Many households in the U.S. are becoming overwhelmed by a potentially surprising debt category: auto loans.
According to the Quarterly Report on Household Debt and Credit from the Federal Reserve Bank of New York, auto loan balances in the United States top $1.66 trillion. That’s a large tally, but economists aren’t just raising a red flag on the total amount borrowed. They’re calling attention to the rate of serious delinquency—loans that are 90 days or more past due—which rose to almost 3% in the last quarter of 2024. That rate is the highest it’s been since the first quarter of 2010, and it’s one that continues to increase even as many other indicators of household financial well-being, such as mortgage delinquencies, are returning to prepandemic levels. The trend persists even after the supply chain issues that initially caused prices to rise have been largely resolved.
What’s to blame? A collision of factors. The economists from the Federal Reserve Bank observe that consumers in every income bracket and across the credit score spectrum are encountering both higher car prices and higher interest rates.
Americans are concerned about the affordability of cars, and their concerns are justified. In a late 2024 study, Edmunds, a trusted car buying guide, tracked the factors consumers face: Interest rates are at near-record highs (they hover above 7% for new cars and are higher for used cars), and it’s nearly impossible to find deals such as 0% financing that was once commonplace. In response to their sometimes $1,000 per month car loans, consumers are taking on longer term, 84-month (7-year) loans. These accounted for more than 18% of new-vehicle loans in the third quarter of 2024.
These trends may continue or worsen with tariffs, which will increase purchase prices. In a statement, Jessica Caldwell, head of insights at Edmunds, says, “The looming threat of tariffs still hangs over the automotive industry like a dark storm cloud.” The ongoing will-they-won’t-they dynamic is causing uncertainty among manufacturers, dealerships and consumers.
If you find yourself overwhelmed by auto loan debt, it may be possible to manage this debt better.
Tips to manage auto loan debt
If you receive an overdue payment notice for your auto loan, it may be tempting to avoid the situation. However, Bruce McClary, former debt collector and senior vice president of membership and communications at the National Foundation for Credit Counseling, says you shouldn’t ignore late notices. “It is an opportunity to explore options that can help you get back on track,” McClary says. “You should be prepared to discuss payment arrangements or potential loan modifications as potential solutions. Review your loan agreement to understand any late payment fees and grace periods.”
There may be options to help you get back on track, including making payment arrangements or modifying your loan. “You can negotiate on interest rates and loan terms, especially if you have a strong credit history or can demonstrate financial hardship,” says McClary. “Be careful when considering loan deferments since they can add to the overall cost of repayment.”
If your credit score is higher than when you originally took out the loan or interest rates have fallen, you may be able to refinance your loan under more favorable terms. This will give you a smaller monthly payment, but keep in mind that it may extend the length of your loan. Make sure the new loan’s terms don’t require you to borrow more than the car’s current worth because doing so could create more financial risk, says McClary.
In some cases, you may want to consider a voluntary repossession. “[This] might be appropriate when you know you can no longer afford the payments and want to minimize the negative impact on your credit compared to a traditional repossession,” McClary says. “It can also be a way to avoid the added fees associated with a forced repossession.”
Selling the car may also be a viable option, but you’ll still be responsible for paying off any difference between the car’s sale price and what you borrowed.
Smart car-buying techniques
To avoid overwhelming auto loan debt in the first place, make savvy buying decisions. The first step, car buying experts from AAA and Edmunds agree, is sussing out needs versus wants. But this calculation shouldn’t just be for today. “Think about what you need in your life right now, but also plan three [to] five years ahead of time,” says AAA repair systems manager David Bennett. “You don’t want to get yourself in a nice little two-door car, and all of a sudden, you’re going to get married and… expand your family, and it’s like, ‘Oh, wait a minute. Now I need an SUV or something where I can put a baby seat.’” He advises considering whether you’re going to relocate, change jobs or start or stop working remotely—all factors that could affect your car choice.
Experts from AAA and Edmunds also advise being an informed buyer. As Edmunds consumer insights analyst Joseph Yoon observes, things aren’t in the buyer’s favor right now. “So, the more you have knowledge on the subject… the more you have the confidence to kind of play the game your way… instead of letting others dictate how you want to purchase the car,” he says.
Bennett recommends getting preapproved for an auto loan so you know what you can afford and what your expected payments will be. This information will also help you determine which dealership is offering a better bargain.
Yoon recommends understanding the availability of cars on your wish list in your area. “Unless you know what’s available locally, or… what’s available where you’re shopping… you have no power to negotiate with the dealer,” he says.
You may also need to expand the radius in which you’re shopping for cars to find better deals, Bennett says.
Yoon advises against getting fixated on one car because it diminishes your negotiating—and, thus, buying—power. “I think for most of the popular cars out there, their competitors are just as good and [are] worth a look, at least for your financial peace of mind and sanity,” he says.
Yoon also warns against the tactics of car dealership finance offices, where tire packages and extended warranties you may or may not need can significantly increase the purchase price of the car—even more so when they’re being paid for at a 7% interest rate.
And the auto loan is not the only cost consumers need to keep in mind. The true cost of operating a vehicle also includes insurance premiums, fuel costs, maintenance expenses and in some cases parking fees. AAA offers a driving costs calculator to help estimate these expenses and to empower you with the knowledge of whether you can afford them.
Bennett recommends carefully considering the implications of an 84-month loan. Considering the vehicle depreciates the moment you drive off the lot, he says, you’re going to owe more than what the vehicle is worth for a longer period of time. If you need to get a different vehicle because of a life change during those seven years, you’re not going to be in as financially strong a position to make that change. If you get in an accident, your insurer will pay out based on the car’s current value, not on what you owe, Bennett says. So, he suggests thinking about gap insurance to cover this difference. “I’m not saying [an 84-month loan] is a bad thing, but you need to understand all the consequences and the unintended consequences of a longer-term loan where you’re going to be upside down for a longer period,” he says.
“Try not to get enamored by the new car smell,” says Bennett. “It’s a business decision, not an emotional decision.”
Photo from Oleggg/Shutterstock.com.
