US car owners struggle as more loan payments climb above $1,000 a month

Banks are warning of trouble ahead if consumers owe more than their cars are worth

A certified pre-owned car sales dealer in Alhambra, California. AFP

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

Almost 16 per cent of consumers who financed a new car in the fourth quarter have monthly payments reaching that level, up from 10.5 per cent a year earlier, according to data collected by Edmunds, a provider of data on the automotive industry.

The share of vehicle owners paying that much was just 6.7 per cent 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 vehicle financing — 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 almost $50,000, a record.

Wall Street is holding its breath as the threat of a recession looms, which has the potential to hurt borrowers and lenders.

Outstanding US car loans rose to $1.52 trillion in the third quarter of 2022, up from $1.44 trillion a year earlier, slightly lower than student loan debt and far below mortgage debt, which totalled almost $11.7 trillion, according to the Federal Reserve Bank of New York.

The pandemic was a boom time for the sale of used and new cars, “but as we shifted towards 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”, said Ivan Drury, director of insights at Edmunds.

The average annual percentage rate for new vehicles rose to 6.5 per cent in the fourth quarter from 5.7 per cent in the previous three months and 4.1 per cent a year earlier, according to Edmunds.

That is prompting some shoppers to have second thoughts about pre-ordered vehicles and increasing the number of vehicles left 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,” said David Christ, head of Toyota Motor brand sales in the US, citing higher borrowing costs.

“Interest rates for new cars have gone up significantly.”

Car buyers are more vulnerable than many other borrowers in falling victim to predatory lending practices.

On Wednesday, New York Attorney General Letitia James and the US Consumer Financial Protection Bureau sued Credit Acceptance, accusing the subprime vehicle lender of luring thousands of low-income individuals into unaffordable high-interest car loans.

The company said that “the complaint is without merit” and will “vigorously defend ourselves in this matter”.

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