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Drivers are paying an average $702 monthly for new cars: Here’s why that record high was ‘inevitable,’ says analyst

  • In addition to elevated transaction prices on new vehicles, higher interest rates are adding to the cost of financing a car.
  • Manufacturer discounts also have dropped 54.7% from a year ago, according to recent data.
  • There are some things you can do to help keep the cost down for a new car.

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Consumers looking to buy a new car may need to clear more room in their budgets for it.

For new vehicles, the average auto loan is for 70.4 months (less than two months shy of six years) and monthly payments have climbed past $700 for the first time ever, according to new data from Edmunds. It echoes similar findings included in a joint forecast from J.D. Power and LMC Automotive released in late July.

"It was inevitable just because we see how much vehicle consumers are financing," said Ivan Drury, senior manager of insights for Edmunds. 

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Why drivers are spending more to buy a new vehicle

The average new-car transaction in July was $45,869, according to  a joint estimate from J.D. Power and LMC Automotive. That's down a tad from the record $45,988 set in June.

Several factors are playing into higher costs, experts say:

  • Higher interest rates for auto loans: The average is about 5.5%, up from 4.5% a year ago, Edmunds data shows. That rate could tick higher, given that the Federal Reserve is expected next month to again raise a key interest rate that many consumer loans derive from.
  • Supply chain constraints: In the midst of a persisting shortage of computer chips needed to complete today's cars, consumer demand continues to outstrip supply, which has led to elevated prices. Over the last year, prices on new cars have risen 10.4%, according to the latest Consumer Price Index.
  • Vehicle popularity: Consumer preference also has shifted over the last decade or so to SUVs and trucks from sedans, which may cost less.
  • Fewer incentives: With dealers not struggling to make sales, manufacturer discounts have fallen to an average of $894 per vehicle, down 54.7% from a year ago, according to the J.D. Power/LMC estimate. It's the first time the average has fallen below $900.

How to save money when financing a new car

If you plan to finance the purchase of a new car, there are some things to consider that could lower the amount you need to finance.

For starters, keep in mind that consumers with higher credit scores are able to secure the best loan terms.

"Boosting your score might make all the difference in an auto loan … the higher you can get it, the better the rate you'll be offered," said certified financial planner Malcolm Ethridge, an executive vice president and financial advisor at CIC Wealth in Rockville, Maryland.

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