Besides a house or college tuition, buying a car is one of the most expensive purchases that a person can make. Understanding the cost to purchase and operate a vehicle monthly is essential and something that is often underestimated. It’s also important not to lose sight of the total cost of buying a car when trying to lower the monthly payment with a longer length car loan.
Average Monthly Operating Cost
| Yearly Salary (Post-Tax) | $43,422 |
| 5-Year Loan Payment | $783 |
| Gas (based on SUV/Truck) | $311 |
| Car Insurance | $148 |
| Car Maintenance | $112 |
| Monthly Operating Cost | $1,354 |
| Monthly Salary Percentage | 37.4% |
Car Loan Factors Explained
Purchase Price
In 2022, the average new car price exceeded $47,000, and the median salary is $53,924 for a full-time worker. After paying income taxes on a $53,924 salary, the take-home pay is reduced to $43,422. The average used car price has surged close to 30% in recent years, bringing the average transaction to $27,633. The old rule of spending 10% – 15% of your monthly income on transportation expenses is hard to stick to, especially when you factor in rising gas prices.
The average American might spend more than 20% of their monthly income on the vehicle’s payment alone. Once car insurance, gas, and maintenance are factored in, the percentage of income being spent on transportation nearly doubles. Driving a small, fuel-efficient car can save 25¢ per mile in operating costs compared to a large SUV or truck.
Average Monthly Car Payment
| Yearly Salary (Post-Tax) | $43,422 |
| 5-Year Salary (Post-Tax) | $214,110 |
| New Car Purchase Price | $47,000 |
| 5-Year Car Loan Payment | $783 |
| Monthly Salary Percentage | 21.6% |
Down Payment
The amount of money that is spent upfront when purchasing a car is the down payment. Increasing the down payment will help lower the monthly payment and save money on interest payments over the length of the loan. If the loan has a high-interest rate (12% – 20%) consider making a larger down payment compared to a low-interest rate loan (0% – 4%)
If you are trading in or selling a car when buying the next one, it’s even easier to come up with a sizeable down payment. Discover used car values by using the Kelley Blue Book vehicle valuation guide.
Credit Score
Credit scores impact the interest rate when borrowing money for a car loan. Higher credit scores benefit from lower interest rates which can save quite a bit of money on the total cost of owning a car. Credit scores over 700 will typically qualify for more competitive car loan interest rates. Having a long-standing credit card that is paid on time will help strengthen a credit score. Also, any previous loans repaid without any late payments will count towards building good credit.
Credit Tier Ratings
| Exceptional Credit | 800-850 |
| Very Good Credit | 740-799 |
| Good Credit | 670-739 |
| Fair Credit | 580-669 |
| Poor Credit | 300-579 |
Interest Rate
Almost all car loans have an interest rate except for new car loans from the manufacturer that can occasionally be found for 0% APR. Having a good credit score will qualify buyers for lower interest rates since the risk of car loan default is lower. If the car loan has a high-interest rate, it’s wise to increase the down payment when buying a car.
Loan Terms
Loan terms consist of the length of the loan and the interest rate. These days, the average loan length is 72 months, and loans usually range from 36 months/3 years to 84 months/7 years. A longer loan term will increase the amount of interest paid over the length of the loan since you’re using the money for longer. In addition, the amount paid towards the loan principal each month is lower in the early parts of the loan. When choosing a long-length loan, it is important to consider that some car manufacturer powertrain warranties will expire before the loan ends.
Car Loan Tips
Check Multiple Lenders for The Best Rate – While it can be hard to beat new car loan rates from the manufacturer, it certainly wouldn’t hurt to check the interest rates at your bank or credit union. Comparing interest rates can pay off big time when buying a used car since the annual percentage is higher and can have a broader range than a new car.
Don’t Overextend Your Budget – Spending a large percentage of monthly income on the car loan payment may lead to trouble down the road when it comes time to pay for operating costs. Budgeting $450 – $600 for monthly operating expenses depending on the type of vehicle and how many miles it’s driven will help prevent any hidden surprises.
Don’t Co-sign for a Car Loan – Having a good credit score is necessary to qualify for lower interest rate car loans, and co-signing somebody else’s loan may jeopardize your credit score. If the lendee cannot repay the lender on time, it becomes your responsibility to make timely payments. Any late payments or loan default will negatively impact both people’s credit scores.
