Navigating your finances: What's the average car payment?

Thinking about buying a new ride? Whether you’re looking at a new, used, or leased car, the monthly car payment is probably top of mind. Here’s how to figure out your average car payment and other fees so you can figure out your budget.

So, what's the average car payment?

In the grand scheme of things, the average car payment varies greatly based on factors like the type of car, your credit score, and the length of the loan. But let's crunch some numbers! In the United States, the average car payment for a new vehicle in 2023 was $726 per month and $533 for a used car, according to Experian. But it can be even higher, according to similar research. Around 15% of those with auto loans are paying $1,000 or more.

Factors that influence your car payment

Now that you have a ballpark figure, you need to know the other things that can make your car payment higher or lower than these averages.

1. Price of the car or loan amount: No-brainer, right? More expensive cars will typically come with heftier monthly payments. However, this might not be the case if you’re leasing the vehicle.

2. Length of the loan: Longer loans often mean smaller monthly payments. But - they also mean you'll pay more in interest over time.

3. Your credit score: Usually, the better your credit score, the better your interest rates.

4. Interest rate: Pay close attention to the Average Percentage Rate (APR) if you’re financing your purchase. Higher interest rates will result in higher monthly payments. And lower interest rates mean lower car payments. Things like your credit score, income, and any outstanding debt can affect your interest rate.

5. Type of car and who you buy from: New and used cars can have different loan rates. Interestingly, sometimes new cars have better rates than used ones. Buying from a private seller or a dealer can also affect the sticker price and financing.

6. The auto market: Factors such as supply and demand for vehicles - especially if you’re particular about the make and model - can influence the price of a car and, consequently, your monthly payment. For example, 2023 saw supply chain problems, an auto worker's strike, and increased demand for electric vehicles. These issues combined raised car payments to the highest they've ever been.

Making smart decisions

Do your due diligence. Knowing the average car payment and what influences it can go a long way to helping you make the best decision for your circumstances. By the way, in terms of overall budget - a good rule of thumb is to keep your car payment under 10% to 15% of your net income. Your total car spend, including gas, insurance, and maintenance, shouldn’t exceed 15% to 20% of your monthly take-home pay.

When estimating your average monthly car payment, remember to factor in those costs along with the loan payments to determine what you can comfortably afford.

FAQ

Q: What is the ideal credit score to get a car loan?

A: Generally, a credit score of 660 or higher is considered adequate for obtaining a car loan with favorable terms. You can get approved for a vehicle loan with a lower credit score, but you'll also likely end up paying a much higher interest rate.

Q: How does the car loan length impact the monthly payments?

A: Longer loans result in smaller monthly payments but also mean you'll pay more interest over time.

Q: Should I buy a new or used car?

A: This depends on your budget and preference. Used cars can be more affordable but might also need repairs sooner. New cars often come with warranties and are less likely to need immediate repairs, but they also depreciate. Conventional wisdom holds that a brand-new car loses 20% of its value in the first year! 

Q: Can I negotiate the price of the car?

A: It's always recommended to negotiate the price of the car, whether new or used, to ensure you're getting the best deal.

Q: How does insurance factor into my monthly car costs?

A: Insurance is a significant part of car ownership cost and varies depending on factors like the car's value, your driving history, and where you live.

Q: What other costs should I consider when buying a car?

A: Other than the car loan payment, consider insurance, maintenance and repairs, fuel costs, and possible parking fees.

Q: Can I get a car loan with a bad credit score?

A: There are financing options for those with poor credit, but the interest rates will likely be higher, resulting in higher monthly payments.

Q: Is it better to get a car loan from a bank or dealership?

A: You want the best price, APR, and loan terms. Compare offers from both banks and dealerships to find the best overall deal for you.

Q: What is a down payment on a car?

A: A down payment is an upfront amount you pay when purchasing a car. A larger down payment can lower your monthly loan payments.

Q: Can I trade in my old car when buying a new one?

A: Most dealerships allow trade-ins. The value of your old car can be used as a down payment for the new one to effectively lower the cost of your new car. 

Now, you're equipped with the knowledge to make an informed decision about your car payment. You’re already on the road to making smart financial choices that suit your individual circumstances. Drive safely!