It's becoming increasingly expensive to buy a new car.
Actually, an unprecedented number of new car purchasers—almost one out of every five—are making payments of $1,000 or higher. according to Edmunds . For a household earning the U.S. median income of $80,610, a $1,000 car payment would take up 15% of pre-tax income, before factoring in the cost of insurance, gas or maintenance.
It doesn't help that the average price of a new auto is nearly $50,000 And prices might rise further still. With the impending threat of 25% tariffs on cars and components from Mexico and Canada, new car costs could rise by as much as 12%, or $5,790, according to one estimate .
With prices at near-record highs and potential tariffs looming, buying a new car has never been more expensive. But factors that you have more control over, like your credit score, loan terms and down payment, also impact your monthly payments. Here's a look at how to make a new car fit your budget.
Begin by examining your credit score.
The amount you pay each month for your car typically depends mainly on one crucial element: your credit score.
Although you cannot change car prices, you have control over your credit score, which significantly impacts what you end up paying for a loan as lenders rely on this score to set your interest rates. A poor versus a strong credit rating could result in thousands of extra dollars in financing fees.
Say you're financing a new vehicle at the average price of $48,641 with a 15% down payment and a typical 60-month loan. Your monthly payments could range from $824 to $1,037, depending on your FICO credit score .
Here's a look at how various credit scores affect monthly payments and interest rates, based on the loan terms above, according to FICO:
- 720-850: $824 (7.25% APR)
- 690-719: $847 (8.45% APR)
- 660-689: $883 (10.22% APR)
- 620-659: $927 (12.33% APR)
- 590-619: $1,019 (16.62% APR)
- 500-589: $1,037 (17.43% APR)
Over the life of the loan, someone with excellent credit would pay $8,071 in interest, while someone with poor credit could pay $20,886 — a difference of nearly $13,000.
You can often lower your monthly payments by extending the term, but remember that you'd be paying more on interest over the course of the loan. If you have the savings, you can also lower the monthly payments with a larger down payment.
Methods for Reducing Loan Expenses
Boosting your credit score prior to taking out a loan can decrease your interest rate and help you save potentially thousands of dollars throughout the duration of the loan.
To achieve this, begin by ensuring that you consistently make your debt payments on schedule, as payment history makes up a significant portion of your credit score. 35 percent of your credit score .
Alternative methods to enhance your credit score consist of:
- Only using a small amount of your available credit — known as your credit utilization ratio
- Steer clear of new credit checks before you apply for a loan.
- Checking your credit report for errors and disputing inaccuracies
Purchasing a pre-owned vehicle is an alternative method to cut expenses Used cars often have cheaper price tags as well as generally lower insurance fees and reduced depreciation rates.
How to estimate your monthly auto loan costs
It’s wise to get an estimate of your potential monthly payments before making a buy, taking into account the loan conditions and interest rates.
Pawonation.comMake It's loan calculator can help you see how financing costs add up. Keep in mind that you'll need to manually input an estimated interest rate based on your credit score, as listed above.
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