It’s becoming increasingly expensive to buy a new car.
In fact, a record number of new-car buyers — nearly 1 in 5 — are making payments of $1,000 or more, according to Edmunds. For a household earning the U.S. median income of $80,610, a $1,000 car payment would take up 15% of pre-tax income, before factoring in the cost of insurance, gas or maintenance.
It doesn’t help that the average price of a new auto is nearly $50,000. And prices could climb even higher. With the looming possibility of 25% tariffs on cars and components from Mexico and Canada, new car costs could rise by as much as 12%, or $5,790, according to one estimate.
With prices at near-record highs and potential tariffs looming, buying a new car has never been more expensive. But factors that you have more control over, like your credit score, loan terms and down payment, also impact your monthly payments. Here’s a look at how to make a new car fit your budget.
Start by looking at your credit score
How much your monthly car payment costs often comes down to one key factor: your credit score.
While you can’t do much about car prices, you can influence your score, which plays a major role in what you’ll actually pay on a loan since lenders use it to determine your interest rate. The difference between good and bad credit can add thousands of dollars in borrowing costs.
Say you’re financing a new vehicle at the average price of $48,641 with a 15% down payment and a typical 60-month loan. Your monthly payments could range from $824 to $1,037, depending on your FICO credit score.
Here’s a look at how various credit scores affect monthly payments and interest rates, based on the loan terms above, according to FICO:
- 720-850: $824 (7.25% APR)
- 690-719: $847 (8.45% APR)
- 660-689: $883 (10.22% APR)
- 620-659: $927 (12.33% APR)
- 590-619: $1,019 (16.62% APR)
- 500-589: $1,037 (17.43% APR)
Over the life of the loan, someone with excellent credit would pay $8,071 in interest, while someone with poor credit could pay $20,886 — a difference of nearly $13,000.
You can often lower your monthly payments by extending the term, but remember that you’d be paying more on interest over the course of the loan. If you have the savings, you can also lower the monthly payments with a larger down payment.
Ways to lower borrowing costs
Improving your credit score before applying for a loan is one way to lower your interest rate and potentially save thousands of dollars over the life of the loan.
To do that, start by making sure you always make debt payments on time, since payment history accounts for 35% of your credit score.
Other strategies for improving your credit score include:
Buying a used car is another way to reduce costs. Used vehicles not only have lower sticker prices but also typically come with lower insurance costs and less depreciation.
How to estimate your monthly auto loan costs
Before committing to a purchase, it’s smart to have an idea of what your estimated monthly payments will be based on loan terms and interest rates.
CNBC Make It’s loan calculator can help you see how financing costs add up. Keep in mind that you’ll need to manually input an estimated interest rate based on your credit score, as listed above.
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