Average car loan is like a mortgage. Can you pay for it?
Most Americans depend on cars to get around, but recent data shows purchasing a new vehicle may now be out of reach for average earners.
The average cost of a new car sold in May was $47,148, a $472 increase from the previous month, according to Kelley Blue Book. This coincided with the average monthly car payment surpassing $700, the highest on record, according to the Cox Automotive/ Moody’s Analytics Vehicle Affordability Index.
Although demand for new cars has increased since the start of the COVID-19 pandemic, the inventory for cheaper vehicles is low due to the lack of a key component used to make most vehicles.
Here’s why car prices are rising, how car payments are determined and what you can do to get a premium deal on your next purchase.
Why are these prices rising?
A shortage in computer chips, which are used to control windows, navigation screens and passenger screen sensors, caused by the pandemic led to the spike in car prices, NPR reported.
In the early part of the pandemic lockdown, when most employees were working from home, car sales plummeted, and automakers cut back on orders for chips. During the same time, people bought laptops, iPads, TVs and other electronic goods, so chip manufacturers shifted their production to serve companies that make those products.
However, as people left cities for suburban areas, demand for cars surged, according to the NPR report. With a limited supply of computer chips, car manufacturers began making more expensive SUVs and fewer affordable sedans.
How are payments determined?
When shopping for a car, many buyers rely on loans from a bank or dealer to finance their purchases.
The amount you pay on a loan is based on the price of the car, whether it is new or used, the down payment, the length of the loan and your credit score, according to Investopedia.com, an online financial information resource.
Auto loan interest rates, said Investopedia, can significantly increase the total cost of a car. Here’s what to know:
The best way to get a lower rate is to improve your credit score. If you have a low credit score, you should consider holding off on a car purchase.
If you have a lower debtto-income ratio, or the amount of money you spend on monthly debts compared to your monthly income, you’re more likely to get a lower rate.
Loans for used cars have higher interest rates than those for new cars, since used cars have a lower resale value.
Longer loan terms usually have higher interest rates.
You can use Investopedia’s Auto Loan Payment Calculator to find out how much you can afford to pay for your next car.
Can you negotiate the interest rate on a loan?
Like the price of a vehicle, the interest rate is negotiable, according to the Consumer Financial Protection Bureau.
The first-rate for the loan a dealer offers you may not be the lowest rate you qualify for, so it’s best to ask for a loan with better terms, the CFPB says. Since dealers and lenders are not always required to offer you the best deal, negotiating could save you thousands of dollars over the life of the loan.
Getting bids from multiple dealerships can help ensure you get the best price on a car purchase, and you can take some of the stress out of the negotiation process by shopping for a car online, Karen Bennett wrote for Bankrate.com.
You can also negotiate the value of your trade-in, as well as dealer fees for prep, documentation, advertising and other miscellaneous costs, U.S. News reported.