Can I Really Afford a New Auto Loan?

Earlier this year, the amount that Americans owe in auto loans hit a record high of $1.19 trillion, according to data from the Federal Reserve Bank of New York and Equifax. Meanwhile, the average new-car loan hit $30,621 with car buyers paying an average of $506 per month.

On top of that, more borrowers are choosing to finance their vehicles for longer periods of time, up from 48- or 60-month terms to 73- or even 84-months, according to financial services company Experian. Now, if you’re following the math, you know that equates to just over $42,500 at 84 months. And that doesn’t even include gasoline, insurance and maintenance. All said, the average American is likely spending somewhere around $750 a month to have and operate a car.

If $9,000 a year seems like a lot to spend to for an asset that just depreciates in value, well, you’re not wrong. The average American has a household income of $51,000 a year, so $9,000 quickly cuts into that. Still, a lot of people see their vehicle as a prestige symbol rather than a tool for getting from one point to another, so they’re willing to sacrifice saving for things like retirement, an emergency fund or even paying off a mortgage faster in order to have a nicer car.

So how much is too much to spend on an automobile? Well, that answer really depends on the driver and their finances. If you use your vehicle for your work (not just getting to and from your job), you’ll want something newer and probably under warranty so you’re covered in the event something goes wrong with your car. In that case, spending a larger portion of your monthly income may make sense, especially since you can likely use your vehicle as a business write-off.

But if a big car payment is going to keep you from doing things like paying down debt or increasing your savings, you may want to consider whether your future self would prefer to have some retirement savings in place or memories of a flashy ride (we suggest the former if you’re having a tough time choosing).

Establishing and sticking to a monthly budget can help you better understand just how much you can afford to spend on a new car. Once you know that, there are tricks you can use to end up with a reliable, nice automobile that doesn’t come with gargantuan car payments. Let’s take a look at some of them.


Buy Used

It’s easy these days to find used cars that are just a few years old and far less expensive than buying new. The average new car depreciates around 15-20% in the year after it is purchased. Why not let someone else pay for that?

Many used cars have low miles, are in excellent condition and are even under manufacturer warranty in some cases (or have extended warranties available). Look for reputable dealers and check the car’s history using CARFAX to ensure you’re getting a fair deal.


Wait to Buy Your Dream Car

If you can’t afford to pay cash right now, buy a practical car that will allow you to save money, both on car payments and fuel. There are plenty of cars that are cheap to buy and operate, so you can put more money toward our down payment for your dream car.


Consider a Lease

Leasing an automobile can be an economical way to get more car for a lower monthly payment, and you have the option to finance the remaining value of the vehicle once your lease term is up. Keep in mind you can save quite a bit of money on interest if you have cash on hand by putting a larger security deposit on your lease or paying all or a portion of your lease payments up front.


Repair & Recondition Your Current Car

If you have a vehicle that is getting a little older and you’re considering trading it in for something new (or new to you) but are worried about car payments, it could be worth taking it to your favorite mechanic for a thorough inspection.

For around $100, your mechanic will take a look at your vehicle’s systems and let you know what, if anything, needs repair or replacement now or may need it soon. It may be cheaper to do some repairs and keep your existing car up and running for another year while you save even more for a down payment on a new car.

If you’re worried about debt in general, it’s possible to construct a debt elimination plan that helps you to wipe out your personal debt once and for all. Check out our explainer on the debt avalanche and debt snowball methods for getting out from under crushing debt.


[Editorial Disclosure: is a service that provides people with tools to pay down their debts through automatic payments. The purpose of this article, however, is not to encourage users to purchase that service. This article is educational and journalistic in nature and aims to help people learn how to pay down their debt, whether they use our site, another, or go it alone.]