American Drivers Go Deeper Into Debt as Inflation Pushes Car Loans to Record Highs

Used cars for sale are on display, on June 24, 2021, in Oklahoma City. (AP Photo/Sue Ogrocki)

As vehicle prices rise amid inflationary pressure, Americans buying new cars are taking on higher loans and pushing themselves deeper into debt, according to credit-monitoring company Experian.

Both the average loan amount and monthly payments for new and used cars have risen over the recent quarters, the firm said in an Aug. 25 news release. In second quarter 2022, the average loan amount for a new vehicle rose 13.21 percent year over year, to $40,290. During this period, monthly payments rose from $582 to $667, an increase of 14.6 percent.

For used vehicles, average loans jumped 18.66 percent, to $28,534, while the average monthly payment rose from $440 to $515.

Experian also found that consumers were shifting back to used vehicles, accounting for 61.78 percent of all vehicle financing during second quarter 2022, which is up from 58.48 percent during the year-ago period.

“Between the inventory shortage and rising vehicle costs, consumers are looking to make the most cost-effective decision, which is often a used vehicle,” said Melinda Zabritski, Experian’s senior director of automotive financial solutions.

“The benefit of higher vehicle values is that consumers are able to get more for their trade-ins, which can help offset the increased cost of their next vehicle.”

According to market research firm J.D. Power, the average transaction price for a new vehicle is expected to hit a record high of $46,259 in August, up 11.5 percent from a year back.

The 12-month Consumer Price Index, a measure of inflation, registered an 8.5 percent increase in July, according to data from the U.S. Bureau of Labor Statistics. Prices of new vehicles rose by 10.4 percent. while used cars and trucks saw prices jump by 6.6 percent.

Rising Auto Loans, Slowing Sales

The jump in average car loan amounts and monthly payments are happening amid an increase in auto loans. According to an Aug. 2 report published by the Federal Reserve Bank of New York’s Center for Microeconomic Data, household auto loans in Q2 rose by $33 billion to $199 billion, continuing an upward trajectory that has been in place since 2011.

Joelle Scally, administrator of the Center for Microeconomic Data, pointed out that the “robust” increase in auto loans is being driven partly by rising prices.

Meanwhile, automotive service firm Cox Automotive is expecting new-vehicle sales in the United States to decline by 0.3 percent on a monthly basis in August. As buying conditions become worse, the “headwinds” to a sales recovery in 2022 keep growing, Charlie Chesbrough, senior economist at the firm, said in a press release on Aug. 25.

“Rising interest rates and historically low consumer sentiment are keeping many potential buyers out of the new-vehicle market. And high prices for both gasoline and vehicles are making affordability an even greater challenge,” he said.

But the biggest obstacle over the near term is the lack of supply, Chesbrough stated, while expressing doubt about new-vehicle supply returning back to “a healthier level” anytime soon.