Used cars sold at auction on July 11, 2023 in Chicago, Illinois.
Scott Olson | Getty Images
The head of one of the nation’s largest auto loan lenders isn’t overly concerned about rising consumer auto loans and rising used car prices that are leading to longer mortgages.
His main thinking? The percentage of income consumers spend on their cars remains low compared to 2019, before the coronavirus pandemic led to price increases as demand grew but supplies remained low.
If I told you, ‘Car prices are going up, interest rates are going up, insurance rates are going up,’ you’d say, ‘You know, consumers have to pay more as a percentage of their income,'” Capital One Auto President Sanjiv Yajnik told CNBC. “However, if you look at all income categories and people’s income, the average income remains low.”
While Capital One reported that average monthly car ownership payments rose from $390 to $525 as of 2019, data provided exclusively to CNBC from its auto division suggests that car costs have remained relatively stable relative to income. That’s because, overall, the rate of interest payments has remained low at about 10% since 2019, according to Bank of America’s auto arm.
Capital One Auto found 80% of car buyers who finance a car are under a 15% down payment.
“The buyer is aware. They are responsible. This is a more healthy way of doing things than the other way, because it is not money spent,” said Yajnik, referring to buyers who prioritize car payments, including work.
To reach that goal, however, many consumers take out longer loans to keep payments affordable.
The auto finance veteran’s view contrasts with that of others in the industry who view long-term loans as damaging to consumers’ pocketbooks.
They argue that so-called “perpetual loans” of six years or more have led many buyers, especially of new cars, to be underwater on the equity of their cars and trucks. That means they owe more than the value of their car when they decide to sell it.
Edmunds reports that about 26% of used car sales that include commercial vehicles have had a bad case this year through April. The amount of negative equity reached $5,105, which is a 35% increase from 2019.
“As the length of the loan period increases on average, the pace at which consumers make progress on their payments slows down,” said Jessica Caldwell, head of insights. CarMaxEdmunds, wrote in a recent online post. “When buyers trade in their cars quickly for whatever reason, they end up with a lot of debt.”
In terms of new car financing in the first quarter, 90.2% of new car loans involving negative equity trades lasted 72 months, and 43% extended to 84 months, according to Caldwell. The average negative equity trade-in was $7,183 during the quarter for new cars, according to Edmunds.
Those numbers have been rising since 2022, when used-car prices spiked due to a chip shortage that fueled the pandemic and prevented many buyers from taking out credit on their next car.
Buyers need to keep their cars longer to make a longer loan worth it, according to Yajnik. But that can also result in increased maintenance costs and the possibility that the car needs repairs beyond its value or has to be scrapped altogether.
“Yes, it takes a long time to get your equity, but in the meantime, you get the use of the car, and you get the money,” said Yajnik, a 28-year veteran of Capital One who has led the auto loan division since 2008.
The median listed price for a used car was $25,390 in March, according to the latest Cox data. That compares to new cars, which depreciate quickly, at $48,667.
Cox Automotive reports that all other things being equal on a loan, financing a $30,000 car at a 9% annual interest rate will cost $3,100 more over an 84-month term than a 48-month loan. However, there is a $264 difference in monthly payments, which Yajnik said makes it more affordable for many consumers, especially those in lower income brackets.
“It is clear that there will be pockets that have problems, but one has to start somewhere else, which is why people buy cars, and they do this without reason?” Yajnik said.
