US auto owners struggle as many loans need monthly payments of more than $1,000.
Concerns that US consumers may be taking on too much debt increased as the percentage of people paying at least $1,000 a month for their autos surged to record highs.
According to data gathered by Edmunds, a source of data on the automobile industry, over 16% of buyers who financed a new car in the fourth quarter have monthly payments approaching that amount, up from 10.5 % a year earlier.
Just 6.7% of vehicle owners were spending that much in the fourth quarter of 2020.
Banks are warning that a flood of missed loan payments, followed by repossessions, is possible should people owe more than their cars are worth. However, used-car prices have been falling over the past few months.
While this is happening, the average cost of a new car has reached a record high of about $50,000.
Wall Street is holding its breath as the possibility of a recession, which may harm both borrowers and lenders, looms.
According to the Federal Reserve Bank of New York, the amount of outstanding US car loans increased to $1.52 trillion in the third quarter of 2022 from $1.44 trillion a year earlier, which is slightly less than student loan debt and significantly less than mortgage debt, which reached almost $11.7 trillion.
The pandemic was a time of significant growth for selling new and used cars. Still, as interest rates have risen and used-car values have fallen in recent months, consumers have become less protected from riskier loan decisions. As a result, we are only beginning to see the effects of negative equity.
According to Edmunds, the average annual percentage rate for new cars increased to 6.5% in the fourth quarter from 5.7% in the previous three months and 4.1% a year earlier.
This is making some customers reconsider their pre-ordered vehicles and causing the number of cars still in showrooms to rise.
According to David Christ, head of Toyota Motor brand sales in the US, “for the first time in a year and a half to two years, consumers are pulling out of some pre-sold automobiles, and cars are hitting the lot that is not pre-sold.” In addition, he cited higher financing rates.
“New automobile interest rates have increased dramatically.”
Car buyers are more susceptible to falling prey to predatory lending practices than many other borrowers.
Letitia James, the attorney general of New York, and the US Consumer Financial Protection Bureau filed a lawsuit against Credit Acceptance on Wednesday, accusing the subprime auto lender of tricking thousands of low-income people into taking out unsustainable, high-interest auto loans.
The business asserted that “the allegation is without substance” and that it will “vigorously defend itself in this regard.”
Professor Mark Cohen of Vanderbilt University, who has researched bias in the auto lending sector, said he is more concerned about the type of borrower taking on debt with such requirements than about $1,000 car loan payments.