What's On This Page:
To answer your question, we need to look at what we mean by "average." Let me explain….
Per Experian's 2018 first-quarter data, the average new car payment is $523. I don't know about you, but when I first read that figure, my initial response was "Yikes! That's hefty!" Then I looked at the average used car payment: $371. Still pretty high, I thought. But then I remembered: hold on, it's just simple math. Let's have a look…
The Amount You Borrow
The amount of money that you borrow to purchase a car depends on:
- How much the vehicle costs and
- How much of a down payment you have.
The average price of a used car is currently just shy of $20,000 and the average price of a new car is in the mid-30 thousands. Of course, we want to be wary of these average figures because, for example, the average new subcompact car is currently about $20,000, while the average new luxury full-size SUV costs a whopping $85,000. The segment, or type of vehicle, makes a massive difference in determining average monthly payment for vehicles. So does the brand. It goes without saying that the payment on a Corolla is going to be a lot less than the payment on an Escalade. But, as you can see below in the Fed's report about the average amount financed for new car loans at finance companies, the amount borrowed seems to go up, and fast.
Maybe this helps explain all those ads you see for "Zero Down!" or "Sign and Drive!" Up until recently, standard advice was to put 20% down on a car.
Let's talk about down payments.
2) While the 20% down recommendation might have been feasible when cars had five-digit odometers, today, with the average used car price at $20,000, this means a $4,000 down payment, With new cars averaging in the mid-30 thousands, that equals about a $7,000 down payment! A recent article in The Atlantic discussed how nearly half of Americans would have a difficult time coming up with $400 in the event of an emergency. Needless to say, most people just don't have a 20% down payment laying around for their next car purchase.
Right now all of this sounds a bit abstract, so let's stop for a minute and take a look at a concrete example: imagine the asking price of a car you're interested in is $18,000 and you negotiate it down to $17,000. You worked extra hard and you have $2,000 saved as a down payment, which means you'll be borrowing $15,000 (assuming you pay sales tax and other fees). Easy math right? But don't forget…
The Term of The Loan
If you're borrowing $15,000, the payment is going to depend on the length of the loan. Did you know some car loans now are up to 96 months? It's true. When I first heard that I thought OMG, at that rate, pretty soon you're going to be able to bequeath an auto loan to your grandchildren.
The average new car loan term right now is 69 months and for used cars, it's 64 months. While some financial pundits recommend 24 or 36-month car loans, that's simply not feasible for many people. I recently explained this to my kids in terms of pizza: if you cut it into 4 slices or 8 slices or 12 slices, the size of the slices is going to be dramatically different. How would that look for our $15,000 loan? Before we can figure that out, we need to know more about…
Your credit history makes a big difference in determining the interest rate on your auto loan. Did you notice I said credit scores plural? Yes, there's more than just one credit score. While the FICO score is the best known, each consumer credit reporting agency e.g. Experian, TransUnion, produces its own proprietary score. And no one tells you this, but sometimes these scores can very different (I've seen disparities over 100 points) which is why we hope you review your credit before you start to shop for a car. But even if you haven't, don't worry, because we can help (maybe insert link here to some your other material. I'm not sure what your revenue model is or else I'd try to make a helpful suggestion).
Getting back to our example of the $15,000 loan, allow me to introduce you to three people, Louise, Sam, and Raquel. Louise fell on some tough times after she lost her job last year. She has a FICO score of 440 and is a month behind on her car payment right now and three months behind on her credit cards and student loans. Things are going better for Sam. He has a FICO score of 650 and is current on all his bills. However, in the past, he's had a few slow payments here and there. Oh, and one of his credit cards is almost maxed out (which hurts his score). Finally, Raquel is doing great. She credits her 750 credit score to both to learn how to manage credit when she was very young and also subsisting on a diet of off-brand Mac and Cheese until she became financially stable. Now let's have a look at Louise, Sam, and Raquel's monthly payment when buying the same car and borrowing the same $15,000
What is the average monthly car payment?
|Louise @ 20.99% interest rate||Sam at 7.99% interest rate||Raquel @ 3.99% interest rate|
As you can see, credit plays a huge role in determining what the "average" monthly car payment is. Louise is paying about $130 more per month for the same car than Raquel!
Per Experian, the average credit score is currently 716 for new car buyers and 656 for used car buyers. The interest rate isn't tied to your exact credit score, but usually to a range that you follow within, for example, the best rates are called superprime 781-850, followed by prime at 661-780, nonprime ranging from 601 to 660, subprime declining to 501-600 and so-called "deep subprime" falling to 300-500.
When considering subprime and deep subprime borrowers, lenders often focus more on the content of your credit report than the score. What I mean is a 380 or a 480 doesn't matter that much; what matters is if they can "see" a pattern or story in the data of your credit report. For example, it looks different to see that someone paid perfectly for a period of time and then suddenly stopped making their payments (indicative that something bad happened to them) as opposed to chronic consistent late payments.
Wait! I almost forgot to mention this: there's one thing besides your credit score that influences the interest rate on your auto loan…
The Year of the Vehicle
Did you know that – in general – that the older the car is, the higher the interest rate on the auto loan will be? It's true. When a lender makes a loan, they're not only thinking about you the borrower and your credit history but also what you're buying. They call this the "collateral." Worst case scenario, if you don't make your payments, they're going to have to repossess and sell your vehicle at an auction to try to recover what you owed. Because they consider older vehicles as riskier, i.e. more likely to break down and result in costly repairs, they assign them higher interest rates and often limit the loans to shorter terms.
Many a time I've met a customer who wanted to spend $250/month and get a "cheap older" car. And many a time I've had to explain to them that to attain their monthly payment objective, they actually need to look at something newer that a lender will be willing to grant a longer-term loan at a lower rate. While some of them have initially looked at me like I was suggesting some type of financial witchcraft, they shopped around and came back having become knowing that what I said was true.
And just when you thought we were done…
There's one more thing that goes into the "average" car payment that no ones talking about. The best-kept secret in the automotive industry perhaps: what happens in the finance office.
Let's go back to our $15,000 loan. Whether your credit resembles Louise, Sam, or Raquel, imagine you've gotten to the point where you've settled the numbers with the salesperson – or so you thought. Because what happens next could change all of that as you meet with the finance manager (sometimes called the business manager) and are offered a medley of products. What kind of products? It depends on the dealership, but the most common include extended service agreements, extended warranties, gap insurance, and tire and wheel protection. Depending on your situation, some of these might be prudent to consider. If you rolled over inequity from a previous loan, gap insurance is probably a good idea, however, it's going to increase your monthly payment. The same applies to any other products that you add onto your auto loan. And this is why it's important to think about the "big picture" as you plan your automotive shopping journey.
Phew, that's a lot to think about when considering the average car payment. Let's cast aside statistics and bell curves for a few minutes and think about what really matters: you. No one is more of an expert on your life than you are. No one knows your lifestyle needs and budget better than you do. So let's start there when you're considering what kind of vehicles to shop for and how much to spend.
If you don't have a budget, roll up your sleeves, because it's time to make one. You can use a spreadsheet or piece of scrap paper, your choice: in the spirit of the famous armless lady, just do it.
Nike of Samothrace
Tally up what you take-home or net income (though lenders often consider your gross aka before-tax income, that's kinda silly for budgeting purposes) and subtract what you spend (hoping for your sake you came out with a positive number).
Voila! We can now calculate what lenders call your debt-to-income (DTI) ratio. For example, if you make $2,000 per month and you spend $1,500 per month, your DTI is 75%. Great, who cares? This is important because – unless you are some kind of rarefied automotive aficionado – you don't want to exchange too much of your hard-earned money to get from Point A to Point B. Different financial experts offer different advice on this, but you should decide what's right for you. There's no one right never exceed such-and-such a percent rule. The physician/philosopher Edward de Bono said, "Many highly intelligent people are poor thinkers. Many people of average intelligence are skilled thinkers. The power of a car is separate from the way the car is driven." The insurgence of summer visitors from Wall Street in my local town reminds me of the truth of this statement (read: early today I going 20mph in a 35mph zone behind a Porsche Panamera). The reason I like that quote is because it reminds me that even if you don't have a huge down payment or your dream job just yet, you can still buy a car and win – if you prepare yourself with the right knowledge and approach (now is the time to pat yourself on the back now for reading this).
I'll end with a quick war story: when I first started in the car business, I shared a desk with a guy, a stereotypical "car guy." He used to tell customers who said that the car payment was almost as much as their rent, "Yea, but you can live in your car, but you can't drive your house to work." To my chagrin, some of them nodded their heads in agreement with this bat guano crazy line of reasoning. And that's why I'm so glad we've taken the time to debunk the myth of the "average" car payment. Leave averages to the actuaries and do what makes sense for you.