Partly that's because the number of Americans taking on auto loans has increased. Drivers are borrowing higher amounts, too, and for longer periods. The average new car loan is $32,480, and the average used car loan is $20,446.
But car debt isn't evenly distributed around the country. Drivers in some places tend to owe way more, relative to their incomes, according to a new analysis from WalletHub that compares the median auto loan debts and average incomes in more than 2,500 cities.
- Bastrop, Louisiana
- Dahlonega, Georgia
- Donna, Texas
- Cordele, Georgia
- San Luiz, Arizona
- Alice, Texas
- Brownsville, Texas
- Lake Placid, Florida
- Willis, Texas
- Cedartown, Georgia
- Scarsdale, New York
- Bronxville, New York
- Chevy Chase, Maryland
- Darien, Connecticut
- Westport, Connecticut
- Mill Valley, California
- Los Altos, California
- Birmingham, Michigan
- Hingham, Massachusetts
- Palo Alto, California
"The cities that tend to overspend on cars do so because they have much lower incomes," says Jill Gonzalez, an analyst at WalletHub. Wealthier drivers may be less likely to need auto loans, and if they do, they may finance smaller amounts or be able to borrow at more favorable interest rates.
Video by David Fang
Reducing your auto loan burden comes down to making smart decisions around that purchase. These four moves can help you reduce the cost of your next car and get better financing.
Before you head to the dealership, take time to compare financing offers, says Matt DeLorenzo, senior managing editor at Kelley Blue Book. "Start with a financial institution that you're banking with," says DeLorenzo. Once you get preapproved for a loan at a particular rate, "then you can shop other institutions and see if they can beat that number."
That sets you up to better assess a dealership's offer. There's a good chance they'll be able to offer a lower interest rate than your bank: Auto manufacturer interest rates are 28% below average, according to WalletHub's Q1 2020 Financing Report. Some are even offering 0%, although you'll likely need excellent credit to qualify.
"It's always wise to say, 'I have this loan at this rate. Can you beat it?'" says DeLorenzo.
The average term of a car loan has crept up over the past few years to just over 69 months, which means that most people are taking out 72-month, or six-year, loans. Ronald Montoya, senior consumer advice editor at Edmunds, suggests aiming for no longer than a 60-month, or five-year, loan.
While a longer loan will generally allow you to pay less each month, you'll end up paying more for the car. For example, with a $25,000 loan at 3% over 60 months, you'll end up paying $449 every month and $1,953 in interest over the life of the loan. For a 72-month loan, your payment is $69 cheaper, but you'll have spent almost $400 more overall.
A shorter loan could also allow you more years in between car purchases where you have no monthly auto payment, says Montoya. Considering that the typical monthly auto payment is $550, that break could let you put thousands of dollars towards other financial goals like retirement, college savings, or buying a home.
Picking a lower trim level or a different car class can make a big difference in your monthly payment. And dropping down requires less compromise now than it would have even a few years ago, DeLorenzo says.
"You'll often find now that a compact car or midsize pickup truck will have the same features that you'll get on the larger model, at a lower cost," he says, like adaptive cruise control or blind-spot monitors. "Manufacturers have learned over time that people want a lot of these features."
Preowned models can also be a great value compared to buying new. "Financially, the best thing you can do is buy a car that's two years old, maybe three, but that is definitely preowned," Rick Kahler, a South Dakota-based financial advisor, told Grow last year.
If you can wait a few months before buying, you absolutely should. February is one of the worst months of the year to buy a car, according to a Grow analysis of Autotrader data — most dealerships cleared out their older models during the holidays but aren't yet offering big discounts on the new models.
Prices on new cars tend to be at their lowest in December. If you can't wait until the end of the year, aim to hold out until May or June, when discounts tend to pick up.
No matter which month you buy, aim to make your purchase toward the end of the month.
"Any time there's sales targets or quotas to be hit, either for some dealer incentives — you hit X number of units, you get Y dollars on every unit sold — that's why you tend to see better deals at the end of the month," Tim Fleming, an analyst with Kelley Blue Book, told Grow last year.
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