Car prices have exploded since 2019. Interest rates are climbing. Insurance costs won’t stop rising. By all logic, consumers should be drowning in vehicle expenses. Yet according to Capital One’s auto finance chief, everything’s actually fine. The math, he says, still works out.
Sanjiv Yajnik, president of Capital One Auto, told CNBC that the payment-to-income ratio for car buyers has stayed remarkably flat at around 10% since before the pandemic, despite monthly payments nearly doubling from $390 to $525. His reasoning is straightforward: people are being smarter about it. They’re stretching loans longer to keep individual payments manageable, and they’re doing so responsibly.
There’s logic here. If your income stays the same but car prices jump 40%, the only way to maintain affordability is to spread payments over more years. And 80% of Capital One’s financed buyers stay below the 15% payment-to-income threshold that lenders consider acceptable. That does suggest financial discipline.
But there’s a catch, and it’s a big one.
The Forever Loan Problem
Those longer loans? They’re becoming genuinely epic. According to data from Edmunds, nearly 90% of new vehicle loans involving trade-ins carried terms of at least 72 months in the first quarter. Some stretched to 84 months. That’s seven years of payments on a car that might feel like ancient history halfway through the loan.
The real damage shows up when life happens. Nearly 26% of used vehicles purchased through April involved negative equity trade-ins, meaning buyers owed more on their old car than it was worth. The average shortfall: $5,105, up 35% from 2019. For new vehicles, it was even worse at $7,183 on average.
Here’s what that means in practice. You trade in a car you still owe $8,000 on, but it’s only worth $3,000. That $5,000 gap doesn’t disappear. It rolls into your new loan. Now you’re financing not just the new car, but the old car’s debt too. And you’re doing it over 84 months.
Yajnik’s counterargument has merit. If you keep the car for the full seven or eight years, the math eventually works out. You get years of reliable transportation while building equity. But that requires discipline most people don’t have, and circumstances most people can’t control. Job loss, a move, a life-changing accident, a better opportunity somewhere else. Cars break down. They become unsafe. Sometimes they’re simply not worth fixing anymore.
“If consumers then trade in their vehicle too soon for any reason, they are increasingly left holding more loan debt,” Jessica Caldwell, head of insights for CarMax’s Edmunds, noted in recent analysis. That’s the real trap.
Who Bears the Cost?
The industry’s split on this is telling. On one side, you have Yajnik and Capital One arguing that longer terms democratize car ownership, particularly for lower-income buyers. A $264 difference in monthly payments is genuinely meaningful if you’re living paycheck to paycheck. Financing a $30,000 vehicle at 9% costs $3,100 more over 84 months versus 48 months, but that shows up as a smaller monthly burden.
There’s an undeniable fairness argument there. Why should someone making $35,000 a year have to choose between buying a $15,000 beater that might strand them on the highway, or a reliable $25,000 car they theoretically can’t afford? Longer terms expand options.
But critics from Edmunds and elsewhere see a different picture. They’re not entirely wrong. Longer loans almost certainly increase the odds of negative equity situations. They’re also virtually guaranteed to cost consumers thousands in extra interest. And they shift the risk profile. A 48-month loan on a depreciating asset makes sense. An 84-month loan is betting that nothing goes wrong.
The problem isn’t really whether longer loans are good or bad. It’s that they’re becoming the default, almost the only option available to keep payments reasonable as prices stay inflated and wages don’t keep pace. That’s a symptom of something deeper than any single lending decision.
The Uncomfortable Question
Yajnik asks a fair question at the end of his commentary: “Are they doing so irrationally?” Most car buyers aren’t stupid. They’re not making reckless decisions. They’re responding logically to circumstances that have already been shaped for them.
Used vehicles averaged $25,390 in March. New cars, which depreciate faster, sit around $48,667. Interest rates have climbed. Insurance is more expensive. In this environment, taking a longer loan isn’t irrational. It’s practically inevitable.
The real question is whether an auto finance system that makes seven-year loans on depreciating assets seem like a reasonable default is actually sustainable, or whether we’re just deferring a problem rather than solving it. When nearly everyone needs to stretch payments over 84 months to afford transportation, that’s not a sign of a healthy business cycle. It’s a sign that something has drifted out of balance, and someone’s going to pay for it eventually.
