“I joke with people that every new car purchase is a luxury car purchase, I don’t care what you’re buying,” Ivan Drury, senior manager of insights at Edmunds told NPR. “And unfortunately for the segment of the population that probably needs it [cars] the most, it’s getting more and more out of reach.”
And the second is that a lot of people are still making car payments even after they should’ve been long paid off. In fact, about one in seven people surveyed by Edmunds said they have “negative equity” in their car — meaning they owe more on their loan than the car is actually worth.
Things are getting ugly.
So, is the car market headed for a crash or is this the new normal?
The Car Market Bubble Just Popped
One look on Leasehackr (a forum where users post details of their leases or finances) and you’ll see people are already feeling the pinch.
Here are a few examples of the desperate situations some car buyers are in:
- One user reported paying $917 a month for a BMW. 1.65%, $65k 78-month loan. And still owes $40k
- Johnny Navarro, a Los Angeles resident, is paying $580 per month for an 8-year-old Lexus
“I’m definitely gonna have to probably pick up a shift or two more a week,” Navarro says, referring to his job as a server at a restaurant in Santa Monica, Calif
The upshot here is that dealerships are asking over MSRP for five-year-old cars. The days of the $199/month lease are gone. But it’s not just the monthly payments that are getting people down, it’s also the length of the loan. The average new car loan is now 69 months, up from 65 in 2013 and 63 in 2012, according to Experian.
But as we all know, things that go up must come down… right?
What Goes Up Must Come Down
At some point, this can’t continue. People can only afford to finance for so long and make such high monthly payments.
That narrative sounds good on paper, but it isn’t as likely as you might think.
“What we’re seeing is the new normal,” says Daniel Boller who founded Leasly Financial after a decade of working in the industry. “I don’t see car prices softening ever; they don’t go backward. They only go up.”
Prices went up because people began moving out of crowded cities to suburban areas, and demand for cars skyrocketed. There’s also the problem of the microchip shortage, which has caused a production slowdown for many automakers.
In fact, a big reason the chip shortage happened, specifically for auto manufacturers, was that they all canceled their orders in 2022, and that chip fab capacity was bought up. The problem was self-inflicted. And on top of that once the orders were canceled the chip fabs upgraded their manufacturing to newer chips and couldn’t fill any new orders for old chips.
All of these factors have come together to create the current situation: high prices and long loans.
So, what does that mean for the future?
The Future of Car Finance
Many car buyers are hoping this “car market bubble” crashes between 2023 and 2024 and they are able to buy a new car on the cheap.
But our experts at Leasly don’t think that’s going to happen, or at the very least, it won’t be that severe.
“Compared to a few years ago when I used to pay $4,000 underneath MSRP, this ‘new normal’ will see an above-premium on cars for a long time,” Zak Sabbagh Chief Product Officer at Leasly said. “However, I do see a correction happening. These ridiculous corrections with $10,000 over MSRP will eventually come down over time and I can see that already in the used car markets.”
Waiting might be your best option, but don’t stake your entire future on the idea that you’ll be able to buy a new car for $199/month in 2024.
This is the new normal.