Rising car prices and loan rates can be disastrous for drivers.
Most important points
- Car prices have risen this year due to shortages in the supply chain.
- That forces borrowers to take on higher car payments — and puts their finances at risk.
- Compare your total monthly expenses to your income to determine a monthly car payment you can afford.
Buying a car has always been an expensive prospect. But nowadays vehicles are even less affordable due to a huge shortage.
The core of the problem is actually a shortage of chips – a problem that started during the COVID-19 pandemic and has not yet been solved. Ultimately, automakers have seen production slow down, resulting in a limited range of vehicles for sale. And whenever you have a situation where the quantity of a particular good is not high enough to meet consumer demand, the price tends to go up.
It is therefore not too surprising to learn that auto loan balances increased nationally in the third quarter of 2022. This is according to a new report from the Federal Reserve Bank of New York. But what’s more surprising is that auto loan debt increased by a whopping $22 billion. That indicates that many consumers have taken out large auto loans and may be at risk of falling behind on them.
If you need a car, you may have no choice but to finance it with a car loan. After all, you probably don’t have $30,000 or $40,000 in your savings account to pay for a new car.
But when taking on the cost of a car loan, you need to make sure it really fits your budget. Otherwise, you could be setting yourself up for a world of financial stress.
How much car can you afford?
There is a formula consumers should follow when it comes to buying a home: Don’t let your housing costs exceed 30% of your income. But buying a car is more difficult, because such a formula does not really exist in that context.
That’s why it’s best to look at your total fixed monthly expenses when buying a car, compare that to your income and see how much room you have left. Let’s imagine you take home $3,000 a month and you currently spend $2,000 a month on essentials such as housing, food, utilities, and health insurance. That leaves you with $1,000 — but that doesn’t necessarily mean you can afford a $1,000 monthly car payment.
You may need some of that $1,000 to pay for non-essentials like streaming content and social events — things you probably don’t want to cut out of your life entirely. And you may need some of that money to increase your savings or fund your IRA for retirement. So you can do the best For real take a close look at those numbers and land on a car loan that is reasonably paid.
Higher interest rates can be a problem
Unfortunately, not only car prices have increased these days, but so have car loan rates. In fact, loan rates are higher across the board, making it a pretty bad time to finance a car.
If you are going to apply for a car loan, see if your credit score is okay. The higher that number, the lower the rate you’re likely to qualify for. A lower rate can make you less likely to fall behind on your loan payments.
Do not forget that buying an overpriced car can have many negative consequences. If you are late on your loan payments, your credit score can drop and you risk having your vehicle repossessed. So you’re better off with a reasonable car payment – even if that means resigning yourself to a vehicle that lacks some features you might otherwise want.
Warning: The Highest Cash Back Card We’ve Seen Right Now Has 0% Intro APR Until 2024
Using the wrong credit or debit card can cost you a lot of money. Our expert loves this top pick, with an intro APR of 0% through 2024, an insane cashback rate of up to 5%, and all somehow with no annual fee.
In fact, this card is so good that our expert even uses it personally. Click here to read our full review for free and apply in just 2 minutes.
Read our free review