Lower-income households have high auto payments, according to Bank of America

Lower-income households had the largest increase in monthly auto loan payments after years of high car prices and interest rates, according to a new report from the Bank of America Institute.

New- and used-car prices rose significantly in 2021 and 2022, and the average 60-month auto loan interest rate has increased since early 2022. Both have begun to normalize, but customers who purchased vehicles during the height of inventory shortages are still feeling the strain, said David Tinsley, a senior economist at the institute.

Lower-income households seem to be feeling that strain the most. In 2019, 63 percent of those car owners paid less than $500 a month for their car, Bank of America found. But since then, that group's median auto loan payment increased by 34 percent. In the first eight months of 2024, roughly 60 percent of lower-income households paid more than $500, Tinsley said.

Customers who bought pricey vehicles with high-interest loans are stuck for now, Tinsley said. They "might be able to refinance in due course if the rates fall enough to make that a sensible proposition, but that is a little way off," he said.

The Federal Reserve announced a 0.5 point cut to its benchmark rate Sept. 18, which should bring auto loan interest rates down. But experts caution the rate changes might not begin to impact customer behavior until later this year or 2025.

Lower-income households' wages and salaries, though, have kept pace with higher auto loan payments, Tinsley said.

"The labor market has been performing very well over the last few years," he said. "Wage growth has been quite strong, particularly for lower-income households."

The burden of auto loans did grow when compared with lower-income households' savings, the institute found. Those households' median monthly payment was about one-quarter of their median savings in August.

Ultimately, "that is fine as long as people have a job," Tinsley said. "Because they do not need to draw on savings for their daily living costs."