Soaring prices for new and used cars mean that consumers financing their purchases are facing ever-higher monthly payments. The Consumer Financial Protection Bureau (CFPB) says this is cause for concern.
The CFPB says the problem is greater with used vehicles because the interest rate on a used car loan is usually higher than on a new car. The agency points to data showing that the consumer price index (CPI) for used cars and trucks has risen 40% since January 2021, while the CPI for new cars has only risen by 12%.
As car prices continue to rise, the CFPB fears loan amounts will continue to rise. However, this may not be immediately apparent to consumers, as increasing loan terms may make these larger loans affordable.
Consumers should shop
These circumstances make it more important for consumers looking to finance a used car to seek the best terms. Some new players, including fintech companies, can be very competitive with banks and credit unions.
Scottie, from Danville, Va., told us he had a good experience with LoanMart, citing its flexibility.
“Unlike a regular car loan, you can pay off the principal and pay it off faster than the months it’s set up for,” Scottie wrote in a ConsumerAffairs article.
“The average loan size will continue to increase”
According to the CFPB, the danger for consumers is to extend the duration of a loan too much. For example, financing a vehicle for six or seven years will result in a much slower repayment of the amount owed. At some point, the consumer will still owe more than the vehicle is worth, even in today’s hyperinflationary market.
“As a result, we expect total debt and average loan size to continue to rise and larger auto loans to put increased pressure on some consumers’ budgets for much of the next decade,” the agency said.
Officials note that auto loans are already the third-largest consumer credit market in the United States with more than $1.4 trillion outstanding. This is double the amount of 10 years ago, and it is expected to continue to grow. The CFPB has expressed concern that inflated prices for used cars and trucks could prompt lenders to repossess the cars faster than they would have in the past.
The financial regulatory agency said it would closely monitor lenders’ practices to gauge their impact on consumers. In particular, he will assess loan structures where lenders seem to rely on high interest rates and fees to profit even when consumers fail.