Believe it or not, many Americans are currently paying four-figure car payments. It’s hard to understand, given that most mortgage and rent payments are only slightly higher in some areas of the country. Either way, it looks like a monthly car payment of more than $1,000 could become the norm. But why?
Interest rates and dealer benefits contribute to higher monthly payments
As interest rates rise and dealers add benefits to new cars, the average monthly auto loan payment will continue to rise. According to Edmunds data, nearly 15% of drivers who financed a vehicle by the end of 2022 are paying more than $1,000 a month. At the same time, nearly 5% of those who financed a used car pay more than $1,000 a month.
At first glance, it may appear that car buyers are simply biting off more than they can chew, but this is only partially true. CBS News reports that “the Federal Reserve continues to raise interest rates in its battle against inflation. The average rate on new and used cars is 6.5% and 10%, respectively, compared to 4.1% and 7.4% from a year ago.”
These high interest rates contribute to higher monthly payments, as do dealer profits.
Negative equity is making things worse
In addition to higher interest rates and dealer profits, negative equity has also contributed to higher monthly payments. Edmunds reported that in the fourth quarter of 2022, 17.4% of new car purchases that included a trade-in had negative equity to bring in a new loan. Having negative equity means the buyer owed more on the loan than their trade-in was worth, which is then rolled over to the new loan and therefore has higher payments.
To be clear, this data doesn’t mean everyone is paying more than $1,000 a month on their auto loans, but it could be headed in that direction. CBS News noted that the average car note at the end of 2022 was $717 for new cars and $563 for used cars, compared to $525 and $389, respectively, just five years ago. As you might guess, global supply shortages and the pandemic are largely to blame for rising car prices and higher monthly payments.
There are ways to get away from a four-figure monthly payment
Fortunately, for anyone looking to finance a car in 2023, there are a couple of ways you can afford such a high monthly payment. The first way is to simply buy a car with a lower cost up front. While new and used car prices are still high, there are some bargains to be found.
Also, putting a higher down payment will lower your monthly car loan payment. Finally, opting to buy a certified used car could be advantageous. Edmunds editors noted that certified used cars typically have incentivized interest rates lower than the national average used car loan rate.
While a monthly auto loan payment of $1,000 might be normal for some car owners right now, it doesn’t have to be normal in every way. At this time, we recommend that you look for a lower interest rate on your next auto loan in addition to a lower priced car to ensure a lower monthly payment in the future.
