Car Payments Are Still at Record Highs. Here's What You Can Do About It
- The average car payment hit a new high in July of $733, while the average cost of a new vehicle reached over $48,000.
- Rate shopping and improving your credit score could reduce the cost of borrowing.
- Minimize the amount you borrow by opting for lower-cost cars and paying more upfront.
There are ways to buy a new car without breaking the bank.
The cost of buying a car continues to increase. The average monthly car payment reached a record-breaking $733 in July as car buyers contend not only with increased prices, but also higher borrowing costs. A shortage of microchips, supply chain issues, and factory shutdowns have all pushed car prices up. According to the latest Cox Automotive/Moody's Analytics Vehicle Affordability Index, the average cost of a new vehicle reached $48,182 -- also a record high.
If you're in the market for a new car, it's soul-destroying to watch prices spiral upwards, especially as you contend with increased costs in other parts of life. Moreover, the low inventory and high demand means that you might pay even more for a car that isn't even quite what you were after.
Here are three ways to handle record-high car costs.
1. Wait a while longer
Sadly, it is unlikely that prices will fall any time soon. However, if you're able to delay your car purchase, there may be other benefits. For starters, if your credit score is less than stellar, you can take steps to improve it. Make sure you pay your bills on time, and see if you can reduce the amount of debt you carry. You might also check for any errors on your credit report in case this is dragging your score down. A higher credit score could help you qualify for better rates, which will lower both your monthly and overall repayment costs.
Delaying your purchase could also let you save more towards your down payment, so you can reduce the amount you borrow. In an ideal world, you wouldn't have to borrow anything to buy a car, but that's not an option for everybody. If time is on your side, you might also try to get a factory car straight from the manufacturer. Even if this doesn't reduce costs, it would at least mean you get the car you wanted.
2. Compare rates
Shopping around for an auto loan can make a huge difference to your costs. Don't assume you'll get the best deal from your car dealership. Instead, aim to get pre-approved for the best rate before you even begin to negotiate prices. Our list of best auto loans is a good place to start.
If you're worried that rate shopping could damage your credit score, don't panic. Lenders do carry out a hard credit check, which will ding your score. But as long as all the checks come within a short period of time (ideally two weeks) the credit rating agencies count it as just one inquiry.
If you're tempted to reduce your monthly costs by extending your loan period, you're not alone. People are starting to take more 72 month or even 84 month auto loans. Be cautious. A longer loan term does reduce your monthly payments, but you'll pay more interest in total. It's also hard to predict what might happen in the coming years, and you may not want to saddle your future self with those monthly payments. Finally, the value of new cars can depreciate quickly -- you may find yourself in a position where you owe more than your car is worth.
3. Look for ways to reduce costs
If you're looking at spending upwards of $40,000 on a new car, it may seem galling to have to compromise on the make and model. However, some lower-cost models cost less than half the average cost of a car. This could significantly reduce the amount you need to borrow, and cut down your monthly payments.
One piece of good news is that you may be able to get more than you expected for trading in your existing car. The higher interest in used cars means you might be pleasantly surprised by the amount you can get. Get a few different quotes before you try to negotiate with a dealer so you know what the baseline should be.
Finally, consider buying a used car. Sadly, prices of used cars have also risen dramatically in recent years -- so much so that in some cases, it may be cheaper to buy new. However, recent data from CoPilot shows that the market for used cars may have finally peaked, so there may be some relief in store.
From high demand to low inventory and increasing interest rates, the deck is stacked against car buyers. If you need to buy a car, shop around for the best rates as well as the lowest-cost car option. Try to avoid taking on any more debt than you need to, and keep the loan term as short as you can afford. There's a lot of uncertainty right now, and many economists warn a recession could be on its way. Car costs may be at record highs, but now, more than ever, is not a good time to take on extra debt.
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