Image source: Getty Images
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.
Discover: This credit card has a rare $300 welcome bonus
More: These 0% intro APR credit cards made our best-of list
Alert: highest cash back card we’ve seen now has 0% intro APR for 15 months
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.
Alert: highest cash back card we’ve seen now has 0% intro APR until 2024
If you’re using the wrong credit or debit card, it could be costing you serious money. Our expert loves this top pick, which features a 0% intro APR until 2024, an insane cash back rate of up to 5%, and all somehow for no annual fee.
In fact, this card is so good that our expert even uses it personally. Click here to read our full review for free and apply in just 2 minutes.
Read our free review
We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
