Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / Why Your Car Payment Feels Stuck Even as Inflation Slows
Transcript
- Lucas: CPI inflation has been cooling. The May headline number came in at 334.0, up from 332.41, so about 0.5 percent month over month—slower than the spikes we saw in 2022 and 2023. But ask anyone who bought a car in the last year if their monthly payment feels like it's cooling, and they'll laugh at you. Luna: Right. I just refinanced my student loan and my rate dropped a bit. But a friend bought a new sedan in March and her payment is $620 a month. That's insane for a mid-tier Subaru. Lucas: That's the disconnect. The Fed funds rate is 3.63 percent as of late June, down from its peak but still high by historical standards. But auto loan rates aren't following the Fed down. New car loan rates are averaging over 8.5 percent—that's the highest since the early 2000s. And used car loans are even worse, pushing 11 percent for prime borrowers. Luna: Why aren't they coming down? The Fed has signaled it might cut rates later this year. Banks usually anticipate that. Lucas: Two reasons. First, auto lenders got burned during the pandemic. Delinquencies spiked, especially on subprime loans, so they tightened underwriting and raised rates to compensate for risk. Second, the cost of funding those loans hasn't fallen as much as the Fed rate suggests. Banks and credit unions still pay depositors around 4 to 5 percent on savings accounts, so they need to charge 8 or 9 percent to make a margin. Luna: So the spread is wider than usual. But there's also the loan term problem, right? People are stretching out payments to make the monthly number fit. Lucas: Exactly. The average new car loan term is now 72 months. A quarter of new car loans are 84 months—seven years. That's almost as long as a mortgage on a 30-year amortization, but for an asset that depreciates 20 percent the moment you drive it off the lot. On a $40,000 loan at 8.5 percent over 72 months, you're paying over $11,000 in interest alone. The monthly payment is around $700. That's up nearly 15 percent from two years ago. Luna: And that $700 is a fixed monthly expense. It's like rent or insurance. So even if grocery inflation has eased, your car payment is a pocket of sticky inflation that the CPI might not fully capture. Lucas: That's the angle I want to drill into. The CPI measures the price of new and used vehicles, and it tracks auto loan interest rates in its calculation. But the way the Bureau of Labor Statistics constructs the index, they use a 'user cost' approach for owned vehicles. It's complex. The headline CPI for new vehicles was up just 0.3 percent in May. Used cars actually fell 3 percent year-over-year. But your actual monthly outlay—your loan payment—is a function of price, rate, and term. Two of those three are still rising. Luna: Let's talk about used cars falling. If used car prices are down, shouldn't that help? You'd think a cheaper car means a smaller loan. Lucas: In theory, yes. But there's a catch. Many trade-in values have also dropped. If you're carrying negative equity from a previous loan—owing more than the car is worth—you roll that into the new loan. The average negative equity on a trade-in is now around $6,000, according to data from Edmunds. So even if the used car you're buying costs $2,000 less than it did last year, you're adding $6,000 of old debt. Your loan balance goes up, not down. Luna: And that's compounded by the fact that people are holding onto cars longer, so the trade-in is older and less valuable. It's a double squeeze. Lucas: Right. The average age of a vehicle on U.S. roads is now 12.6 years. So when you finally trade it in, it's got high mileage, maybe some damage. The dealership offers you $5,000, but you still owe $11,000 on the loan. Congratulations, you just bought a used car with a $6,000 invisible down payment built into the new loan. Luna: That's brutal. And for subprime borrowers, it's even worse. Their rates can hit 15 to 20 percent. A $25,000 used car loan at 18 percent over 72 months means a monthly payment of about $600. That's a huge chunk of someone making $40,000 a year. Lucas: It's one of the reasons delinquencies on auto loans are still above pre-pandemic levels. The New York Fed's quarterly report on household debt showed that about 2.5 percent of auto loans were 90 days or more past due as of Q1 2026. That's not a crisis, but it's elevated. And it's concentrated among younger borrowers and those with lower credit scores. Luna: So this is a kind of inflation that hits lower-income households hardest, even if the overall CPI number looks better? Lucas: Exactly. And here's where it ties back to the Fed's dilemma. The Fed looks at core services inflation, which includes things like rent, medical care, and financial services. Transportation services includes auto loans. In the April PCE report, services inflation was still running at about 3.5 percent annualized. That's well above the Fed's 2 percent target. Car payments are a component of that. So even if goods inflation is fading, sticky services like auto loans keep pressure on. Luna: And the Fed can't cut rates aggressively until that services inflation comes down. But high rates are what keep auto loan rates high. It's a chicken and egg problem for anyone needing a car. Lucas: Walking through these mechanics is exactly why we do this show. We want you to understand why your wallet feels different from what the headlines say. And we keep these episodes free of ads, because we think this kind of explanation should be accessible to everyone. Luna: Yeah, it's a deliberate choice. If you find these breakdowns useful and want to support keeping them ad-free, you can do that at buy me a coffee dot com slash fexingo. Lucas: Even a small gesture helps us keep the lights on and the episodes coming. So back to the car payment trap—there's another angle I want to explore. The shift toward longer loan terms isn't just about affordability. It's also about the auto industry's strategy to keep new car sales volume up. Luna: You mean manufacturers are encouraging 84-month loans to make the monthly payment look palatable, even if the total interest is massive? Lucas: Yes. Many automakers have their own financing arms. They offer subsidized rates on longer terms to move inventory. The average transaction price for a new car is still around $48,000. Without a 72- or 84-month loan, that monthly payment would be over $900. That would scare away a lot of buyers. So they stretch the term, and the buyer focuses on the monthly number, not the total cost. Luna: But stretching the term also means the buyer is underwater on the loan for longer. If they need to sell or trade in after three years, they likely owe more than the car is worth. It locks them into the cycle. Lucas: Exactly. And that's why even as the Fed inches toward rate cuts, auto loan rates may not fall much. The risk premium that lenders built in during the pandemic isn't disappearing. And the loan term dynamic is self-reinforcing. As long as car prices stay high, longer terms are the only way to make payments affordable. That keeps borrowers exposed to negative equity, which keeps them in the market for another loan when they trade, perpetuating the cycle. Luna: So what's the takeaway for someone listening who might be car shopping right now? Lucas: A few things. One: if you can swing a shorter term, even 48 months, you'll pay way less interest and build equity faster. Two: consider buying a slightly older car with cash if you have it, or a smaller loan. Three: negotiate the out-the-door price, not the monthly payment. Dealers love to ask 'what payment are you looking for?' because they can adjust the term to fit that number while hiding the total cost. And four: check credit union rates. They often undercut bank and dealer financing by a full percentage point or more. Luna: That's good advice. And I'd add: don't roll negative equity into a new loan if you can avoid it. Pay off the old car first, even if it means driving it another year. The interest you save is real money. Lucas: Absolutely. The bottom line is that inflation may be cooling in the aggregate, but there are pockets where it's still hot. Auto loans are one of them, and they're hitting households hard because they're a necessity for most people. The CPI might show progress, but your bank account might not feel it yet. Luna: And that's the kind of nuance we try to unpack here. I think we've got a good handle on it today. Thanks for sticking with us. Lucas: Next time we'll look at another sticky corner of inflation. Until then, keep asking why your money doesn't go as far as it used to. We'll keep explaining.