Buying a new car in the US is increasingly challenging, forcing consumers to choose between higher monthly payments and loan terms rivaling those of a mortgage. As prices continue to climb, many buyers are stretching loan lengths to keep payments manageable. This short-term solution offers temporary relief but carries long-term financial consequences.
With the average price of a new car hovering around 50,000 USD in recent years, maintaining a monthly budget is difficult.
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A Ford Explorer at a dealership in Michigan. Photo: Bill Brown Ford |
A Ford Explorer at a dealership in Michigan. Photo: Bill Brown Ford
According to Edmunds, nearly one in five buyers in the second quarter signed up for monthly payments exceeding 1,000 USD, a record high of 19.3%. Loans lasting 84 months (7 years) or longer also hit a record, representing 22.4% of all new financing.
Six-year loans are now the most common for new car purchases, accounting for 36.1% of the market, followed by 7-year loans at 21.6%. In contrast, 5-year loans, once the standard, have fallen to around 19%. Shorter terms are increasingly rare, with only 6% of buyers opting for a 4-year loan and only 4% for three years. Meanwhile, the quiet return of 8-year (96-month) loans, still under 1% but rising, is a warning sign.
Mike Schwartz, vice president of dealer operations at Galpin Motors in Los Angeles, said dealerships typically discourage customers from taking out long loans. "We try to steer customers away from that. We don’t want to put a customer in a bad spot where their life changes and they come back to trade the car and they are completely upside down. It doesn’t do them any good, and it doesn’t do us any good," Schwartz said.
Edmunds reported that 26.6% of trade-ins on new vehicles were in negative equity in Quarter II—the highest rate since early 2021—with the average customer owing 6,754 USD. This makes trading in a vehicle without owing money more difficult, especially considering depreciation and repair bills outside of warranty.
Longer loans increase the total cost of a car. Edmunds' director of insights, Ivan Drury, noted that the average interest paid on an 84-month loan is 15,460 USD, roughly 4,600 USD more than a 5-year loan.
"It's clear that buyers are using the few levers they can control to manage affordability, whether that’s through longer loan terms, higher amounts financed, or smaller down payments, even if some of those decisions increase their overall costs", Drury said.
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