A record number of car buyers now have to pay $1,000 a month, but should they?

A record number are paying monthly payments of $1,000 or more as drivers increasingly want newer, tricked-out versions of cars.

Car shopping guide Edmunds reported this week that more than 15% of consumers who financed a new car at the end of last year committed to a monthly payment of $1,000 or more, potentially stretching household budgets in favor of bigger and better. tenses up.

Alarmed by the trend toward higher payments and loan terms that can stretch to 10 years, financial experts blame lavish spending and posts on social media that exemplify the YOLO (you only live once) mindset.

“It used to be about keeping up with your neighbors, now it’s trying to keep up with everyone on social media,” said Nicole Middendorf, an adviser at Prosperwell Financial in Minnetonka.

Edmunds reports that the higher down payment trend is fueled by rising interest rates and buyers’ appetite for newer, larger cars with all the upgrades. That could quickly raise the price of the Chevrolet Silverado, the most popular car sold in Minnesota last year, from $40,000 to $60,000.

“$1,000 down payments are not people buying used Toyota Corollas,” said Greg McBride, chief financial analyst at Bankrate.com.

The trend toward higher monthly payments has been building for years. In the fourth quarter of 2020, only 6.7% of buyers had monthly payments of more than $1,000. This increased to 10.5% of consumers in the last quarter of 2021, and to 15.7% in 2022.

Buyers are passing up base models in favor of upgrades like advanced driving and connectivity features.

“Consumers have so many things they can depend on if they have it in their house and they want it in their car,” said Ivan Drury, director of insights at Edmunds.

Other contributors to higher monthly payments include production delays, reduced vehicle leasing and demand outstripping supply due to fewer dealer incentives.

Tom Leonard, co-owner and president of Fury Motors, sees buyers facing less availability of the $30,000 to $45,000 options they leased a few years ago, and they’re not interested in smaller cars.

“Popular vehicles, four-wheel drives, hybrids and crossovers – these are more expensive,” he said.

According to Edmunds, the average monthly payment for a new car at the end of last year was $717 over about 6 years, with a down payment of $6,780 and an average interest rate of 6.5%, totaling $40,833.

Even with gas prices down, Edmunds reports that electric cars are going for top dollar. For example, the Ford Mustang Mach-E averaged $57,988, higher than the overall average for Ford.

Even the used car market is seeing an increase in consumers committing to more than $1,000 in monthly payments. In the fourth quarter, 5.4% of consumers agreed to these payments, up from 3.9% a year ago and 1.5% at the end of 2020.

Edmunds reports that consumers are putting more money into their purchases to offset rising costs. The average down payment for new and used cars rose to record highs of $6,780 and $3,921 in the fourth quarter, respectively.

Buy high, sell low?

Analysts warn that financing for more expensive vehicles and lower used car values ​​could cause problems later on.

According to Edmunds, about 17% of new car sales had negative equity in the fourth quarter. The average amount owed on these upside loans was about $5,300, which was then converted to the new car loan amount.

In Minnesota, the situation may be more subdued.

Jennifer Parsons, senior director of finance at Walser Automotive’s 17 locations, doesn’t see a noticeable increase in loan payments, which average around $500 even for large vehicles.

“Sometimes, national market conditions don’t have the same effect here because of the high credit scores of many consumers here,” Parsons said. “Minnesota has always been insulated from this because of how Minnesotans feel about their money.”

Financial experts recommend buying with cash or paying off a loan over three to five years, then driving the car for a few more years.

“The thing about car payments is that they definitely break the budget. For households living paycheck to paycheck, oftentimes the culprit is sitting in the garage,” McBride said. “Even higher-income households are buying higher-priced vehicles, and they might be in the same situation if they’re financing it.”

Besides paying for a depreciating asset, Middendorf of Prosperwell Financial warns that there are other risks to taking on a high car payment: turning to credit cards to pay everyday bills, not being able to save for a down payment or retirement, or worse, Disney I feel emboldened to take on more debt for family trips to the world.

He finds that his wealthy clients are mostly avoiding car loans.

“Having said that now, there were years when we had 0% financing and wealthier individuals took advantage of that,” Middendorf said. “Right now, you’re not going to get 0% financing, so rich people are paying cash for them.”

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