Is now a good time to buy a new car?

January, 2023

Personal Finance

Americans looking to buy a new car in 2023 may find slightly better prices than in the past two years, although industry analysts say it is probably better to wait until the fall. Prices for many types of vehicles remain relatively high, with the average price of a new car being $47,681 in November, according to online car-shopping guide Edmunds. The average annual rate on an auto loan for a new car was 6.5% in Q4 2022, compared to 4.1% the previous year, while the average monthly payment on a new car rose to $717 from $659. As inventories increase this year, analysts expect prices to fall, and suggest that prices could drop by as much as 10% by the end of the year.

There are a few key factors that consumers should consider when determining how much car they can afford:

Budget: The first step is to create a budget that includes all of your monthly expenses, such as rent or mortgage payments, groceries, utilities, and debt payments. Subtract your total monthly expenses from your income to determine how much you can realistically afford to put towards a car payment each month.
Debt-to-income ratio: Lenders often use the debt-to-income ratio (DTI) to determine how much you can afford to borrow. To calculate your DTI, divide your monthly debt payments by your gross monthly income. Most lenders prefer a DTI of 36% or less, so aim for a car payment that keeps your DTI within this range.
Down payment: The larger your down payment, the lower your monthly car payment will be. Aim to put down at least 20% of the purchase price to avoid paying for private mortgage insurance (PMI), which is required if you make a down payment of less than 20%.
Interest rate: The interest rate on your car loan will also affect your monthly payment. A higher interest rate means a higher monthly payment, so try to get the best rate possible by shopping around and comparing offers from multiple lenders.
Length of loan: The longer the loan term, the lower your monthly payment will be. However, a longer loan term also means paying more in interest over the life of the loan. Consider whether you can afford a shorter loan term with a higher monthly payment or if you need to stretch the loan out over a more extended period to make it more manageable.