Post-COVID, car prices have surged due to a combination of supply chain disruptions, chip shortages, and increased consumer demand. New vehicle production slowed significantly during the pandemic, creating a backlog of demand that outpaced the available inventory. This led to skyrocketing prices for both new and used cars, with some used models even surpassing their original sticker prices. As manufacturers gradually resumed full production, prices remained elevated due to ongoing supply issues and inflationary pressures. While the market has started to stabilize, affordability remains a concern for many buyers, especially with high interest rates compounding the financial strain.

In the third quarter of 2024, American car buyers found themselves caught in an financial bind. According to Edmunds, interest rates for new auto loans have remained stubbornly high, with the average Annual Percentage Rate (APR) sitting at 7.1%. This marks the sixth consecutive quarter where rates hovered around this level, significantly impacting affordability for consumers looking to buy a new vehicle. 

One of the most notable trends in Q3 was the scarcity of 0% financing deals, which accounted for just 3% of new car purchases. These offers, once more common, are now reserved for buyers with excellent credit, making them increasingly difficult for the average consumer to access. With fewer financing options available, buyers are turning to longer-term loans to keep their monthly payments manageable. This is happening at the same time banks are tightening credit standards. 

In Q3, 84-month auto loans made up 18.1% of all new car loans, up from 17.3% in the previous quarter and 15.8% in Q1. While these extended terms offer some relief in the form of lower monthly payments, they come with their own set of risks. Longer loan terms can leave car buyers vulnerable to negative equity—owing more on the car than it’s worth—by the time they’re ready to trade in or sell their vehicle.

Despite a modest interest rate cut of 50 basis points by the Federal Reserve in September, industry analysts remain cautious about the near-term outlook for car sales. Jessica Caldwell, Edmunds’ head of insights, noted that “the Fed’s decision to cut rates was a welcome update at the end of the quarter, but on its own, is unlikely to dramatically change the financial landscape for car buyers.” Most experts agree that it will likely take several more rate cuts over the next year to have a meaningful impact on vehicle affordability.

The financial pressure is evident, with more than 17% of car buyers now paying over $1,000 per month for their vehicles. As consumers continue to rely on longer loan terms and higher payments, the future of the auto industry could be headed for more challenges if affordability issues persist.