US car buyers owe approximately $1.07 trillion in debt according to a financial-services company tracking and reporting credit trends for both consumers as well as companies.
This amount is a record-high, which means issues could arise for lenders such as Ally Financial, or automakers such as Ford or GM due to increasing interest rates and less affordable monthly payments.
According to The Motley Fool, consumers on a budget could find themselves struggling to pay their car loans as the Federal Reserve is tightening rates. In fact, the average interest rate on a 60-month new-car loan has gone up from 4.27% to 4.44% last December.
Experian, the financial-services company that calculated the $1.07 trillion in debt, also found that the average new-car loan has increased to $30,621, with average monthly car loan payments climbing to as much as $506/month – up from $493/month in 2015.
These rates have forced borrowers to choose longer financing terms on their loans. During the last quarter of 2016, roughly 32% of borrowers chose a 73- to 84-month loan, up from 29% in Q4 of 2015.
Even with tightening standards (less loans to people with poor credit scores), companies such as Ally Financial expect losses on loans to go up this year by anywhere between 1.4% and 1.6%, compared to 1.24% in 2016. This same type of dynamic could impact Ford and General Motors, two automakers who have otherwise seen revenues climb significantly these past few years.
One solution would be for automakers to boost profit-busting incentives or take on more risk during lending operation – which may already be happening with the daily sales rate of US light vehicles having slipped by 1.4% in the first two months of 2017 compared to Jan-Feb 2016.
Unfortunately, the Federal Reserve has already indicated that rates could increase even further by 0.50% in 2017, which means borrowers could be looking at higher monthly payments.