Monday, 30 October 2023
by Rose White
On average, 9.2% of household budgets go toward making car payments, and according to the Federal Reserve Bank of New York, Americans owe $1.56 trillion on their vehicles. That’s almost double the amount it was 10 years ago. We appear to have a love affair with shiny new cars and have the debt to show for it.
Here, we’re going to look at the average car payment, how the loan term impacts how much we pay to finance a vehicle, and ways to keep auto loan payments low.
According to the car shopping experts at Edmunds, by the second quarter of this year, the average monthly car payment reached a record high of $733. What’s more, 17.1% of us were financing a vehicle with a monthly payment of $1,000 or more. That’s also a new high.
While auto prices have increased dramatically since the early days of the pandemic, interest rates have also risen dramatically. In an effort to fight growing inflation, the Federal Reserve has ratcheted up the federal funds rate. And while inflation is slowly coming down, the interest rate does not seem to be in a hurry to follow.
Whether a person gets their loan from their local bank or a bank suggested by the car dealership, the combination of high interest rates and higher-than-usual car prices has resulted in stiff monthly payments.
Experian reports that the average loan amount for new vehicles is $40,851. For used vehicles, it’s $26,420. Let’s say that someone takes out a 48-month loan for $40,851. If their loan’s APR is 8.5%, their monthly payment will be $1,007, and they’ll pay a total of $7,481 in interest.
The interest rate lenders charge tends to be higher on used vehicles, so if a car buyer takes out a 48-month loan for $26,420 to purchase a used car at 9% APR, they’ll pay $657 a month and a total of $5,138 in interest.
To keep payments down, many buyers opt for a longer loan term. Edmunds’ research showed that 64.5% of buyers signed up for a loan term ranging from 67 to 84 months and an average interest rate between 8.5% and 9.6%.
A longer-term loan does have lower monthly payments. For example, if someone takes out a $40,851 loan for 72 months with an 8.5% APR, their monthly payment is $726. That’s $281 less per month than they would pay if the loan term was 48 months.
However, by stretching out payments to 72 months, they end up paying a total of $11,440 in interest, $3,959 more than if the loan term was 48 months. That’s nearly $4,000 they could use to build an emergency savings account, make repairs around the house, or invest for retirement.
With higher interest rates and new car prices, it takes a savvy shopper to keep their payments as low as possible. But remember, keeping payments low by stretching out the loan term means paying more in interest. Here are a few ideas that do not involve extending your loan term.
In September, Experian released the following table, showing how much a credit score impacts the cost of borrowing money.
|Average APR, New Car
If your credit score is lower than you would like, take time to improve it before applying for a car loan. While it may feel daunting, millions of people have improved their credit situation, and you can, too.
It may seem obvious, but making a larger down payment means you won’t have to borrow as much, and the less you borrow, the less you’ll pay in interest. If possible, postpone applying for a new auto loan until you’ve had time to build up a good down payment. And don’t forget: If you have another vehicle to trade in, it can form part of your down payment.
One of the least fun things about adulthood is having to make responsible decisions and not getting what we want. Revisit the type of vehicle you want and decide if there’s another — less expensive — car that could also make you happy.
There are folks who trade in their cars every year or two. Keep your eyes open for a used vehicle with low mileage. Many cars lose 20% of their value within the first year. You can capture that savings by purchasing a newer used car. Its original warranty may still be in effect, or you can look into purchasing an extended warranty.
Most people enjoy the feeling of driving a new car, but no one wants to toss and turn in bed at night, worried about high payments. If you’re going to be in the market soon for a vehicle, make it easier on yourself by minimizing the amount you pay.
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