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The affordability of new cars continues to deteriorate as the auto industry sets new prices for new car payments. May 2022 was a record-breaking month for the auto industry as the average new car payment rose to $712. Furthermore, the affordability of new cars is worse than ever, according to a detailed study by Cox Automotive.
It’s no secret that the prices of new and used cars have increased tremendously over the last few years. Factors such as the global COVID-19 Pandemic, the chip crisis, record inflation, rising interest rates, and an overall decline in vehicle supply continue to inflate new car prices.
According to Cox Automotive, “The average number of weeks of earnings needed to purchase a new vehicle increased for the fourth straight month to 41.3 weeks in May from an upwardly revised 40.8 weeks in April.” This metric is up 19% year-on-year, meaning that new car prices are still growing rapidly.
In May 2021, the average new vehicle purchase required an average of 33.5 weeks of earnings, or nearly 8 weeks less than the 41.3 weeks of May 2022. This large increase in costs involved several factors. Year-on-year average earnings grew by just 0.3%, while prices rose 1.0%, producer incentives declined, and the average interest rate increased eight basis points.
This isn’t the first time we’ve set a new car price record in recent times. In January 2022, the average new car payment was $636, and as expected this trend will continue in 2022.
The most popular loan term today is 72 months as customers seek to amortize their borrowing costs over the larger loan term. While this will result in lower monthly payments, it also increases the overall cost of the vehicle as interest accrues over the longer term of the loan. These longer 6 year loans also require owners to keep their vehicles longer or risk carrying the loan balance to the next vehicle which can cause greater financial stress.
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