The New Reality: A Monthly Car Payment of $700

When average monthly payments for new cars topped $700 in May and car prices hit record highs, many would-be car buyers decided to stay away until the market returned to normal. the normal.

Six months later, normal seems further away than ever. The Federal Reserve continues to raise the federal funds rate, driving interest rates on auto loans to a 20-year high, and the average transaction price for new cars remains above $48,000.

According to data firm Cox Automotive, the average monthly payment for a new car hit a new high of $748 in October. Average used car payments exceeded $550, based on a 70 month term loan and 10% down payment.

Automotive research firm Edmunds reports that the average October auto loan APR is 6.3% for new vehicles and 9.6% for used vehicles. Edmunds senior knowledge manager Ivan Drury says slight improvements in car supplies and prices are negated by the rate increase.

“Even if you save $500 on the purchase price of a car, it could be wiped off the interest rate if you don’t get the exact APR you need,” says Drury.

To illustrate Drury’s point, financing a $46,000 car for six years with an APR of 3.1% would result in a car payment of $700. Reduce the loan amount to $42,000 at 6.3% APR for the same term, and you still have a car payment of $700.

Matt Degen, Editor at Kelley Blue Book, says: “From what we’ve seen so far, it’s even harder to get even a used car. And I don’t know if that will change much. Even if inventory issues ease further, with rising interest rates and tougher lending standards, this could just be another struggle for people to overcome.

High payments for cars affect all car buying segments

During Cox Automotive’s quarterly auto industry call, senior economist Charlie Chesbrough said, “No buyer can escape these higher rates. They are passed on to everyone, which means the monthly payments will be even higher. »

On the same call, chief economist Jonathan Smoke said the “deadly combination” of high car prices and high interest rates were driving low-income, low-credit buyers out of the auto market.

At the other end of the spectrum, Edmunds recently reported that 14.3% of consumers commit to monthly car payments of $1,000 or more when financing a new vehicle. The report pointed to consumer preferences for luxury brands and large trucks and SUVs as one of the factors driving these car payments over $1,000.

Says Drury, “I tell people if a car payment of $1,000 makes sense for you mathematically and for your budget, that’s fine. But we see in our data where someone can pay $1,400 per month for a 72 month term at 10% APR. We are talking about nearly $30,000 in financing costs. What I can’t defend.

When waiting to buy a car is not an option

Twenty-six-year-old Tim Roeder of Westfield, Indiana and his wife had no car payments when 10-year-old Roeder’s car needed expensive repairs. Roeder says they weren’t “super excited” about accepting payment for a car in today’s market, but some planning and job promotion helped them get it done.

Roeder and his wife discussed the budget, used a car loan calculator set a maximum payment amount and trade-in values ​​sought. Roeder took the day off and drove to the dealership with hard numbers in mind, but ready to go. He says: “It helped me to feel comfortable with the decision and to pull the trigger, because I already knew in advance which numbers I was okay with.”

As Roeder discovered, managing the numbers up front puts guardrails around the purchase, giving buyers the power to say yes or no.

Even as interest rates and car payments rise, conventional car buying advice can still be helpful for those who can’t put off buying a car.

In a typical car market, the rule of thumb is to spend less than 10% of your take home pay on car payments. If it’s overkill, try reallocating other expenses. Avoid going for a long-term loan to lower the payment, as you could end up upside down and owe more than the value of the car.

Compare interest rates from different lenders. Many lenders offer pre-qualification, which gives you rate estimates without affecting your credit score. Then apply for a pre-approved loan and take it to the dealership, giving them a rate to beat. If you don’t do your homework and end up with a double-digit interest rate from a dealership, you may still be able to refinance at a lower rate and payment with another lender.

Another long standing tip is to make a down payment of at least 20% on a new car and 10% for used cars. If this is not possible, any down payment may help reduce your payment.

Says Drury, “You can get an older vehicle, and luckily some are good for easily 100,000 miles. I tell people you can buy older and deeper on the used market if you’re trying to save money or just to get a vehicle to hold you over for another year or two.

If you’re buying an older vehicle, look for models known for their longevity, check maintenance records, invest in a pre-purchase inspection, and avoid a long-term loan that could upset you as the car loses value.

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