Average new car payment hits $648: How to calculate and lower monthly auto payments

More than 115 million people in the U.S. finance their automobile purchases, and if you do, you might want to hold on to your current vehicle for as long as you can. Buying a car is becoming more financially difficult than ever, with the average car payment in the U.S. at an all-time high — $648 for new cars and $503 for used vehicles.

Key findings

Using Experian’s most recent report, The Zebra found that for Q1 2022:

• New car payments averaged $648, a 12.31% year-over-year increase, due to average new car loans rising 11.74% to $39,540. 
• The average loan interest rate for a new car was 4.07%, and the average term length was 69.48 months.
• Average used car payments reached $503, a 21.5% yearly increase, as the average used car loans increased 24.88% to $27,945. 
• The average loan interest rate for a used car was 8.62%, and the average term length was 67.65 months.
• The average monthly lease payment was $522.

Before heading into a dealership to buy a new car, try out this worksheet to calculate your monthly car payment or, alternatively, you can use our calculator that quickly shows how much you can afford for a new vehicle purchase. You could put some money back into your pocket by setting a budget first and taking a few extra steps to find the lowest car insurance premiums and lender interest rates.

Average monthly car payment

By the beginning of 2022, the U.S. saw the nationwide average car payment reach $648 for new vehicles. This was a 12.31% increase from the previous year — and it will likely continue to inflate further due to rising average car prices and the overall rise of inflation.

During the same time period, used vehicles' monthly payments saw a higher year-over-year increase of 21.5%, with payments at $503.

Why are car payments rising?

Although auto loan interest rates began to rise before the COVID-19 pandemic (though they have since dropped again), the average is much lower than in the last decade or two. Therefore, interest rates can't be blamed for the current market's rising auto prices.

Instead, today's higher-than-ever average car payments result from manufacturer delays and increased expenses that arose once the pandemic hit. Manufacturers were forced to close their doors and then later reopen, and social distancing and labor shortages halted production schedules and reduced the available supply. Since most manufacturers — regardless of what they're producing — have dealt with similar production issues, costs of vehicle parts have increased.

Since supply is unusually low and unable to meet the already-high demand, coupled with an increase in production costs, manufacturers have had to raise car prices to keep up. And when the average price of a car increases, so does the monthly payment associated with financing a car purchase.

What goes into determining a car payment?

Two individuals buying the same car in different states would likely have different monthly payments.

Principal and interest, and even additional taxes and fees, comprise monthly payments. However, additional factors also impact a borrower's monthly payment, such as interest rates and loan term length.

Principal

A loan’s principal is the amount borrowed from a lender. This covers the agreed-upon purchase price between a buyer and seller. Of course, the higher the principal, the higher the car’s monthly payment. Trading in a vehicle or providing a larger down payment reduces the principal amount.

If the borrower requests it and the lender approves, the additional fees and taxes associated with buying a car may be bundled into the loan principal. 

Interest

Interest is how much it costs to borrow the loan principal over time. It’s a percentage determined by the lender added to the monthly cost of paying back the borrowed money. A higher interest rate increases the monthly car payment. Interest rates are influenced by a borrower’s credit score, the vehicle’s age and the lender type.

Credit scores

Credit scores impact interest rates — low scores may mean higher interest rates and vice versa. Those with the highest credit scores have the lowest interest rates and lowest monthly payments. Lower credit scores, from 300 to 500, have the highest interest rates on auto loans — from 14.76% to 20.99% — but lower monthly payments due to overall smaller loan amounts.

Vehicle age

Despite having lower sticker prices, used vehicles typically boast higher interest rates because lenders view them as a riskier investment. This is because of the vehicle's depreciation, lower value, trade-ins and potential issues with older cars. As a result, monthly payments for used cars may still be lower, but you're spending much more over time than the vehicle's value on interest.

The lender

Who you finance a vehicle with can make a big impact on your monthly car payment. You can go through your own bank, a credit union or the manufacturer or dealership's partner bank.

To get the lowest possible monthly payment, a credit union may be your best choice for financing. Credit unions are not-for-profit financial institutions where account holders become part-owners. Since they don't need to make a profit for shareholders, they can offer lower interest rates on loans and fees.

It may seem worth it to finance through the dealership, but this is likely the most expensive route. Going through a dealership's financier may be more convenient for buyers as it takes out the additional step of finding a loan. However, dealerships mark up interest rates as compensation for doing that work for you.

Fees and taxes

Unless you’re new to the area, you’re probably already familiar with your state and local tax laws. Taxes and fees associated with car buying vary state to state and sometimes even county to county. There are only five states without sales taxes, but local sales tax can still be imposed.

Beyond taxes are the fees associated with registering and documenting the sale. Some vehicles may have higher registration fees depending on their size and age. It typically costs more to register heavier or older vehicles. 

You may be able to request to roll these fees and taxes into your final loan principal, though this would increase your monthly payment.

Loan term length

A loan’s term length is the payback period. To lower monthly payments, borrowers can stretch their term length out over a longer period of time. Keep in mind that this extends the length of time paying interest as well.

It may be possible to find lenders who offer 96- or 120-month auto loan terms, but they are few and far between. The average term length for new cars is 69.48 months, and 67.65 months for used vehicles. Average term lengths have been slowly increasing year over year and will likely continue to do so as car prices rise.

Estimating your monthly car payment

Unfortunately, calculating a monthly car payment isn’t as simple as dividing the cost of the car by how many months it will take to pay back the loan. However, it’s not difficult as long as you have the following information to plug into the formula:

• Purchase price of the vehicle
• Trade-in value (if any)
• Down payment
• Interest rate
• Loan term length (in months)

You can use this monthly car payment formula in a few different ways — to calculate the exact details of an active purchase, to help you determine your budget for a new car, or to work through ways of maintaining a lower monthly payment.

If you have a car in mind or already know your vehicle price budget, try plugging in different amounts in the fields you can control, like down payment and loan term length. This will show you the monthly payment for longer payback periods or higher down payments, both of which are ways of reducing monthly costs.

For those who don't have an exact interest rate from a lender, use the average interest rates in our credit score chart above to determine what you can expect for an interest rate. Plan for some wiggle room if you do this, since your interest rate could be lower or higher than the average.

Lastly, if you know you can only afford a specific monthly payment, you can also do this formula in reverse to see what sticker price you can afford.

It's a good idea to work through this formula before heading to a dealer to avoid going outside what you can comfortably spend. A salesperson can calculate this for you, but they may inflate numbers to convince you that you can afford more. Download the printable worksheet to estimate your next car's monthly payment.

Additionally, you may want to consider the extra costs of owning a car. While these costs aren't rolled into your monthly payment, it's still wise to keep them in mind when choosing which vehicle to buy. For example, try to calculate and budget for gas, auto insurance, maintenance, registrations and inspections.

4 ways to lower your car payment and costs

With the cost of living rising in the U.S., Americans are finding strategic ways to save money. Car payments are at the top of the list, as the average price of a new car is at an all-time high. Whether you’re buying a new car or looking to reduce your current monthly car payment, here are four ways to help.

1. Negotiate

When buying a new or used car, there are two financial aspects buyers can try to negotiate with the seller — the sticker price and trade in-value. A lower sticker price or higher trade in-value can help lower monthly car payments.

The manufacturer’s suggested retail price (MSRP) is provided by automakers to determine a new vehicle’s worth. However, dealers only use this to inform their sticker price. Many vehicles today are selling over MSRP due to the auto industry’s current supply and demand issues. This may make it difficult to negotiate the sticker price, but it’s worth trying.

Where buyers have more power is with their trade-in value. Dealerships will always start at the lowest offer first on a trade-in, which is why it’s important to do your homework beforehand to understand your car’s current worth.

2. Consider leasing

The average monthly lease payment was $522 at the beginning of 2022, $126 less than the average car payment for a new vehicle purchase. If it makes sense for you, leasing is a great way to lower your monthly car payment.

Leasing works well for those who like to be in a new vehicle every couple of years and who don’t travel long distances. Leasing used cars is not as common, as many dealerships and lenders will only approve new vehicle leases. 

3. Refinance your current loan

If you’re not interested in buying a vehicle but still want to lower your monthly payments, you might be able to refinance your current auto loan with a different lender. Refinancing might be a good option if when you purchased your vehicle initially:

• Your credit score was significantly lower than it is currently
• Average interest rates were higher nationwide than rates today
• You went through a dealership or manufacturer’s financing program

Refinancing with a different lender may help you get a lower interest rate. In reaching a lower interest rate, you may be able to walk away with a lower payment, or you could keep the same monthly payment but reduce your loan term, which will help you save more on interest in the long run.

4. Compare insurance

When it comes to lowering your expenses as a car owner, there’s only so much you can actually do. Gas prices are what they are and will continue to fluctuate, and the state government sets registration and inspection fees. But you do have the power to shop around for car insurance quotes.

On average, car insurance costs $124 a month in the U.S. Progressive, Nationwide and Geico are known for offering some of the lowest rates. If you’re paying more than the average, it might be worth looking into other coverage options. You may even be able to get a lower rate with your current insurance provider by simply asking what they can do to help you out or by bringing a quote from another company to yours for them to match.

Bundling insurance types might be another option to lower your monthly insurance costs. If you’re using two different companies for your home and car insurance policies, consider finding one company to cover both. Most providers offer deals for bundling.

Like many consumer goods, the average car payment in the U.S. saw a significant increase due to impacts felt by the COVID-19 pandemic. Until automakers are able to recoup from manufacturing issues or demand drops, consumers can expect to wait another year or two before car prices, and monthly payments, begin to level out. 

In the meantime, you may still be able to reduce your monthly car payment by shopping around for lower car insurance rates or refinancing your current auto loan with another lender for better loan terms.

Sources: US News | Credit Karma