With new car ownership costs up 5% from last year, the appeal of driving something shiny and new is driving car shoppers to empty their wallets on their car payments. We'll cover what the average new car payment is in the U.S., the reasons for the skyrocketing costs and some strategies to help you avoid depleting your life savings for the sake of driving the latest model.
With the average new car price quickly approaching $40,000, buying a new vehicle is becoming a financial burden for many car shoppers. According to a study by AAA, the average yearly cost of a new vehicle is $9,289, up from $8,849 last year. This breaks down to $773.50 per month. Declining new car sales are evidence that these rising prices are starting to become out of reach. However, the appeal of owning a brand new car can be hard to pass up and some car shoppers are stretching out their car loans in order to make monthly payments more affordable. Unfortunately, long-term car loans along with rising interest rates are simply adding to the problem.
The increase in average car prices can't solely be attributed to automakers hiking their prices. A large part of the spike is due to the growing popularity of trucks and SUVs. According to Kelley Blue Book, there is a wide discrepancy between the average price of a small car ($20,000) and that of a midsize SUV ($33,000) or a truck ($41,000). The annual cost of a small sedan is $7,114 compared to $10,839 for a pickup truck.
Another cause is an increase in finance costs. In fact, 40% of the total increase in vehicle ownership costs is from financing. As vehicle prices are rising, car shoppers are stretching out their loans to finance the vehicles. According to AAA, one additional year on a car loan adds an average of $1,000 in financing costs. This is a catch 22 since stretching out a car loan can reduce monthly payments but also forces you to pay more overall.
Just because the average monthly payment hovers at nearly $800 doesn't mean you can't get a reliable vehicle that fits your needs and won't knock your finances out of whack. Used cars are more reliable than ever and you're able to obtain most of the accident and ownership history through a vehicle history report. In exchange for the new car smell, you'll find the average price of a used car ($20,000) sits at almost half of the average new car price.
If you're concerned about the reliability of a used car, a good compromise is buying a certified pre-owned vehicle. These cars usually have lower mileage and have been inspected by the automaker to ensure there are no mechanical issues before they are sold. Not only will you find a lower price tag on a used car, but you'll also bypass new car depreciation which is the single biggest cost of ownership (at least when it comes time to trade-in).
If buying new is non-negotiable but you want to keep your monthly payments well below the average, you should ask yourself if a small vehicle will work for you. Since trucks and larger SUVs are driving up the average vehicle cost, going with a smaller car can get you the features you're looking for at a fraction of the price. For example, consider if you really need that compact SUV or if the flexible cargo space of a hatchback will also fit your needs.
Keeping your financing costs down will help prevent the monthly car payments from cornering you into a tight spot. Shopping around for the lowest possible interest rate by getting pre-approved can save you hundreds of dollars over the course of the loan. Saving up for a down payment before purchasing your new or used vehicle is another way to control the monthly payments and save you money in financing costs. You should shoot for at least a 10% down payment for a used car and 20% for a new vehicle.
Finally, you can save an average of $1,000 per year by keeping your loan terms as short as possible. Go with a 60-month loan or shorter to avoid overpaying in interest.