Car payments just hit a record $787 a month—and 1 in 4 new-car buyers is now signing a 7-year loan

In the third quarter of 2021, the average monthly payment for a financed new car reached an all-time high of $787, according to Edmunds. This represents a significant increase from $777 in the previous quarter and $756 a year earlier. Buyers are also financing more than ever before, with the average loan amount reaching $44,664, and the average price of a new vehicle sitting at $50,562, just $52 shy of the all-time high.

Nationwide, auto loan balances hit $1.71 trillion in the second quarter, a 56% increase from a decade prior.

Consumer insights analyst Joseph Yoon from Edmunds attributes the rising car payments to two primary factors: record-high vehicle prices and stubbornly elevated interest rates. With the average new-car APR sitting at 7%, Yoon explains that the combination of high prices and interest rates is driving up monthly payments. The pandemic played a significant role in this trend, as manufacturers chose to build cars with higher margins instead of reducing production due to factory closures and parts shortages.

As a result, new vehicles now cost about 30% more than they did six years ago. In response, many buyers are opting for longer loan terms, with 25.5% of financed new-car purchases in the third quarter carrying an 84-month term or longer. However, longer terms come with significant consequences, as the average amount of interest paid over the life of a new-car loan reached a record $9,938 in the third quarter.

Despite the high monthly payments, car sales have remained steady, with economists attributing this resilience to the "K-shaped economy." While households with six-figure incomes continue to buy new cars, buyers earning less than $100,000 have seen a decline in their share of new-car buyers. One such buyer, 35-year-old Abbey Burbach, struggles to afford a new car despite working three jobs. She notes that most of her peers who drive newer-model cars inherited them from family members.

The used car market has become an increasingly attractive option for those priced out of new cars, but prices have also risen, with the average used-vehicle transaction price reaching $27,306 in the third quarter of 2021. Financing for used-car purchases comes with a 10.6% APR, and this market has largely remained static due to a slump in leasing.