Why a large U.S. auto lender isn't concerned about 'forever loans'

Key Points:

• Capital One Auto reports that despite rising car prices, interest rates, and insurance costs, the payment-to-income ratio for vehicle ownership has remained stable at around 10% since 2019, indicating consumers are managing payments relative to their income.
• Median monthly car payments have increased from $390 to $525 since 2019, but 80% of financed car buyers maintain payments below the 15% payment-to-income threshold, reflecting cautious and responsible consumer behavior.
• To keep monthly payments affordable, more consumers are opting for longer loan terms, sometimes six years or more, which can lead to negative equity where buyers owe more than their vehicle's value, especially when trading in vehicles early.
• Edmunds data shows that 26% of used vehicle trade-ins involved negative equity averaging $5,105, and for new vehicles, negative equity trade-ins averaged $7,183 in Q1 2024, with many loans extending to 72 or 84 months.
• While longer loans reduce monthly payments, they slow equity buildup and may increase maintenance costs over time; Capital One sees this as a trade-off that can be manageable if consumers keep vehicles longer and use them to generate income.