Rising car prices and loan rates could spell disaster for drivers.
- Car prices have been up this year due to supply chain shortages.
- That’s forcing borrowers to take on higher car payments — and put 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 these days, vehicles are even less affordable due to a massive shortage.
The core of the problem is actually a chip shortage — an issue that started during the COVID-19 pandemic and hasn’t yet been resolved. Ultimately, automakers have seen production slow down, which has resulted in a limited supply of vehicles for sale. And any time you have a situation where the quantity of a given good isn’t high enough to meet consumer demand, its price tends to go up.
It’s not all that surprising, then, to learn that auto loan balances increased on a national level during the third quarter of 2022. This is per a new report by 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 took out large car 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 an auto loan. After all, you probably don’t have $30,000 or $40,000 just sitting around in your savings account to pay for a new car outright.
But if you’re going to take on the expense of an auto loan, you’ll need to make sure it really fits into your budget. Otherwise, you could set yourself up for a world of financial stress.
How much car can you afford?
There’s a formula consumers are told to follow when it comes to buying a home — don’t let your housing costs exceed 30% of your income. But buying a car is trickier, because such a formula doesn’t really exist in that context.
Your best bet, therefore, when buying a car is to look at your total fixed monthly expenses, compare that to your income, and see how much room you’re left with. Let’s imagine you bring home $3,000 a month, and you currently spend $2,000 a month on essentials like housing, food, utilities, and health insurance. That leaves you with $1,000 left over — but that doesn’t necessarily mean you can afford a $1,000 monthly car payment.
You might 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 might need some of that money to boost your savings or fund your IRA for retirement. So your best bet is to really take a close look at those numbers and land on a car loan payment that’s reasonable.
Higher borrowing rates could be an issue
Unfortunately, not only are car prices up these days, but so are auto loan rates. In fact, borrowing rates are higher across the board, which makes it a pretty bad time to finance a car.
If you’re going to be applying for an auto loan, see if your credit score is in good shape. The higher that number, the lower the rate you’re likely to qualify for. A lower rate could make it so you’re less likely to fall behind on your loan payments.
Remember, taking on too expensive a car can have a lot of negative consequences. If you’re late with your loan payments, it could cause your credit score to plunge and put you at risk of having your vehicle repossessed. So you’re better off landing on a reasonable car payment — even if that means resigning yourself to a vehicle that’s missing some of the features you may have otherwise wanted.
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