Americans paying more than $ 550 a month

In the Netflix era, many Americans manage their finances based on paying their monthly subscriptions, often without worrying about the total amount they will pay in the long run.

This paradigm benefits the auto industry and lenders who finance auto loans, with auto sales remaining near record levels.

According to Kelley Blue Book, the average price of vehicles has reached an all-time high of more than $ 36,000 in 2018 and, with rising interest rates, car buyers are borrowing more than ever and extending their borrowing to record times.

New car buyers agreed to pay an average of $ 551 a month for 69 months in January, according to the council website for Edmunds car purchase. That's almost 10% more per month than three years ago.

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This is a clear sign of American confidence in a strong economy.

But is it sustainable?

Car debt has risen 75% since the Great Recession in 2009, reaching a record $ 1.2 trillion, according to the US Public Interest Research Group.

"Easy credit and longer repayment terms have led many consumers to buy more cars than they really could afford," said Ed Mierzwinski, senior director of consumer programs at PIRG in the United States. United, in an email. "It's even worse for those who have been subjected to deceptive and predatory lending practices at car dealerships."

Average annual interest rates increased from 4.68% in January 2017 to 4.99% in the same month in 2018, then to their highest level in 10 years, to 6.19% in January 2019, according to Edmunds. According to Kelley Blue Book, with new car prices approaching $ 37,000 in January, monthly payments are out of reach for many buyers.

In the United States, TODAY recently interviewed several automotive industry executives who said that car buyers could afford it in the face of a strong job market and encouraging inventory gains.

"The economy is still at a very good level," said Henio Arcangeli, Jr., one of the top leaders of Honda's US division. "Although interest rates are rising, which can obviously increase the cost of buying the vehicle, on a historical basis they are still at a very low level."

That's true. Auto interest rates on four-year loans have never been lower in the 1990s, for example between 7 and 12%, according to the St. Louis Fed.

But car buyers could have problems if the economy deteriorated and their incomes fell, especially because they were locked in long-term loans.

Netlix subscriptions can be canceled. Car payments can not – at least not without giving up the vehicle. According to a survey conducted in August 2018 by the Gallup research firm, about 83% of Americans rely on their own car or that of someone else to get to work.

More than 7 million Americans are now at least three months behind on their auto loan payments, the benchmark for many lenders to trigger a repossession.

According to the Federal Reserve Bank of New York, the number of these troubled borrowers is one million more than in 2010, as a result of the global financial crisis that has led to a rescue of automakers and financiers.

Phaedra Wainaina, a recent Michigan law graduate who recently lost her position as a law researcher, was quickly overwhelmed by her bills, including a car loan.

"I had to choose between paying car tickets and buying food," said the 26-year-old single mother. She defaulted on her 2010 Chevrolet Equinox loan and the SUV was taken over. "I'm considered someone who has gone to graduate school and still behind."

Businesses dry up

One of the reasons why the tab gets more and more expensive is that the offers are harder to find. Zero-rate bids, which were common after the Great Recession, hit a 13-year low in January, according to Edmunds.

One of the main reasons is the interest rate hike by the Federal Reserve, which aims to reduce inflation in a strong economy. But the impact on consumers is higher monthly payments.

"The biggest surprise for me is the speed with which we have seen interest rates exceed 6%," said Edmunds analyst Jessica Caldwell, about auto loans. "People were used to low interest rates, and that's no longer the case. It's scary for a lot of people. "

According to Melinda Zabritski, Senior Manager Automotive Financial Solutions at Experian Automotive, the largest vehicles are one of the biggest drivers of larger loans.

Ten years ago, the best-selling segment of the market was small affordable cars, like the Ford Focus sedan, she said. Today, these are entry-level crossovers, such as the Toyota RAV4 and Ford Escape, which start at thousands of dollars.

"Consumers have fundamentally changed what they buy," Zabritski said. "It's partly because of this price hike."

They have changed so much that Focus has disappeared. Ford stops the car, as well as the Fusion and Fiesta sedans. And General Motors kills the Chevrolet Cruze, a competitor of the Focus, as well as several other car models.

This is because rising interest rates simply do not prevent people from borrowing more to feed their thirst for bigger and bigger vehicles in the SUV boom, which has weighed on passenger car sales less expensive and less expensive.

The average new car buyer borrowed $ 31,707 in January, which is a record high for the month, according to Edmunds.

And the most common loan term is now 72 months, according to Experian.

The good news is that the average consumer has "a very healthy balance sheet" at the moment, said Lakhbir Lamba, Executive Vice President of Personal Lending at PNC.

Lamba noted, however, that while PNC does not offer loans beyond 72 months, many of the bank's competitors offer loans of up to 84 months or more in some cases.

"There has been a lot of debate, is there any stress … in this asset class, and I'll tell you, it depends largely on the financial institution and the type to whom they lend money, "Lamba said. "We have seen stress but nothing that concerns us."

How to avoid paying too much

Advisers say that car buyers should consider the total amount they pay over time. But many people wonder more than they can handle the monthly payment.

At January rates, a 60-month loan taken out of the average amount borrowed costs a total of $ 36,947 over time. Adding just 12 months to the loan increases the cost of the vehicle by $ 1,092.

"It feels like everything is announced to us monthly," Caldwell said. "That's the way we've been conditioned now."

Another tip: If you can not afford an intermediate SUV, for example, consider an intermediate car. The price difference between the average mid-size SUV and the average vehicle in January was $ 38,744 to $ 25,930, according to Kelley Blue Book.

Contribute: Frank Witsil, Detroit Free Press reporter

Follow USA TODAY reporter Nathan Bomey on Twitter @NathanBomey.

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