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According to a report by Experian, car prices have skyrocketed since the start of the Covid-19 pandemic, pushing the average monthly car payment for a new car up 11% year over year to $644 in the fourth quarter of 2021.
If you’re looking for a new car and want to get a better idea of what you could be paying monthly, here are some stats on the average car payment and what goes into calculating those numbers.
Average monthly car payment
Here’s an idea of the average monthly car payment from certain types of car purchases, based on Experian data for the fourth quarter of 2021.
- New car: $644
- New leased car: $531
- used cars: $488
Leasing, a popular form of auto financing that lets you “rent” a car from a dealer for a period of time, is usually cheaper than buying it. Because you plan to return the car, you’re paying less than someone financing a car with the intention of one day owning the title.
However, you have no equity or ownership of the vehicle when you lease it. And at the end of the tenancy, you could face additional costs for commodities.
Used cars, which typically cost less than new cars, have lower average monthly payments compared to newer models. According to Experian, the average monthly payments for used cars in the fourth quarter of 2021 were $488.
What makes up your car payment?
Car payments are largely determined by your loan amount, interest rate, and the length of your loan term, but may also take into account:
- The type of car
- deposit amount
So everyone pays a different car payment for the same car purchase. For example, consumers spent an average of $43,025 on a full-size car and $99,953 on a full-size SUV or crossover in March, according to the Kelley Blue Book. These numbers are based on the purchase price and do not include the total cost over the life of the loan.
Your car payment is broken down as follows:
- rector: Principal is the amount you borrow to buy the car.
- interest: Interest is what you pay a lender to borrow money. Your interest rates are 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 Duties: Every vehicle purchase comes with fees that vary widely depending on where you live and where you bought the car.
- credit term: Your repayment term is the time it takes to fully repay your loan. The longer your term, the longer it takes you to pay off your car loan, which means you pay more interest overall over the life of the loan. But it also means lower monthly payments, which is best if you don’t have a lot of room in your monthly budget.
Related: Automatic loan payment calculator
How credit affects your car payment
Your credit score is one of the most important factors when paying for your car. Your credit rating affects your interest rate and how much a lender is willing to lend you.
The better your credit score, the better your chances of qualifying for a car loan and getting the lowest interest rate available. A higher credit score also gives you more purchasing power. It shows lenders that you are responsible for your debt payments and gives them an incentive to approve the loan.
A lower credit score means you pay a higher interest rate and you may not get the full loan amount that you want. If you’re looking for a new car, you may have to settle for one that costs less than other models you’re considering.
Related: How to improve your credit score
5 ways to reduce your car payment
It’s important to make room in your budget for a car payment, whether it’s new, used, or leased. Here are some ways to reduce the cost of a car payment.
1. Get pre-approved
Looking around for the best loan offer and getting pre-approved will give you more buying power when you finally walk into the dealership. It shows how much car you can afford and what interest rate you best qualify for based on your credit history.
If you cannot obtain pre-approval on your own, you can ask a trusted friend or family member to act as a co-signer. Not only does a co-signer help you qualify for a loan, but if they have excellent credit, you can get the lowest interest rate available. However, keep in mind that if you don’t make payments on your loan – and that of your co-signer – your creditworthiness will decline.
2. Browse used vehicles
New cars are almost always more expensive than used cars. If you think you can’t afford the monthly payments for a new car, consider buying a used one.
Look for a certified used vehicle 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’ll need to do when you start owning it.
If buying a car is still too expensive, consider leasing a car.
3. Increase your deposit
The more money you can pay upfront, the less your monthly payments will be. Try to save as much as you can before you start your car search. If you can wait for a dream car, take the time to save every bit of cash for when the time is right.
4. Get a longer repayment term
Most borrowers, regardless of credit rating, are given a term of five or more years to keep monthly payments manageable. Despite the additional interest accrued in exchange for lower payments, it is becoming more common to get a 72 or 84 month loan term as vehicle costs continue to rise.
5. Pay off some old debts
When you take out a car loan, lenders examine your debt-to-income (DTI) ratio to determine if you can 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 favorable you look at 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 outstanding debt as possible before applying for a car loan. Whether it’s student loans, medical bills, or credit cards, pay it down to lower your DTI. This proves to the lenders that you are responsible with the loan.
Make sure you do a thorough research on the cost of your dream car as well as financing costs. A little pre-planning and research can set you up for a positive car buying experience and lay the groundwork for future purchases.
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