How to Avoid a $1,000 Monthly Car Payment
As of May this year, the average cost of a new car is $47,148, according to KBB. With simple math, that means that the average monthly car payment is around $650 to $700. However, new data analysis from Edmunds shows that many car buyers are now taking out loans with $1,000 monthly payments, which is the highest level the publication has ever recorded.
There are a few different factors that are contributing to the four-digit monthly car payments
While it’s easy to blame the cost of new cars for the elevated monthly payments, that’s not the only reason that buyers are paying so much. According to Car and Driver, “in the second quarter of 2022, the average annual percentage rate (APR) on new financed vehicles hit 5 percent.” Also, it’s been found that 36.1% more new-car buyers are choosing longer loan terms of up to 73 and 84 months compared to the 32.8% that did in June 2021.
The average financed amount is also a culprit as that total amounted to $40,602 last quarter compared to the $39,726 average in the first quarter of this year. Overall, these three factors – a higher APR, a longer loan term, and a higher financed amount – can easily lead to four-digit monthly payments.
How to lower your car payment
If you recently purchased a new car and are part of the four-digit monthly payment club, then there are ways to lower your car payment. Here are a few different strategies according to Nerd Wallet:
- Refinance your car: If you have been paying your loan for at least 6 months and have a strong credit rating, then you may be able to refinance your loan and get a lower rate. You can shop for refinancing loans with different lenders to see if you can get a longer loan term or a lower interest rate, or both, in order to lower your monthly payment.
- Sell or trade your car: This tip might sound extreme, however, desperate times call for desperate measures. If you can’t afford your high monthly car payments, then you can look into selling the car or trading it in for a cheaper one. That way, you have lower monthly payments on a new loan.
- Lease a car: If you can sell your car or trade it in to lease a new a car, then you could get lower payments. However, keep in mind that you may need a decent-sized down payment and a good credit rating in order to do so.
- Talk to the lender: If you find that you can’t make your monthly payments, then you can try talking to your lender in order to get a “forbearance.” This will allow you to skip or make reduced payments. Although, just know that doing so will extend the loan and you could end up paying more interest in the end.
Tips on avoiding a high monthly car payment
If you’re planning to shop for a new car this year and want to avoid a $1,000 monthly payment, then there are a few things to keep in mind:
- Don’t buy a car that you can’t afford: While that fancy BMW might sound like a good idea, its’ $45,000 price tag could get you into trouble. Instead, shop for a new car that’s well within your budget, even if it doesn’t have the same panache.
- Shop around for the best interest rate: Before buying a new car, shop around to different lenders and find the lowest interest rate possible.
- A high down payment: As a general rule of thumb, a 10% down payment is a good idea. However, if you want to lower the monthly loan payment, then consider putting down 20% to 30% instead.
While many American car buyers are paying $1,000 a month for their cars, that doesn’t mean that it’s the norm. With careful planning and shopping, you can easily prevent yourself from becoming part of the club.