New Car Prices and Auto Loan Debt Have Spiked — Here’s How to Keep Your Payments Low

Here's how to ensure your auto loan is affordable.
  • The average price of a new car in the U.S. reached $36,590 in Feb. 2019, according to an estimate by Kelley Blue Book.
  • In the third quarter of 2018, Americans held $1.26 trillion in auto debt — a 75 percent increase since the end of 2009.
  • With longer repayment terms, car buyers are at greater risk for financial vulnerability due to the higher total costs of purchasing a new vehicle.

New car prices climbed to an average of more than $36,000 in Feb. 2019, marking the biggest spike in transaction prices since 2013, according to Kelley Blue Book. However, as car ownership becomes more expensive, the amount of money that Americans owe on auto loans has also skyrocketed. With Wall Street analysts predicting another recession on the horizon, it’s important for Americans to get a handle on their auto debt and prepare their finances to weather an economic downturn.

See More: How Do Your Finances Measure Up to the Typical American’s?

American Auto Loan Debt Balloons After Great Recession

American auto debt rose by 75 percent to a staggering $1.26 trillion between 2009 and the third quarter of 2018, according to a February 2019 report published by the U.S. Public Interest Research Group. Overall, transportation follows housing as the second-costliest expense for U.S. households — the report found that workers typically spend about an hour each day earning back the cost of the transportation that allows them to commute to their jobs.

With Americans spending such a significant portion of their budget on transportation, any risky financial decisions end up compounding the vulnerability of their finances. In fact, borrowers with subprime credit carried up to 26 percent of all auto loans in 2016, according to the PIRG report, and nearly a third of all traded-in vehicles in 2017 were underwater, meaning there was more money owed on the car than it was worth.

Find Out: How Much Your Car Is Really Worth

How to Recession-Proof Your Car Loan

Making smart financial decisions with your auto loan is crucial to protecting yourself in the event of another recession or a financial emergency, such as a job loss. You can help avoid defaulting on your car during hard times by considering two important factors at the time of your car purchase.

Check Out: Here’s How Much a $35,263 Car Today Would Cost the Year You Were Born

Calculate the Total Payments Over the Life of Your Loan

Forty-two percent of all car loans originated in the first half of 2017 carried terms of six years or longer, compared with only 26 percent of car loans at the tail end of the Great Recession, according to the PIRG report. That means Americans are paying off their auto loans over longer periods of time.

While your monthly loan payment amount needs to be affordable enough to fit into your budget, you should also calculate the true cost of your vehicle, which is the new auto price plus loan interest. Longer repayment plans inflate your total cost of purchasing a car, so it makes financial sense to pay off your auto loan as soon as possible.

Skip the SUV and Choose a Smaller Car

Going with a smaller vehicle from the outset will help make your car payments more affordable. The average transaction price of a midsize SUV was approximately $37,000 in December 2018, according to Kelley Blue Book, whereas a midsize sedan only cost about $25,000 in October 2018. If you downsize even more to a compact car, you can buy one for an average price of $20,000 — and put the $17,000 in savings from an SUV purchase to good use elsewhere.

Related: The Costly Effects the Weather Has on Your Car — and Ways to Minimize Your Expense

If your lifestyle requires a bigger car for whatever reason, you can also negotiate the sticker price of your dream SUV to get the best deal possible and set up your auto loan for repayment success.

Keep reading to learn the pros and cons of rent-to-own cars.

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