By on July 6, 2017

Chevrolet Silverado purchase GM dealer - Image: GMALG says new vehicle prices averaged $32,900 in June 2017, up 2 percent from last year and a record high for the month of June.

Yet month after month, for six consecutive months to begin 2017, automakers are witnessing fewer and fewer buyers walking into dealers after sales shot to record levels in calendar year 2016.

Incentives, at $3,550 per car, are an effective lure. But that doesn’t change the fact that buyers are paying, on average, $33,000 and borrowing, according to Edmunds, $31,000 in order to finance a purchase.

How do car buyers afford the highest prices on record? By stretching the payment period to the longest terms ever: 69.3 months in June, Edmunds says.Before buyers ever accept the looooong-term payment plan for a $33,000 purchase, they’re making their actual monthly payment somewhat more tolerable by putting more money down than they used to. In June, Edmunds said, down payments rose 7 percent to nearly $3,700 in June; up 12 percent compared with down payments in 2012.

Still, the payments in June, at $517/month, were the highest they’d been all year; 11 percent higher than the average monthly payment was in 2012.

But the $500-plus payment is deemed tolerable, in part because it could have been much worse. Instead, because the average loan term now stretches to 69.3 months — meaning you won’t stop paying for the Ford Escape you drive away in today until April 2023 — America’s typical new car buyer can keep the payment in a comfortable zone.

Yet while the payment is comfortable now, the individual economic situation faced two or three years down the road when circumstances change may not be so enjoyable.

“It’s financially risky, leaving borrowers exposed to being upside down on their vehicles for a large chunk of their loans,” says Edmunds director of industry analysis, Jessica Caldwell, “but it’s also a sign that consumers are still confident enough in the economy to spend more on their vehicles and commit to paying for them longer.”

The length of an average new vehicle loan has grown 7 percent over the last five years.Ford dealer Wind Energy Corp - Image: FordBut we’re just talking averages. Long-term loans with payment plans stretching 72 months or more now account for one-third of all loans, up from barely one-in-ten eight years ago, according to Experian.

As an example of enticing long-term loans, a 2017 Dodge Charger R/T is currently discounted by $2,750 and can be financed at 4.04 percent through FCA for a payment of $491/month over 72 months, or six years. Dropping the term to four years lowers the interest rate to 0.9 percent, but increases the payment by nearly $200, in part because FCA removes some of the discounts.

What about a 2017 Ford F-150, prior to the revamped 2018 F-150’s arrival? A Supercrew XLT 4×4 V8 Lariat is financed interest-free over 60 months at $813/month. Spread over 84 months, Ford increases the interest rate to 5.9 percent but drops the price by $1,250, lowering the payment to $692.

Consumers’ collective willingness to stretch those terms explains, in part, how Dodge sold 24-percent more Challengers this June than last; how Ford F-Series sales grew twice 10 percent.

[Images: GM, Ford]

Timothy Cain is a contributing analyst at The Truth About Cars and and the founder and former editor of Follow on Twitter @timcaincars.

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67 Comments on “How Do Americans Manage to Pay Record High Prices for New Cars in 2017? By Paying Forever...”

  • avatar

    I’ve never paid more than 15k for a car. I make good money but just don’t like the idea of a $500-$700 month payment. That’s a lot of hobby / fix up the house money.

    • 0 avatar

      I’m the opposite, my car is my hobby and my house is just a place I keep my crap until I bail for parts unknown.

      The 757 is trying its, it’s damnedest to knock New Orleans out of the #1 spot for per capita homicides so I doubt I’ll ever get back what I’ve spent on my place.

      Just as well, I told one of my brothers he can squat after I leave until he gets his six feet of clay.

  • avatar

    “but it’s also a sign that consumers are still confident enough in the economy to spend more on their vehicles and commit to paying for them longer.”

    Yeah, I’m not so sure that is the right assumption. I suspect a lot of these long term loans are utilized by people whose “confidence in the economy” is on a day to day basis; it’s what I can afford right now. I wouldn’t necessarily extrapolate a healthy economy from longer loans, more like this is the only way I can eat, pay rent, and have a new car. But I’m a glass half empty guy, so I could be wrong.

  • avatar

    A $31,000 loan for 69.3 months on a $517 payment works out to about a 5.1% interest rate.

  • avatar

    I used to borrow money for cars. I still never had more than a 3-year loan. By that point I may be tired of a car and want out, or I would keep it for years more and feel OK as I was free to get out at any time. Now I just save until I can pay cash. Doing that has kept me from buying anything new. I can get really nice, nearly new cars for $15-20K. For the time it takes me to save more than that I would have a hard time spending it on a new car that would lose money so fast, not to mention the extra costs of dealer delivery fees.

  • avatar

    As the cartoon ZIGGY would say “It’s not whether the glass is half full or half empty, it’s gonna spill anyway!”
    To conserve hard-earned income you should lease for three years only.
    Like me, you can get out of a 2016 Ram 1500 Big Horn lease early by leasing a $6,000- discounted 2017 Pacifica Touring Plus! We had driven 23,000 miles on a lease contract that allowed 12,000 per year. KBB showed a PLUS value of $372 because to them the 2018 model year is almost here!
    With a lease you do not have to pay any upfront sales tax, no new tire expenditures, no maintenance besides oil changes and you never have to work on the vehicle to keep it running.
    It’s easy to repair a 1984 Buick LeSabre Limited Coupe (my latest) but I will not even attempt to approach a newer car in the repair vicinity.

    • 0 avatar

      I ve leased 2 Accords – EX V-6 Leather.
      Range Rover
      4 cars so far.

      Here in Georgia they changed the law recently. Now when you lease, you pay sales tax on the whole car.
      $33,000 car x 7% sales tax = $2300
      So, no more leasing in this house.

      used to be a no friggin brainer.

      • 0 avatar

        Maryland does that. If you think that’s a good deal then you’ll love what they did before.

        Which was to charge titling tax on the new vehicle, roll that into your payments, and then charge sales tax on each monthly payment. If you wanted to buy it out at the end of the lease, that was a retitle and you got to pay the titling tax again.

        I don’t know why they’re called blue states. They bleed you white.

        • 0 avatar

          NY (7%) regards the sale of the car to the leasing company a sale, and the transfer to you at end of lease another sale…so, a $50k BMW which is bought at the end of the lease for $35k has generated for the state $85k worth of sales tax. This is almost always rolled into the lease or note. D’oH !

    • 0 avatar

      In order to conserve income, you should make sure you’re always paying for the steepest part of a car’s depreciation curve, while making sure you pay the most possible in insurance. Got it.

      • 0 avatar

        People who think they are saving money by leasing are a bit dilussional. Do it for business purposes, do it for cash flow reasons, do it to not worry about maintenance expenses….but not saving money. The only way that would work is if the manufacturer gives crazy discounts to leasing and not buying, or if the manufacturer gives a crazy level of residual value that you can predict as being incorrect.

        • 0 avatar

          Leasing *does* save you money – if you a) you buy a new car and b) want a new car every three years.

          Otherwise, buying and keeping a new car until it drops will be cheaper.

          It all depends on what your needs and wants are. As with all things, YMMV.

  • avatar

    Repeat after me: “I will be able to afford a $30,000 car when I have thirty thousand dollars more than I need in the bank.”

    It’s not so hard.

    • 0 avatar

      Yep, until then, buy $5000 cars. I’ll even sell you mine, when I’m tired of it.

      • 0 avatar

        Lots of people can’t afford 5k cash either.
        Now for that I recommend the best beater you can buy and a lot of youtube DIY vids. but in real life here is what happens.
        Good credit go to dealer by a Versa for 18,000 1,500 down 72 months 4.5% that’s 260 a month.

        Or bad credit
        BHPH Altima with 90k mile and a 30 day warranty $8500 for car 27% interest
        4 years 240/ month (of course BHPH you have to make a payment at least twice a month. )

        It’s pretty easy to see how people get in to trouble.

        • 0 avatar

          Ugh… don’t say “buy a Versa” like that’s not cursing….

          It’s often easier to get approved with bad credit on a new car than a used one. Banks value the cars at MSRP and anyone with 5 minutes of time and a state paid cell phone can figure out how to get a great deal. Heck, with good rebates you could pay sticker and get a good deal by the banks standards. I always feel better selling someone with bad credit a new car than a used one because so long as they can afford the payment they should be able to work towards getting a better footing rather than fixing a beater every weekend.

        • 0 avatar

          “Lots of people can’t afford 5k cash either.”

          Agreed. At some point, you need to weigh repair costs vs payments. I plucked $5K out of the air as a reasonable compromise. YMMV.

    • 0 avatar

      Or, a 30,000 loan at 2.97 percent for 5 years would allow me to put the $30,000 in an IRA or jack my HSA up to the max which would save me at least $3,000 in taxes this year PLUS earned interest until retirement.

      Unless your retired or close to it or the interest rates on new car loans get over 4%, there is no way I’d buy a new car cash.

  • avatar

    Just want to make sure I understand what is being said here.

    Average Joe is paying $517/mo for his car, for 5.75 years?

    That means an “average family” with 2 cars is paying over $1,000/mo on car loans?

    This same average family is paying $9,600 to borrow $62,000 for their two average cars?

    That’s a lot of money.

    From my Excel loan amortization schedule:

    Loan Amount $31,000
    Loan Period 5.75 years (69 months)
    APR 5.10%
    Sched Payment $519
    Total Interest $4,832

    • 0 avatar

      Sure, in the sense that the average person is a Chinese woman with two and one tenths children. Plutocrats skew the numbers.

      And we’re lucky that they do or I’d be having duck intestines for dinner with my brace and a bit of brats.

    • 0 avatar

      It’s hard to tell if these stats are for new loans last month or active loans at the moment. Either way, it is an “average of people active in the new car market” and not really “average of everyone everywhere”.

    • 0 avatar

      Yeah well ask Average Joe what he’s paying monthly in cell phone bills and perhaps cable and $517/month for something he enjoys and may actually someday own doesnt seem so bad

      i wouldnt do it but just saying…

  • avatar

    If its more vehicle than you afford, you shouldn’t buy it..That being said, it depends at what position you are in life. If you have a young family, and many other commitments to your income, I can see the merits of a 6-7 year loan. Dependable transportation is pretty well a necessity here in North America. Yes, you will be upside down for a period of time. Be prepared that at some point in time you will need to factor in repairs. Tires, brakes, suspensions, can and will start costing money. So now you paying for repairs, and a payment. But your no longer upside down…

    6-7 years is a long time, and a whole lot of things can change. At the end of your loan , If you have looked after your vehicle, you can drive payment free. You also have the option of trading, it or selling it, to give yourself a nice down payment on the next one.

    If you older, and your thinking you may retire in few years, don’t even consider carrying debt into retirement. I’ve seen to many guys fall into that trap…It aint pretty…Taking out a 5-6 year loan when your in your 60’s…the loan insurance premiums will knock you over.

    • 0 avatar

      “Dependable transportation is pretty well a necessity here in North America.”

      This is true, but in the US you can satisfy that requirement for well under $33k.

    • 0 avatar

      Amount of times I’ve been stranded in 15 years of driving pretty much exclusively cars and bikes which were over a decade old: 3. One was an alternator wire that I could have soldered on the spot had I noticed it before towing the car home (free through auto club). The other was also an alternator. I drove the car into my garage spot on battery, removed the alternator, took the bus to go have it rebuilt, put it back in. The third one was a flat tire resulting from picking up a sliver of metal on an onramp on my bike – hardly the fault of the vehicle being undependable.

      That’s not a lot of hassle in having “undependable” vehicles from the 90s.

      A three year-old Civic will easily cover just about any rational person’s definition of “dependable transportation.” You don’t need $30k for that if debt is an issue.

  • avatar

    “but it’s also a sign that consumers are still confident enough in the economy to spend more on their vehicles and commit to paying for them longer.”

    I can’t say for certain, but I’m pretty sure that people buying cars on 70 month loans aren’t basing that decision on the confidence they have in the national economy.

    Who thinks this way?

  • avatar

    I’m a fan of obscurities, so it’s nice to see a rare C-Max photo. I’m even shopping for one… but shouldn’t you have saved that photo with the Fusion for next week’s inevitable expose of unsellable EVs?

    • 0 avatar

      If you’re looking for a used C-Max, they’re out there at pretty good prices. I’m waiting until next year for one, when the used 2017s will be more abundant (or as abundant as ~1900 new units per month translates to used availability)

      I understand that people want shiny new cars, but I don’t understand taking out a 6 year or longer loan on them because they cost so friggin’ much new.

      Ford changed their incentives yesterday on the C-Max. They’re now offering 2.9% for 84 months on a new one if you finance it. Insanity…

  • avatar
    Kyree S. Williams

    Cue all of the holier-than-thou comments.

    • 0 avatar

      I don’t blame them.

      People who spend big money on fly new cars get to floss their fly new car.

      People who don’t get to floss their financial acumen and the resulting security.

      Not sure “I saved X by paying cash for used” is in any way worse than “Woohoo, check out this thing I bought!”

      The very wealthy, of course, get to floss both. That’s probably the best solution.

    • 0 avatar

      Yep. The holy rollers will be out in force for this conversation.

      When gas prices spiked, SUV sales cratered as people changed their ways. The same will happen here when interest rates rise and they’re too upside down to trade in for something nicer.

      Believe it or not, humans learn from their mistakes and not every mistake is an end of the world situation.

      …but it makes for great headlines, doesn’t it?

      • 0 avatar

        My 2008 Acura, still going strong, has seen gas at $3.50, $4.89, $3.75, and now, $2.45. It is a LOT easier to drive a tank with cheap gas, but if prices spike again, lots of folks will take upside down in a huge way with all the big trucks out there now. Driving the truck at $5 per gallon makes you think about your route and mileage if every time you see the pump it’s $100. Suddenly those small cars will get all scarce again…..

      • 0 avatar

        “The same will happen here when interest rates rise and they’re too upside down to trade in for something nicer”

        Normally I would agree, but coming up on 10 years of ZIRP and insane Government borrowing we are going the way of Japan, ZIRP forever. Interest rates will never rise to normal levels again, the Fed Government could not afford to service the debt.

        ZIRP forever!

  • avatar

    Well, this is why I’m leasing.

  • avatar

    I have never read “The Art of the Deal” but the title is intriguing as it relates to auto and truck purchases. First, one has to define average buyer in terms of household income. Not everyone in that “average” category can afford a new car, even though their average salary may fall into the overall number. Credit to debt ratio, and indeed “normal” monthly and household expenses must figure into the equation. OTOH, there are average families who can indeed afford the 500 plus per month for a 5 or 6 year plus term. Some people actually manage their money better than others.

    I have purchased many new vehicles over the years, and probably fit that “average” income moniker as much as anyone, although my wife and I are both retired and live off our retirement. I do make a few thousand extra per year working driver training and ride and drive events on a contract basis. I purchased a new vehicle in 2011, traded it in when the 2014s were being phased out, and actually lowered the payment while purchasing a much more expensive vehicle. I recently purchased a new Focus ST that stickered for 25650, and when the dealing was over, no trade involved, was able to purchase for a few bucks under 19 K, paying only a bit more than tax and license with a couple grand down. So, a nearly 26 K dollar vehicle can be had for over 6 K off if the “deal” is good enough. There are other examples of great deals, and if an “average” buyer wants or feels he/she needs a new vehicle, deals are out there for far less than 31 or 33 K dollars. No one I know pays sticker for a car anymore, however, some lease agencies will only write sticker price lease deals…screw that…If one takes care of their respective purchased vehicles, being upside down when desiring a trade is less likely, and indeed, there may be some amount of equity.

    As for the future of the economy, that question has lingered for years, but very little has changed overall. I liken the economy issue to a political prop, used by politicians to further their own career via scare tactics, even during a booming economy…

  • avatar

    My parents bought a Rav4 thru loan they are spending more money monthly than I did on 2 vehicles I leased. They point out after 6 yrs they will own the car but they will lucky to get 10k for it.

  • avatar

    Those that make more money are not saving proportionally, they are spending and living a certain “lifestyle”. $10k used Civic is not as nice as a Honda Pilot at $31k

  • avatar

    Financing $31,000 over 69 months translates to “want over need.”

  • avatar

    I’m not holier than anyone. I was raised by a depression baby, that’s all. I’ve taken 3 car loans in my life, and only one of them was out of necessity – the other two were because it was a sound financial choice.

    In 1989, I took out a $5800 loan on a new Dodge Omni. Four-year loan paid off in three, because that loan hung around my neck like an albatross.

    Never have I since bought a car I couldn’t afford. I just was raised not to live with debt.

  • avatar

    My first instinct is to dismiss these car buyers, but their situation is much more pathetic than most of us realize.

    The financially literate will say “Aren’t they aware that the used car market has a glut of supply, and many newish vehicles can be had for 50% of their MSRP?”

    But the sad reality is that the average person’s cash position is so poor, they couldn’t take advantage of the used car glut if they wanted to. Even if someone was selling a clean 3-year-old S-Class for $10K, these people couldn’t make it happen.

    The lesson for the rest of us is that this used car glut will not disappear in the near future so maintain a strong cash position, and buy great cars for a fraction of their real value.

    • 0 avatar

      You can finance used vehicles.

      You can also finance less-fancy new vehicles that cost well under $33k.

      If somebody loses their shirt on a $30k+ machine loan I don’t have too much sympathy, because they could have financed a reliable, capable car for about 2/3 of that amount without any special skill or effort.

      • 0 avatar

        The least expensive new cars these days I think start around $15,000.

      • 0 avatar

        In some cases, now-a-days, you can even lease used vehicles.

      • 0 avatar

        Yes, you can finance used vehicles, but the interest rates are often higher and the loan durations are shorter. For many people, the monthly payments are no better compared to purchasing a new vehicle on a 72 month note. Furthermore, many people are too lazy to go bank shopping for personal loans. They want a finance rep at the dealership to do everything for them, and they sign on the dotted line.

        This is the problem for people without any cash reserve, and it is fueling the used market glut.

      • 0 avatar

        Used vehicle finance terms are also getting longer pointing to a somewhat deeper economic issue. People have always been dumb with money deeper things are at work making them worse off for it then they were 20 years ago.

    • 0 avatar

      The “Cash for Klunkers” made the situation even worse by getting rid of most of the less expensive used cars, making the remaining used car market more expensive overall.(IMHO).

      • 0 avatar

        It didn’t help, but my reading of the data is that:

        1) Most of the cars that got Clunkered in 2009 were already dogs that would have been of limited value to anybody then, much less 8 years later

        2) The total number of vehicles that got Clunkered is much lower than the drop in new vehicle sales during the 2008 recession.

        C4C did take some viable used vehicles off the market, but not as many as people think. It also is not the primary cause of current used car supply constraints, which is more a result of low new car sales for several years.

      • 0 avatar

        @ bikegoesbaa: Agreed but the last several years have seen record sales and leasing of new cars.

        Only in 17 have sales started to soften. Not seeing used car constraints out there, either.

        And even more availability when the leases end for 3 year old models

    • 0 avatar

      I think it’s a mistake to assume everyone’s cash position is so poor for taking out a loan. A lot of people have transitioned from ‘traditional saving’ i.e. money in a bank, to dumping into 401ks, tax deferred health plans, etc.

      Also, they are spending more on housing than ever before-which assuming they bought, is typically an appreciating asset.

      Buying cash isn’t all it used to be.

  • avatar

    Generally speaking, a car loses half its value in five years. It doesn’t matter if the car is new or used, $10,000 or $30,000. So in order to never be upside down in a loan, never get a loan more than five years. Simple!

  • avatar

    How you pay tax on the lease varies from state to state.

    In Ohio, they charge for only the amount paid towards the lease, including on money down. And, NOW you pay the entire tax amount up front, not on the month to month payments(it used to be that way). Of course the finance guy can spread the tax over the number of payments in the lease. But, the State of Ohio is getting the total tax up front.

  • avatar
    Daniel J

    The problem around here is buying a 1 to 3 year old used car costs as much if not more once financing the car with higher interest rates. Then pushing 4 to 6 years out, the cars are typically higher mileage are real dogs. It was cheaper for us to buy new the last two car purchases.

  • avatar

    Wouldn’t longer loan terms be an indication that buyers intend to keep their vehicles longer? Also, regarding financial literacy, if the manufacturer is offering lower interest rates than you conservatively expect your portfolio to return, it would be foolish not to take as long a term as possible. For example, Chevrolet is currently offering 0% for 72mo. with an opportunity cost of $1500 due to the forgone cash incentives. If you’ve got the funds being productive somewhere else, there’s no reason to take anything less than 72mo…

    • 0 avatar

      True, but what percentage of buyers do you think are tactically using long low-interest loans to maximize their returns on other investments?

      I’d say maybe 5%? At best.

      Everybody else is just going long to get the monthly payment down.

      • 0 avatar

        Then they are shocked when in 3 years they attempt to trade in said car only find they are massively upside down. Its almost like people have given up on down payments to reduce the initial outlay of cash.

        I feel bad for people with such credit issues but buying too much vehicle and then financing for that long just leads to more problems. My last four vehicles where bought used and paid off early.

        You can score really great cars that are used coming off lease. For example my wife’s Infiniti is 2 years old thus still under warranty but we bought at 50% less then MSRP. Its condition is so good most people assume its a brand new car. Between our trade and down payment we will never be upside down on it. Plus again it will be paid off early by making extra payments to ensure we stay well ahead of the curve.

  • avatar

    Liquidity is valuable in its own right. In a world of low interest rates and at-will employment, I would rather finance the car and keep my cash. If I lose my job, I have a larger emergency fund than I would have if I had paid cash (even for a used car). If I keep my job, I can earn a little interest to offset the interest I’m paying on the car loan.

    There are two sides to a balance sheet.

  • avatar

    I’ve owned five cars, two new. I never felt like going and buying a new car when I commissioned in the Navy, as many do, and both of my new cars have been compact hatches. The urge to buy an expensive car mystifies me. Rather, the willingness to do it does, if not the desire. In the end, they all burn the same fuel, and the differences are mostly window dressing.

    But I wonder what the psychological explanation for this might be. The conventional wisdom is that Americans are pretty miserable with financial literacy, but I just don’t buy that as the sole explanation. Could it be that a lot of people probably have no real chance of owning a decent home? Maybe for some, a relatively nice car is something they can eventually own in full. It’s not a smart move, but I wonder if it doesn’t factor in.

  • avatar

    From MIT: Cash for Clunkers, total failure

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