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We’ve reached the end of the road for turning the purchase of a car, SUV or truck into affordable monthly payments.

A pile-up of factors has increased the cost of financing a vehicle to a point where the average monthly loan payment hit a record $781 in July, according to the analytics company J.D. Power. In personal finance terms, the average numbers make financing a new vehicle look close to insupportable.

That $781 figure, up 9 per cent from $716 a year ago, is for all loan terms. The most popular term today is 84 months – check out the “build and price” page on a car company’s website and you’ll likely see this term used as a default. At 84 months specifically, the average payment is $710 monthly for new cars and $700 for used.

The popularity of long loans for new vehicle buyers has been on the rise for years. What’s new is that buyers of used cars are getting sucked in as well.

The dominant used car loan has now flipped from 72 to 84 months, said Robert Karwel, a senior manager at J.D. Power. “Used cars are accelerating in price faster [than new]. Customers are going, ‘Geez, I can’t manage the payment on 72 months. Now, I’m going to flip to 84.’”

Used vehicle prices have soared in the pandemic because of the weak supply of new cars and SUVs. This explains why the average payment on an 84-month used car loan is so close to a new vehicle. J.D. Power’s used car data come from the used car departments at dealers selling new vehicles, which means the average age is two to five years.

Few parts of the economy were hit harder by the pandemic than the auto industry. Production of vehicles was slowed by supply-chain issues, which has led to big price hikes and people being told in some cases that the car they want won’t be available until next year. J.D. Power pegs the average new vehicle transaction price in July at close to $44,000, up from about $41,500 a year earlier.

Also, 0-per-cent financing deals seem to have gone the way of manual transmissions. Mr. Karwel said special financing rates today typically come in around 3.9 per cent or 4.9 per cent and they’re often applied to the 84-month term.

All of this explains why close to 60 per cent of buyers who finance are choosing a term of 84 months and up. That’s not a historic high – seven-year car loans were popular before the pandemic as well.

What’s changed is that these long-term loans are producing such high payments. At a time of high inflation and rising rates on all kinds of debt, vehicle buyers are facing monthly financing costs similar to the average mortgage payment 20 years ago.

One way to get your monthly financing costs down is to lease instead of buy. J.D. Power says the average new vehicle lease payment in July was $702, compared with $640 a year ago. Leasing terms of 36 and 48 months have typically been popular, but Mr. Karwel expects 60-month terms to become more popular to make payments manageable.

While the most popular term for car loans now is seven years, the average age of a trade-in is six years. At the start of the year, about 25 per cent of people trading in a car or SUV owed more than the value of the vehicle. Rising used car prices have helped cut the share of trade-ins with negative equity to 20 per cent. Trade-ins are being valued at high enough prices to pay off outstanding loan balances in more cases.

I’ve written a lot about how the high cost of owning a house can choke your finances, but cars and SUVs are clearly an issue as well. If your household needs a vehicle, think hard about buying something priced at a level that lets you clear your loan in five years and costs something well south of $781 a month. Also, work harder on your down payment.

Also consider buying in an economic downturn, if possible. We bought a car in the summer of 2009 and the summer of 2020 – dealerships were quiet, 0-per-cent financing was available and prices were negotiable. We picked up our new vehicle in the next few days after purchase, not the next year.

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