Most Americans depend on cars to get around, but recent data shows that buying a new vehicle may now be prohibitive for average earners.
According to Kelley Blue Book, the average cost of a new car sold in May was $47,148, up $472 from the previous month. This coincided with the average monthly car payment exceeding $700, an all-time high, according to the Cox Automotive/Moody’s Analytics Vehicle Affordability Index.
Although demand for new cars has increased since the start of the COVID-19 pandemic, the inventory of cheaper vehicles is low due to the lack of a key component used to manufacture most vehicles.
Here’s why car prices are rising, how car payments are determined, and what you can do to get a premium deal on your next purchase.
Why are car prices rising?
A pandemic-induced shortage of computer chips used to control windows, navigation screens and passenger screen sensors has caused car prices to surge, NPR reported.
Early in the pandemic lockdown, when most employees were working from home, car sales plummeted and automakers cut orders for chips. At the same time, people were buying laptops, iPads, TVs, and other electronics, so chipmakers shifted their production to companies that make those products.
However, as people left the cities for the suburbs, demand for cars soared, according to the NPR report. With a limited supply of computer chips, automakers began making more expensive SUVs and less affordable sedans.
How are the car payments determined?
When buying a car, many buyers rely on loans from a bank or dealer to finance their purchases.
The amount you pay on a loan is based on the price of the car, whether new or used, the down payment, the length of the loan, and your credit score, according to Investopedia.com, an online financial information resource.
Auto loan interest rates can significantly increase the overall cost of a car, according to Investopedia. Here’s what you should know:
The best way to get a lower interest rate is to improve your credit score. If you have low credit, consider holding off on a car purchase.
If you have a lower debt-to-income ratio, or the amount of money you spend on monthly debt compared to your monthly income, you are more likely to receive a lower interest rate.
Used car loans have higher interest rates than new car loans because used cars have a lower resale value.
Longer loan terms usually have higher interest rates.
You can use Investopedia’s car loan payment calculator to find out how much you can afford for your next car.
Can you negotiate the interest rate on a car loan?
Like the price of a vehicle, the interest rate is negotiable, according to the Consumer Financial Protection Bureau.
The first rate on the loan a dealer offers you may not be the lowest rate you qualify for. So it’s best to ask for a loan with better terms, says the CFPB. Because dealers and lenders aren’t always obligated to give you the best deal, negotiating can save you thousands of dollars over the life of the loan.
Getting bids from multiple dealers can help you get the best price on a car purchase, and you can take some of the stress out of the negotiation process by buying a car online, wrote Karen Bennett for Bankrate.com.
You can also negotiate the value of your trade-in, as well as dealer fees for preparation, documentation, advertising, and other miscellaneous costs, US News reported.