High interest rates mean the new normal in vehicle buying is a monthly payment in the $1,000 range

The average new vehicle loan payment is about $880 per month and almost 30 per cent of buyers who finance their purchase are paying $1,000 or more.

The effect of high interest rates on houses and groceries has been talked about a lot, but what’s happening in the driveways of the nation is equally dramatic. As depicted by the data analysis company J.D. Power, new vehicle affordability has blown a gasket.

Vehicle prices have risen a lot in recent years as a result of shortages caused by pandemic supply chain disruptions, but high rates are a big driver of high monthly payments. J.D. Power says the average interest rate on the popular 84-month loan term jumped to around 6.1 per cent before Wednesday’s Bank of Canada rate hike from a prepandemic 2.6 per cent.

J.D. Power numbers show the average monthly loan payment on a new vehicle is up 10 per cent from the $800 level of June, 2022. The 29 per cent of borrowers with loan payments of $1,000 and up per month, compares with just 10 per cent back in 2019.

Eighteen of the 30 vehicle brands tracked by J.D. Power had an average financing cost of $1,000 or more in the first quarter of 2023. “The implication is that many non-luxury brands have four-figure financing payments, on average, in the current market,” Robert Karwel, a senior manager at J.D. Power’s Canadian office, said in an e-mailed summary of his findings.

The average large pickup truck costs more than $1,000 per month to finance. Mr. Karwel said pickups are the second-largest retail vehicle segment in the Canadian market.

I haven’t bought a new vehicle in three years, but my personal rule of vehicle buying has always been to cap the term of a loan at five years and never pay more than $400 per month. J.D. Power numbers show buyers are going way beyond these limits in the 2023 version of the new vehicle market.

Almost 60 per cent of new vehicle loans have a term of 84 months or more. Even with the popularity of this lengthy payback period, just under 5 per cent of vehicle loans have payments of $399.99 or less, 7.3 per cent are in the $400 to $499.99 range and 58.7 per cent have payments between $500 and $999.99.

Another way to look at the effect of high interest rates is the total cost of borrowing in dollars. Mr. Karwel calculates this cost at $11,750 for a $50,000 vehicle bought with 13 per cent HST, a loan term of 84 months, a down payment of $5,600 and an interest rate of 6.1 per cent. That’s roughly triple the 2020 level.

“A shorter loan will for sure ease the cost of borrowing, and you get a better APR,” Mr. Karwel noted. “But the resulting payment goes up … a lot! So It’s undoable for many, and the result would be no-sale.”

One of the inequality divides of the pandemic was between those who financially struggled as a result of job or income loss and those who saved a lot of cash during lockdowns. Mr. Karwel said record numbers of people are paying in cash for vehicles – about one in four. These are deals with no dealer or manufacturer financing, but it’s possible the buyer borrowed some of the cash paid to the dealer elsewhere.

The Bank of Canada has increased rates 10 times in the past 15 months to subdue inflation, but people keep spending. You can see this in the housing market, where prices have been rising in recent months, and in the new vehicle market. Sales were up about 7.6 per cent for the first half of the year compared with the same period of 2022, and transaction prices for vehicles are up about 2 per cent.

Mr. Karwel said he gets asked a lot whether the $880 average cost for a new vehicle loan payment is the new normal. His expectation is that we could see price growth show or plateau if the economy stalls. But upward pressure will resume in part because of the adoption of electric vehicles, or EVs, which carry higher sticker prices than gas-powered vehicles.

By 2030, 60 per cent of new cars, SUVs and light trucks sold in Canada must be EVs. Until recently, EV price cuts have been almost unheard of.

Some parting thoughts on expensive vehicles: Choose a new car over an SUV – cars are cheaper; wait for an economic downturn to buy; build a bigger down payment; and, consider buying used instead. Used car prices soared in the pandemic, but the trend has run out of gas.

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