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If you’re ever looking for a demonstration of the adage “it’s expensive to be poor,” look at buying a car. If you’ve got your eye on a car that costs $35,000 with all fees included, and you have $35,000 in your bank account, that’s what you pay for the car. If you don’t have the cash, let’s say you put down $5,000 and finance the remaining $30,000 with a five-year loan with a 6.9% annual percentage rate (APR). You’ll wind up paying $5,557.29 in interest—that means, including your down payment, your $35,000 car will run you $40,557.29.

What’s really incredible about that example is the fact that the monthly payment on that loan ($592.62) is actually pretty low these days. What used to be rent on a one bedroom apartment is now an attractive monthly payment for a car you don’t even own. A rising number of new car buyers are actually paying $1,000 a month for their rides, which isa lot.

But is it too much? Buying a car is often a pressure-cooker experience with salespeople tossing numbers at you. Meanwhile, new car prices are at their highest point in history with an average price of $47,000 (up 12.6% in the past year)—and don’t even get us started on used car prices, which defy rational numbers. Most people have to finance their cars, but they often look at car loans the wrong way. So how much is too much for a monthly car payment?

Focus on total cost

Before we get into whether your monthly payment is too high, it should be stressed that focusing on the monthly payment is usually a mistake. Sure, you have to make sure you can actually come up with the money every month, so it’s a necessary and useful number. But you should be focused more on the total cost of the loan. Salespeople will often manipulate other aspects of a car loan to make the monthly payments lower, which makes it seem like a better deal. In other words, you might be getting a trash interest rate and they might be overcharging you for the car, but because they added two years to the term, the monthly payment looks doable.

This technique essentially hides the fact that you’re getting ripped off, so it’s essential that you make the monthly payment just one data point to consider when you’re financing a car. Not only does a longer term on your loan hide the overall cost of the car, new cars lose value so fast that the term shouldn’t be longer than five years or you risk winding up being “under water” with the car being worth less than what you owe on it.

The average car payment

The average national monthly car payment is now between $650 and $700 a month. There are a lot of reasons behind this: Supply chain issues have driven up the cost of the car itself, and the Federal Reserve has pushed interest rates up in an attempt to stifle inflation.

The monthly payment depends on the loan’s APR, and the interest rate you get has everything to do with your financial history and your credit score. Interest rates range from 2.4% for folks with solid-gold credit scores above 780 to a dismal 14.76% for folks whose credit scores resemble a batting average. That has a huge impact on the total cost of your loan and thus the size of your monthly nut on the car.

Of course, an average is just that—an average. You can find car deals with monthly payments well below the $650 average, especially if you ignore our sage advice and opt for a longer term on your loan—for example, if you’re willing to entertain a six-year loan you can get your monthly payment under $300 in many cases. But you can avoid those longterm deals. Keep in mind these deals typically assume an excellent credit rating, and rates and offers expire, so the details of these new car deals are subject to change:

  • 2022 Nissan Sentra. This popular compact isn’t fancy, but it also doesn’t have a fancy price point. With an MSRP under $20,000, you can find 1.9% APR financing with a 36-month term. If you finance $15,000 of that, your monthly payment will be about $430.
  • 2022 Chevy Equinox. Brand-new with basic features, this small crossover SUV can be had with $0 down and $515 a month at a 72-month term and 2.49% APR; but put down $5,000 and shorten the term to 60 months, and the payment would be $492 at 0% interest.
  • 2022 Chevy Spark. Another car under $20,000, this hatchback can be had with $0 down and $345 a month at 2.49% APR. Put down $5,000 and the monthly payment is just $257.

One note on 0% financing: Many car manufacturers offer 0% financing, and there’s nothing wrong with it. Just keep in mind that this usually means you’ll get charged more for the car, either with a baked-in pack on the MSRP or with extras you can’t strip out of the offer. This isn’t exactly a scam, but it’s another bit of misdirection often used when selling cars. Whether or not the deal works for you depends on those monthly payments and the total cost of the car once you factor everything in.

As you can see, deals are out there, and if you need to keep your monthly car payment well below the national average, you can pull it off—assuming you have good credit and some money to put down.

   



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