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The average car payment can vary based on a variety of factors. How much you'll owe every month goes up or down based on whether you're purchasing a new vehicle or used car, the car's cash price, your down payment, loan terms and your credit and income.
If you're planning to buy a new or used car, here's how much you should expect to pay and how to fit that new payment into your budget.
How Much Is the Average Car Payment?
Auto loan debt and automotive monthly payments in the U.S. are both at all-time highs, according to recent data by Experian. Consumers have a total of $1.2 trillion in outstanding auto loans. The average car payment for a new vehicle is $554, and the average for a used car is $391.
Keep in mind, though, these are averages—your car loan's monthly payment will differ depending on your loan amount. Understanding what to expect when financing a new or used car will be important as you determine whether you can afford it.
This is especially important if you're on a tight budget. If you'll soon pay off your car and you want to trade up, securing a similar monthly payment to the one you have may be the best way to avoid running into budgetary problems. If you have more cash flow now than when you got your current loan, you may have room for an upgrade.
Regardless of the average car payment, take the time to look at your budget and decide how much you can afford before you start car shopping.
How Is a Car Payment Determined?
There are several factors that will determine your payment on an auto loan. Here's what goes into the calculation:
- Size of the loan: Knowing how much you're borrowing is key because it's the amount you'll be liable for paying back. Your loan amount is the price of the vehicle plus fees, tax and interest, minus your down payment amount and value of your trade-in, if applicable. Loan fees can include an extended warranty, vehicle service contract, maintenance, GAP coverage or other add-ons.
- Length of the loan: Your loan's repayment term determines how much time you have to pay back the debt. The shorter the loan's length, the higher your monthly payment will be. Conversely, a longer loan term—84-month loans are becoming more common—will result in a lower monthly payment. Just keep in mind that the longer your repayment term, the more you'll ultimately pay in interest over the life of the loan.
- Credit score: Your credit score provides lenders with a snapshot of your overall credit health, and essentially tells them how risky you are as a borrower. With a higher credit score, you're less of a risk to a lender, so you may qualify for a lower interest rate that will bring down your monthly payment. A low credit score can drive up your interest rate and, in turn, your monthly payment.
- Income: In addition to your credit score, lenders consider your ability to repay the loan when determining your interest rate. More specifically, they'll look at your debt-to-income ratio (DTI), which is the percentage of your gross monthly income that goes toward debt payments. The lower your DTI, the better your chances of securing a lower interest rate and monthly payment.
Let's say you qualify for a $30,000 loan on a new car with a 3.74% interest rate over 60 months. Your monthly payment would be $549, and you'd pay $2,939 in interest over the life of the loan. If you were to extend your repayment term to 72 months, the monthly payment would drop to $466, but the total interest paid would jump to $3,538.
Now let's say you manage to reduce the interest rate to 3.24% by putting down $5,000 but keep the term at 60 months. Your new loan amount would be $25,000, your monthly payment would be $452, and you'd pay $2,113 in total interest charges.
How to Get a Low Auto Payment
As you can see, making changes to the factors that go into calculating your car payment can affect not only how much you pay each month but also in total. The good news is that you have some control over all of the moving parts that go into determining your monthly payment.
Here are some ways to get the right car payment for your budget:
- Choose a less expensive car: If your monthly budget would buckle with a $30,000 new car, you're better off with a car that costs $20,000 or even less. And remember, new cars can lose more than 10% of their value the minute you drive them off the lot. So if you're looking to save money but don't want a clunker, consider a used car that's still relatively new.
- Put more money down: The more you can knock down the loan amount, either with a bigger down payment or a trade-in, the less you'll have to finance and the lower your monthly payment will be. Avoid draining your savings for a bigger down payment, though. It's always a good idea to have cash set aside in case the car breaks down or you get slapped with another emergency expense.
- Improve your credit: If you need a new car right now, this option may not be available. But if you have the time, build your credit score to improve your chances of getting a lower interest rate and monthly payment.
- Pay off debt: A lower debt-to-income ratio can help improve your chances of getting a lower interest rate. If you have the money and the time, work on paying off some of your credit cards and loans to show lenders you have the capacity to take on and pay off more.
- Ask for a longer repayment term: Extending the repayment term on your loan will automatically reduce how much you have to pay each month. Just remember that a longer loan term equals higher interest charges, making it more expensive in the long run. If you can afford a shorter repayment term, that's usually the better option.
Think About How a Car Loan Fits Into Your Financial Plan
There's nothing wrong with borrowing money to buy a car. But if you have other financial goals you're trying to work toward, it's important to consider how an auto loan fits into your financial plan.
For example, if you're aggressively paying down high interest debt or saving for a down payment on a home, it may be worth buying a cheaper car or taking a longer repayment term for now to get a lower monthly payment. You may be able to trade the car in later on for an upgrade or refinance the car loan.
Late or missed car payments will have a big effect on your credit scores, so if your income is unstable or you're not confident you'll be able to make on-time monthly payments over the life of your loan, financing may not be right for you.
Whatever you do, take some time to think about how a new car loan will impact your immediate budget needs, as well as your long-term goals.