will lower interest rates, and even when they do, there is a six-month delay before those changes reflect in auto loan rates.

Although the Federal Reserve does not set auto loan rates, it determines the rate at which banks can borrow federal funds, which in turn affects the rates banks charge customers for loans, including those on cars. Additionally, inflation increases the cost of vehicle sticker prices.

"Mike Brisson, senior economist for Moody's, stated that inflation has remained higher and stickier than anticipated. As a result, the Fed's expected date for lowering interest rates or the prime rate has been postponed. Manufacturers artificially lower the interest rate using incentives, providing some relief. However, real relief in the actual interest rate won't occur until after this year."

Although relief may be temporary, long-term changes in the auto market could keep prices and payments high for an extended period.