Americans Are Borrowing More Than Ever for Vehicles — Here’s How to Save for Your Dream Car
If you’re in the market for a new car, be prepared to go deep into debt to afford it. The average new vehicle loan in the United States soared to a record high of $40,290 during the second quarter, according to data released Aug. 25 by Experian.
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As CNN reported, Experian estimates that the average monthly payment for a new vehicle loan rose to $667 during the quarter, up nearly 15% from a year earlier. The average amount borrowed rose 13.2% year-over-year.
Those higher loan amounts correspond with both an ongoing rise in vehicle prices and higher borrowing rates amid a move by the Federal Reserve to hike interest rates to tame inflation. The price of the average new car or truck reached a record $46,259 in August, CNN noted, citing data from market research firm J.D. Power.
The higher debt also extends to used cars, as the average used vehicle loan rose 18.7% to $28,534 during the second quarter. The average monthly payment for used cars climbed 17% to $515.
This obviously creates a challenging environment for consumers, but there are steps you can take to save up for your dream car. A good first step is to be realistic about how much car you can truly afford, according to Melanie Nguyen with Kelley Blue Book. As she advises: “Think Champagne taste but a beer budget.”
KBB’s sister site, Autotrader, offers an affordability calculator tool that helps you determine how much you can afford for a vehicle based on your budget. Make sure you cover everything — not just the price of the vehicle, but the prevailing interest rate as well as taxes, dealer fees and destination charges.
After that, you should consult the Kelley Blue Book valuation tool to determine what your current vehicle is worth, so you’ll know how much trade-in value it will bring.
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In terms of getting the best possible deal and saving money, KBB offers these tips:
- Build your credit: The best way to lower your interest rate on a new car is to improve your credit score, regardless of whether you’re looking for a bank, credit union, or dealership loan. A score of 700 or higher can usually qualify you for the best loan terms. If your score is much lower than that, take time to build it up before buying a new car.
- Cut expenses: Saving up for a dream car means making sacrifices in other areas, such as cutting back on discretionary expenses. This can range from forgoing that morning cappuccino to cutting back on expensive vacations. Saving just $50 a week adds up to $2,600 a year.
- Get a side gig: Earning extra money in your off time is one surefire way to increase your income, which you can then put into your dream-car fund.
- Pay down credit cards: Reducing your credit card debt helps you avoid interest, which can add up to significant savings. Paying your cards off in full each month is the best way to avoid interest charges.
- Start by looking at used cars: Although used cars are getting more expensive — the median price jumped 37% between July 2019 and July 2022, according to Cars.com — they are still cheaper on average than new cars. As of July 2022, the median price of a used vehicle was 61% that of a new vehicle. Saving nearly 40% on your dream car is one way to make that dream come true.
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