Average car payments are at an all-time high. Here's what you need to know.

The limited supply of new cars, high prices and rising interest rates are making automobiles increasingly unaffordable for many American...


The limited supply of new cars, high prices and rising interest rates are making automobiles increasingly unaffordable for many Americans.

In June, the average transaction price for a new car exceeded $48,000 for the first time, an increase of almost 13% over the previous year, Kelley Blue Book reported this week.

And because the interest rate on cars is influenced by the benchmark rate set by the Federal Reserve, car payments are skyrocketing as the Fed raises rates to combat inflation. Most new car purchases are financed and the monthly average new car payment is now hovering around $700, a record high, according to recent industry reports.

“It’s now a combination of higher prices and higher rates,” said Jonathan Smoke, chief economist at Cox Automotive, parent Kelley Blue Book.

What’s going on? The availability of new vehicles remains below demand, mainly due to a persistent shortage of computer chips used in automotive manufacturing. Other global factors are also weighing on production, such as a earthquake in Japan, the continued Covid-19 shutdowns in China and the war in Ukraine. Capacity is unlikely to fully rebound for a year or even two, Smoke said. “Supply continued to be an issue.”

The average car price is rising in part because more people are choosing luxury brands, Kelley Blue Book said. Growing share of affluent buyers paying $1,000 a month or more, auto website says Edmunds. But for most consumers, affording a new car is “increasingly out of reach,” said Jessica Caldwell, executive knowledge manager at Edmunds.

Buyers have options, however. If you have a well-functioning car, keep driving it a little longer. “If you can, it’s still a good time to wait” before buying a car, said Ben Preston, an automotive writer with Consumer Reports.

You can also try to plan ahead and ask the dealership to order one for you directly from the automaker, Preston said. With a so-called factory order, you can choose your exact spec, rather than settling for, say, a color you just hate because it’s the only vehicle on the lot. You’ll have to wait at least several months for the car, Mr Preston said, and you’ll still pay a “destination” charge for delivery to the dealer – but you’ll likely minimize any dealer mark-ups on the list price.

If you need a car right away, some models, like compact cars and compact sport utility vehicles, sell for about 30% less than the average transaction price, Kelley Blue Book said.

Your best bet may be a used car, which had an average monthly payment of $555 in the second quarter of this year, said Ms. Caldwell of Edmunds.

But don’t expect big deals there either. Used car prices rose due to tight supply in the new car market. Prices remain higher than they were before the pandemic, although they have recently relaxed somewhat, according to online car search site iSeeCars. At least one used small car, the Kia Rio, remains relatively affordable despite price increases, iSeeCars found.

Sedans used to be out of favor and easier to find, but that’s changing. “There aren’t a lot of sedans out there,” said Tyson Jominy, vice president of data and analytics at JD Power, with people buying them because they get better fuel economy. .

Midwestern states generally have better prices than those on the coasts, so you might be able to save some money if you’re willing to travel, Jominy said. Or you can try using a car broker to find the car you want in a different condition.

With a limited inventory of new and used cars, “you really have to look at both,” Ms Caldwell said. Prices are higher on new cars than used cars, but interest rates are generally lower.

If you find a car you like – new or used – at an affordable price, “buy it immediately,” Ms Caldwell said. “Do not wait.”

A silver lining in the auto market madness is that trade-in values ​​are strong. Ms Caldwell said the average trade-in price was nearly $24,000 in June, up 12% from a year earlier.

Here are some questions and answers about car prices:

It’s important to maintain good credit so you can get the lowest possible interest rate, Smoke said. Some dealerships can still offer zero percent financing on new cars, but you’ll usually need a credit score of 760 or higher to qualify, he said. You can get a free credit report at annualcreditreport.com.

Compare loan rates between lenders and get prequalified before you buy a car, said Consumer Reports’ Preston, so you can check the rate you got against the one offered by the dealership.

Yes, and many consumers do, says Edmunds. More than a third of buyers who financed a new car in June chose a loan of 73 to 84 months, or about six to seven years. But longer loans usually have higher interest rates, so you’ll pay more over time, even if the payments are more manageable. And with longer loans, there’s more risk of it going “upside down,” meaning the car will be worth less than the loan balance. In other words, you might owe money if you have to sell the car before the debt is paid.

Consumer debt delinquency rate including car loans, remain weak but rose “modestly” in the first quarter of the year, according to the Federal Reserve Bank of New York. If you’re having trouble making payments, contact your lender to discuss options, said Kristen Holt, managing director of GreenPath Financial Wellness, a nonprofit credit counseling agency headquartered in Detroit: “It’s worth better talk to the lender instead of just missing a payment.”

If the problem is short-term, you may be able to defer payments while you stabilize your finances. With high car values, you could probably sell your car and pay off the debt, then buy a more affordable model – if you can find one. For most Americans, commuting work without a car is difficult, unless you work from residence or live near a city with good public transport. If your loan rate is high, you can try a refinance. Ms. Holt said some credit unions offered low-interest programs.

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