Financing a vehicle with an auto loan is a common option for car shoppers. But if you want to avoid debt, or you've been saving up for a new car, you might decide to pay in cash instead.
``The average monthly car payment for new cars is $667. The average monthly car payment for used cars is $515. 38.22 percent of consumers financed new vehicles in the second quarter of 2022. 61.78 percent of consumers financed used vehicles in the second quarter of 2022 (Source: Bankrate).''
Going to a dealership despite the drawbacks
Consumers actively shopping for a car expected to finance with the dealership (42%), higher than any other option. And more consumers use dealership websites to do their car shopping than any other online buyer's website.
A $30,000 auto loan balance with an average interest rate of 5.0% paid over a 5 year term will have a monthly payment of $566. In total, the loan will cost $33,968 with $3,968 in interest.
NerdWallet recommends spending no more than 10% of your take-home pay on your monthly auto loan payment. So if your after-tax pay each month is $3,000, you could afford a $300 car payment. Check if you can really afford the payment by depositing that amount into a savings account for a few months.
How much should you put down on a car? A down payment between 10 to 20 percent of the vehicle price is the general recommendation.
1. California
California is by far the most expensive state to own a car. The three biggest costs for car owners in this state were sales taxes (almost $4,000), gas ($4.71 per gallon) and repair costs for both parts and labor.
And it's made people rethink how they're financing this very large purchase. In a recent survey, CDK Global asked approximately 1,000 new car buyers how they financed their purchase. Nearly three out of 10, 29%, paid in cash.
A good rule of thumb is to spend no more than 10% of your take-home pay on a car loan payment when possible.
If you plan to finance your car purchase, follow the 20/4/10 rule: 20% down, loan no longer than 4 years, and keep total car payment – including insurance – to a maximum of 10% of your gross monthly income.
A private buyer tends to be more willing to pay a higher price than a dealer or auction. For you, it works well because there's no middleman to deal with. On the flip side, you might struggle to find a buyer and wait some time for a sale. Another option is to sell your car to a dealer.
It depends on how much income you have after your bills and expenses. But as a rule of thumb, your car payment should not exceed 15% of your post-tax monthly pay. For example, if after taxes, you make the U.S. median income of $37,773, you could shop for a car that costs up to $472 per month.
Paying With Cash
While it might be unrealistic to save enough cash to buy a brand new car outright, it's a wise strategy to pay with cash if you're able to buy an inexpensive used car. Benefits: Interest savings: By paying with cash savings instead of taking out a loan, you save money by not paying interest.
The most common ways people pay for their first car purchase vary, but it often involves a combination of savings, loans, or financing through a bank or dealership. Paying cash means you own the car outright, while financing involves borrowing money and paying it back over time with interest.
Pros. May help you get the best terms: Dealers generally work with a limited set of lenders, who may not offer the ideal loan terms. In addition, dealers may add a markup to the annual percentage rate (APR) as compensation for arranging the loan. When you work directly with a bank, you won't have to worry about this.
You'll have less cash on hand: After purchasing a vehicle, you might not have enough to cover emergencies. You may have a limited selection: If you stick to your cash budget, some models will likely be out of your price range.
While the best state will vary based on any given driver's personal needs, there is a clear general winner if you're looking for the most affordable state to buy a car in. The grand champion is New Hampshire.
Final answer: When buying a car, it's suggested to pay for it in cash if possible, save an equivalent to your car payment, and consider buying a good quality used car instead of a brand-new one.
No down payment means a bigger car loan, leading to more interest (unless you pay your car loan off early). You might also need to choose a longer term to keep your monthly payments affordable, which means you'll pay more interest over the life of your loan.
Another option may be to get a family member or friend with a strong credit score to cosign the loan. If you have poor credit, having a cosigner can help you get a car with no down payment and with potentially lower interest rates.
An increase in your monthly payment will reduce the amount of interest charges you will pay over the repayment period and may even shorten the number of months it will take to pay off the loan.