The Expert Podcast

Is one thousand dollars a month too much for a car payment? Whether you think it's too much or not, that may be the new normal for a car loan. We'll talk about how the math works to get there, and there may not be any option if you're thinking, "Well, it's too much. I'm going to wait for it to be different." You may be in for a rude awakening, where it might even be higher later. According to CNBC, more car buyers pay at least $1,000 a month for their loans because of higher prices and rate hikes.

So you might think, "How do you get to a thousand dollars a month? That makes no sense. That’s not a payment that should be normal." Well, take a look at this: the average price paid for a new car is $45,971—roughly $46,000. If you look at the cars in the market nowadays, you can find a pretty decent car in the low to mid-40s. There are many cars well over $50,000, and many normal, average cars are well over $50,000. But to get a nice, normal, regular car that's above average, you're going to spend in the $40,000 to $50,000 range.

What does that work out to for a payment? Let’s look at Bank of America's auto loan calculator. A $46,000 loan amount for 60 months (five years) at 6% interest—assuming you shop around and can get a rate close to that—brings your payment to $890, close to $1,000. If you go through a dealer, that's probably what you're going to end up paying. This calculation does not reflect any kind of down payment. However, it also doesn't include sales tax, license fees, documentation fees, or dealer add-ons, which might eat up your down payment.

Sales tax in most states is between 6% and 8%. If you put a 10% down payment, that’s $4,600, and a lot of that will go toward taxes and other fees. Most people don’t put down that much money—maybe $1,000 or $500, or a couple of thousand dollars. In that case, your down payment might not even cover your taxes. If it didn’t, and you added another couple of thousand dollars to the loan, making it $48,000, you’d now be looking at a payment over $900. That’s how the payment on a vehicle can easily reach $1,000.

What’s going to happen in the future? You might think, "I’ll wait for prices to go down." Not on new cars. New car prices are going nowhere but up. Every manufacturer has started to announce their 2023 model year pricing, and on all vehicles, it’s higher—some significantly higher. For example, the Jeep Gladiator is $5,000 more than it was the year before. Many mid-size and high-end trucks are several thousand dollars more than they were in 2022. Electric vehicles are certainly more expensive than in prior years.

The reason why is inflation. Manufacturers are dealing with higher costs for parts, labor, and services, just like consumers are. Everything that goes into manufacturing a vehicle—fuel, materials, subcomponents—has higher prices. At the same time, manufacturers are selling fewer vehicles, which means their fixed costs for plants, factories, and overhead are spread over fewer cars. Instead of dividing costs over a million cars, they’re dividing them over 500,000. That’s why prices are rising.

There’s an argument that used car values might decrease, but it’s unlikely. If there aren’t enough new cars available or if new cars are $50,000 to $60,000 with $1,000 monthly payments, used cars may hold their value. What about interest rates? Those aren’t going down either. Interest rates of 5%, 6%, or 7% on cars are normal—what rates were for decades in the 70s, 80s, and 90s. The low rates of the 2000s were an anomaly due to the 2008 housing crash. That era is over, and rates are rising. The Fed has announced more rate hikes into 2023.

If you’re looking for a new car, now might be the time to act. Get a 2022 model year before prices increase and lock in an interest rate of 5% or 6% before it goes higher. You might find a slightly lower rate with a credit union, but the days of 0%, 2%, or 3% interest rates are gone. Similarly, the days of nice $20,000 or $30,000 cars are mostly over. A main car will likely cost $40,000 to $50,000, and a second car might cost a bit less. Electric vehicles, in particular, will be more expensive, and within four to five years, they may be the only option on the market.

Let us know what you think about $1,000 car payments becoming the norm. If it seems high now, waiting for prices to come down might be a pipe dream. If you can’t afford $1,000, you might have to pass on a new car altogether. However, a $1,000 monthly payment could soon become the new reality for purchasing a reasonably nice new vehicle.