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Many prospective car buyers chose to wait until the market returned to normal when average monthly new-car payments exceeded $700 in May and car prices hit record highs.
Six months later, normal looks further away than ever. The average new-car transaction price is still more than $48,000, and auto loan interest rates are at a 20-year high due to the Federal Reserve’s continued hikes in the federal funds rate.
Data from Cox Automotive indicates that in October, the average monthly payment for a new car reached a record-breaking $748. Average used-car payments have surpassed $550, based on a 70-month-term loan and 10% down.
Automotive research firm Edmunds lists October’s average car loan APR as 6. 3% for new and 9. 6% for used. According to Ivan Drury, senior manager of insights at Edmunds, rising rates are offsetting marginal gains in vehicle supplies and pricing.
“If you don’t get the exact APR that you need, even a $500 savings on the purchase price of an automobile could be obliterated on the interest rate,” Drury says.
To illustrate Drury’s point, financing a $46,000 car for six years with a 3. 1% APR would result in a $700 car payment. Reduce the loan amount to $42,000 at 6. 3% APR for the same term, and you still have a $700 car payment.
Senior editor at Kelley Blue Book Matt Degen states, “Based on our observations thus far, it appears that obtaining a used car is becoming increasingly difficult.” And I dont know thats going to be changing much. With growing interest rates and more stringent lending requirements, even if the inventory problems go away more, people may still have additional challenges to overcome. ”.
In today’s economic climate, characterized by rising interest rates and record-high car prices, many car buyers are grappling with the question of whether a $700 monthly car payment is too much.
This article delves into this complex issue, analyzing various factors that influence car affordability and providing insights to help you make an informed decision.
Understanding the Impact of High Car Payments
Strained Budgets: A significant portion of your income going towards a car payment can leave you with less money for other essential expenses such as housing, food, and healthcare. This can lead to financial strain and difficulty meeting your basic needs.
Debt Accumulation: High car payments can result in accumulating significant debt, especially if you opt for a long loan term. This can trap you in a cycle of debt and hinder your ability to save for future goals or emergencies.
Limited Financial Flexibility: With a large chunk of your income committed to car payments, you may have less financial flexibility to handle unexpected expenses or take advantage of opportunities that arise.
Negative Equity: If the value of your car depreciates faster than you pay off the loan, you could end up owing more than the car is worth. This is known as negative equity, which can make it difficult to sell or trade in your car.
Factors to Consider When Determining Affordability
Income: Your income plays a crucial role in determining how much you can comfortably afford to spend on a car payment. A general rule of thumb is to keep your car payment below 10% of your monthly take-home pay.
Credit Score: Your credit score influences the interest rate you qualify for on a car loan. A higher credit score typically translates to a lower interest rate, which can significantly reduce your monthly payment.
Down Payment: Making a substantial down payment can lower your loan amount and, consequently, your monthly payment. Aim for at least 20% down for a new car and 10% for a used car.
Loan Term: Opting for a shorter loan term will result in higher monthly payments but will save you money on interest in the long run Conversely, a longer loan term will lower your monthly payments but increase the total interest paid.
Car Value: The value of the car you choose also impacts affordability. Consider your needs and budget when selecting a car, and avoid overspending on features or a brand name.
Additional Expenses: Remember to factor in additional expenses associated with car ownership, such as insurance, registration, maintenance, and fuel costs. These expenses can add up, so it’s essential to include them in your budget calculations.
Strategies for Managing High Car Payments
Refinance Your Loan: If interest rates have dropped since you took out your loan, refinancing to a lower rate can reduce your monthly payment.
Extend Your Loan Term: While this will increase the total interest paid, it can provide immediate relief by lowering your monthly payment.
Make Extra Payments: If your budget allows, consider making extra payments towards your loan principal. This can help you pay off the loan faster and save on interest.
Downsize Your Car: If you find your current car payment unaffordable, consider selling it and purchasing a less expensive vehicle that fits your budget better.
Explore Alternative Transportation Options: Public transportation, carpooling, or ride-sharing services can be more affordable alternatives to owning a car, especially if you live in an urban area with good public transportation infrastructure.
Whether a $700 monthly car payment is too much depends on your individual circumstances and financial situation. By carefully considering the factors outlined above and exploring strategies for managing high car payments, you can make an informed decision that aligns with your financial goals and well-being.
Remember, responsible car ownership involves striking a balance between affordability and meeting your transportation needs. By prioritizing your financial health and making smart choices, you can ensure that your car is an asset, not a burden.
High car payments are affecting all car-buying segments
Charlie Chesbrough, senior economist at Cox Automotive, stated during the company’s quarterly auto industry call that “no buyer can escape these higher rates.” They are being passed along to everyone, and this means that monthly payments will be pushed even higher. ”.
Chief economist Jonathan Smoke claimed during the same call that lower income and credit score buyers are being driven out of the car market by the “lethal combination” of high interest rates and car prices.
On the other end of the spectrum, Edmunds recently reported 14. 3% of consumers are committing to monthly car payments of $1,000 or more when financing a new vehicle. The report identified one reason for these car payments exceeding $1,000: consumer preferences for luxury brands and large trucks and SUVs.
Drury states, “I tell people that’s fine if a $1,000 car payment makes sense for you financially and mathematically. However, we observe in our data that a person might be paying $1,400 a month for a $272-month term at 2010% APR. We’re talking about nearly $30,000 in finance fees. That I cannot advocate. ”.
My Car Payment is $1,200/Month!
FAQ
Is $700 a lot for a car payment?
Is $750 a month for a car good?
What is too high of a monthly car payment?
How much car for $700 a month?
What is the average new car payment?
Combine that with expensive prices for new cars, and the average new auto payment just hit an all-time high well over $700. Car buyers who financed a new vehicle in the first few months of the year committed to an average auto loan interest rate of 7%, compared to 4.4% in the first quarter of 2022, according to a new report from Edmunds.
Should you focus on a monthly car payment?
If you focus only on the monthly car payment and ignore total financing costs, you could waste a lot of money. For example, look at how two different loans can result in the same car payment. The interest rate on your auto loan also affects your car payment.
How much does a 46,000 car loan cost?
To illustrate Drury’s point, financing a $46,000 car for six years with a 3.1% APR would result in a $700 car payment. Reduce the loan amount to $42,000 at 6.3% APR for the same term, and you still have a $700 car payment.
Should you pay $1,000 a month for a car?
Says Drury, “I tell people if a $1,000 car payment makes sense for you mathematically and for your budget, that’s fine. But we see in our data where someone may be paying $1,400 a month for a 72-month term at 10% APR. We’re talking about nearly $30,000 in finance fees.