Ever wonder why you can’t afford a new car?
- The price of a new car is still near the all-time high of $49,500.
- Prices have skyrocketed due to high demand and limited supply.
- An increase in interest rates, insurance premiums, and the cost of gas have also made cars increasingly unaffordable.
Want to buy a car? Well, there is finally some good news, as the cost of new cars is going down and the supply of cars is starting to increase. The bad news? Prices are still near an all-time high, making them more unaffordable for Americans. On top of rising prices, higher interest rates and insurance, taxes, gas, and repairs can quickly add up. Wages are still stagnant, making it difficult to save enough money for a down payment. Even if the purchase is possible, paying off the loan may still be a struggle. Here are the details.
The price of new cars has skyrocketed
The prices for new cars have risen exponentially since the start of the COVID-19 pandemic, hitting an all-time high in December 2022, of $49,507. Prices dropped this past month to $49,388 — down 0.6%, but still 5.9% higher than a year ago. Prices are not increasing as fast as they did a year ago, but it is difficult for the average American household to afford a new car.
The price of a new car in January of 2020 was $37,851. This means the price of new cars has increased by 30% in just three years! Prices skyrocketed due to high demand and limited supply. Car manufacturers were forced to cut back production due to the global shortage of microchips. And supply chain issues and high inflation are affecting prices as well.
Rising interest rates make it harder to afford a car loan
Another factor making it harder for people to buy a new car is the Federal Reserve’s interest rate hikes. The Fed has increased interest rates from 0.25% to 4.5% in less than a year, making the rate hikes the fastest cycle in history. This makes it more difficult to get approved for car loans as well as making them more expensive when you do get approved.
Average auto loan interest rates have increased from 4.52% prior to the rate hikes to 6.55%, representing a 45% increase in less than a year. This means that even if you are able to secure an auto loan, you will be paying more in interest than you would have last year. A $45,000 car loan today would cost you an extra $2,500 in interest over the same loan a year ago.
Gas prices and insurance premiums are also increasing
In addition to higher prices and higher interest rates on car loans, many people are also facing higher gas prices and insurance premiums. The average price per gallon of gasoline has increased significantly since the start of the pandemic — from around $1.91 in April 2020 to $3.40 in 2023.
This means that even after purchasing your vehicle, there will still be even higher additional costs associated with owning and operating it. Insurance rates have also been increasing steadily over recent years due to higher replacement costs, higher car prices, and a rise in the number of car accidents. The average annual cost of an auto insurance policy has increased 15%, from $2,640 in 2021 to $3,017 in 2023.
For many people, buying a new car just isn’t feasible due to rising prices, higher interest rates on loans, and increasing gas and insurance costs. Many can’t afford a car without making some major sacrifices or taking on significant debt — something that most people are unwilling or unable to do right now. While the prices of new cars are not rising as fast as they were, new cars are still at an all-time high, making them out of reach for the average American.
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