What is the average payment for a car? – Forbes Advisor
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Car prices have soared since the start of the Covid-19 pandemic, sending the average monthly payment for a new car jumping 11% to $644 in the fourth quarter of 2021 from a year earlier, according to a Experian report.
If you’re on the hunt for a new car and want to get a better idea of what you might be paying monthly, here are some statistics on the average car payment and what goes into calculating those numbers.
Average monthly car payment
Here’s an idea of the average monthly payment for a car by certain types of car purchases based on Experian’s fourth quarter 2021 data.
- New car: $644
- New rental car: $531
- Used car: $488
Leasing, a popular type of car financing that allows you to “rent” a car from a dealership for a fixed term, is generally less expensive than buying. Since you plan to return the car, you pay less than someone financing a car with the intention of owning the title one day.
However, you will not have equity or ownership of the vehicle when you lease it. And you could face additional costs for washing up and tearing at the end of the lease.
Used cars, which generally cost less than new cars, have lower average monthly payments than newer models. Average monthly payments for used cars for the fourth quarter of 2021 were $488, according to Experian.
What makes up your car payment?
Car payments are determined largely by your loan amount, interest rate and term of your loan, but they can also take into account:
- The type of car
- Deposit amount
- Credit score
As such, everyone pays a different car payment for the same car purchase. For example, consumers in March spent an average of $43,025 on a full-size car and $99,953 on a luxury SUV or crossover, according to Kelley Blue Book. These figures are based on the purchase price and do not include the full cost over the life of the loan.
Your car payment breaks down as follows:
- Major: The principal amount is the amount of money you borrow to buy the car.
- interest: Interest is what you pay a lender to borrow money. Your interest is based primarily on your credit score: the higher your score, the lower your interest rate. Your interest rate is also based on your lender, your credit history, and the type and age of your car.
- Fees, taxes and charges: Every vehicle purchase comes with a fee, which varies greatly depending on where you live and where you purchased the car.
- term of the loan: The term of your loan is the time it takes to fully repay your loan. The longer your term, the longer you will pay off your car loan, which means the total interest you will pay over the term of the loan will be higher. But it also means lower monthly payments, which may be better if you don’t have a lot of room in your monthly budget.
Related: Car loan repayment calculator
How credit affects your car payment
Your credit score is one of the most important factors in paying for your car. Your credit score influences your interest rate and the amount a lender is willing to lend you.
The higher your credit score, the more likely you are to qualify for an auto loan and get the lowest interest rate available. A higher credit score also gives you more buying power. It shows lenders that you are responsible for paying your debts and encourages them to approve the loan.
A lower credit score means paying a higher interest rate, and you might not get the full loan amount you want. If you are looking for a new car, you may have to settle for a car that costs less than the other models you are considering.
Related: How to improve your credit score
5 ways to lower your car payment
Making room in your budget for the payment of a car, whether new, used or leased, is major. Here are some ways to lower the cost of a car payment.
1. Get pre-approved
Finding the best loan deal and getting pre-approved ahead of time gives you more buying power when you finally make your way to the dealership. It shows how much car you can afford and what interest rate you are most eligible for based on your credit history.
If you can’t be pre-approved on your own, you might consider asking a trusted friend or family member to serve as a co-signer. A co-signer not only helps you qualify for a loan, but if they have great credit, you can get the lowest interest rate available. Keep in mind, though, that if you don’t repay your loan, your credit score will plummet, as will your co-signer’s.
2. Browse used vehicles
New cars are almost always more expensive than used cars. If you don’t think you can afford the monthly payments on a new car, consider buying a used one.
Look for one that is certified pre-owned and preferably one with low mileage. The less the car has been used, the more like new it will be and the less maintenance you will have to do at the start of your ownership.
If buying a car is still too expensive, consider renting a car.
3. Increase your down payment
The more you can pay upfront, the lower your monthly payments will be. Try to save as much as possible before you start your car search. If you can wait for your dream car, take the time to set aside as much money as possible for when the time comes.
4. Get a longer repayment term
Most borrowers, regardless of their credit rating, get a term of five years or more to keep monthly payments manageable. Even with the added accrued interest as a trade-off for lower payments, getting a loan term of 72 or 84 months is becoming more common as the cost of vehicles continues to rise.
5. Pay off an old debt
When you complete an auto loan, lenders look at your debt-to-income ratio (DTI) to see if you can comfortably afford to continue making payments in an emergency. This is a ratio based on your total monthly debt to your income. The lower your DTI, the more you turn to lenders; the higher your DTI, the less likely lenders are to give you a low interest rate or approve the amount you need to finance your car.
Pay off as much debt as possible before applying for a car loan. Whether it’s student loans, medical bills or credit cards, pay it to lower your DTI. This proves to lenders that you are responsible for the credit.
Be sure to research the cost of the car you want as well as the cost of financing thoroughly. A little pre-planning and research can set you up for a positive car buying experience and lay the foundation for future purchases.
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