Record numbers of car buyers now pay $1,000 monthly, but should they?

As drivers increasingly want brand-new, tricked-out versions of vehicles, a record number are paying $1,000 or more in monthly payments.

Car shopping guide Edmunds reported this week that more than 15% of consumers who financed a new vehicle at the end of last year committed to a monthly payment of $1,000 or more — potentially straining household budgets for the sake of bigger and better.

Alarmed by the trend of higher payments and loan terms that can stretch to 10 years, financial experts blame social media posts showing off lavish splurges and a YOLO (you only live once) mentality.

"It used to be about keeping up with your neighbors, and now it's trying to keep up with everyone that's out there on social media," said Nicole Middendorf, an advisor at Prosperwell Financial in Minnetonka.

Edmunds reports that the higher payment trend is fueled by rising interest rates and buyers with an appetite for newer, bigger vehicles with all the upgrades. That can quickly push up prices for a Chevrolet Silverado — the most popular vehicle sold in Minnesota last year — from around $40,000 to more than $60,000.

"The $1,000 payments aren't people buying used Toyota Corollas," said Greg McBride, chief financial analyst for Bankrate.com.

The trend toward higher monthly payments has been building for years. In the fourth quarter of 2020, just 6.7% of buyers had more than $1,000 in monthly payments. That rose to 10.5% of consumers in the last quarter of 2021 and 15.7% in 2022.

Buyers are passing up base models in favor of upgrades, such as advanced driving and connectivity features.

"There's so much that consumers can be addicted to if they have it in their house and they want it in their cars," said Ivan Drury, Edmunds' director of insights.

Other contributors to higher monthly payments include demand outpacing supply because of production lags, a decline in vehicle leasing and fewer dealer incentives.

Tom Leonard, co-owner and president of Fury Motors, sees buyers facing less availability of the $30,000 to $45,000 options they may have leased a few years ago — and they're not interested in small cars.

"The popular vehicles, the four-wheel drives, the hybrids and crossovers — those are more expensive," he said.

At the end of last year, the average monthly payment for a new car was $717 over nearly six years, with a $6,780 down payment and an average interest rate of 6.5% for a total of $40,833, according to Edmunds.

Even as gas prices drop, Edmunds reports that electric vehicles are going for top dollar. For example, the Ford Mustang Mach-E, at $57,988 on average, is higher than the overall average for Ford.

Even the used vehicle market is experiencing a rise in consumers committing to $1,000-plus monthly payments. A record 5.4% of consumers in the fourth quarter agreed to those payments compared to 3.9% a year earlier and and 1.5% at the end of 2020.

Consumers are putting more money down on their purchases to help offset rising costs, Edmunds reported. The average down payment for new and used vehicles hit record highs in the fourth quarter, climbing to $6,780 and $3,921, respectively.

Buying high, selling low?

Analysts caution that the combination of costlier vehicle financing and declining used car values could spell trouble later.

About 17% of new vehicle sales with a trade-in had negative equity in the fourth quarter, according to Edmunds. The average amount owed on those upside-down loans was about $5,300, which was then rolled into the new vehicle loan amount.

The situation may be more restrained in Minnesota.

At Walser Automotive's 17 locations, Jennifer Parsons, senior director of finance, isn't seeing a noticeable jump in loan payments, which average around $500, even for big vehicles.

"Sometimes, the national market conditions don't have the same impact here because of the high credit scores of many consumers here," Parsons said. "Minnesota has always been insulated from this because of how Minnesotans treat their money."

Financial experts advise buying with cash — or paying off a three- to five-year loan, then driving the car for several more years.

"The thing about the car payments is they're absolute budget busters. For households living paycheck to paycheck, oftentimes the culprit is sitting in the garage," McBride said. "Even higher-income households are buying higher-priced vehicles and may be in the same situation if they're financing it."

Besides paying for a depreciating asset, Middendorf of Prosperwell Financial cautions there are other risks in taking on a high vehicle payment: Turning to credit cards to pay everyday bills, not being able to save for a home down payment or to retire or, worse, feeling emboldened to take on even more debt for family trips to Disney World.

She sees her affluent clients mostly avoiding auto loans.

"Now, having said that, there were years we had 0% financing and wealthier individuals took advantage of that," Middendorf said. "Right now, you're not going to get 0% financing, so wealthier people are paying for them in cash."