Car prices and interest rates down, but monthly payments aren't. Here's why.
The average American's ability to afford a new car has never been more challenging and more complicated to address than it is right now.
That's because the problem is more nuanced than mere sticker shock, experts said.
On the surface, there are reasons for optimism. Automakers are offering new vehicles for seemingly affordable prices of around $25,000, such as the Chevrolet Trax subcompact SUV, for instance. And the average transaction price consumers have been paying to buy a new car has been sliding lower in recent months. According to Edmunds.com, the average transaction price from January through November 2024 was $47,465, a 0.8% decrease compared with $47,851 in the same period a year earlier. Still, those who last bought a car in 2019 are in for an eye-popping surprise, given that the average transaction price then was $37,310.
In addition, the Federal Reserve has cut interest rates, which should make borrowing money for a new car cheaper. And, with higher new-car inventory on dealer lots now compared with a few years ago, many carmakers have been offering incentives.
Yet affordability of new cars continues to be one of the biggest challenges the industry faces in 2025, industry watchers say.
"It’s a big, real tangled mess," said Tyson Jominy, vice president of data and analytics at J.D. Power. "We’ve done nothing to address affordability in this industry.”
Why people can't afford cars
The crux of the problem comes down to how most car buyers define affordable, which often depends on many factors beyond the manufacturer's suggested retail price pasted on the window.
"The way we see consumers experience affordability is through monthly payments. The reasons why things still don’t feel affordable is because monthly payments still keep going up,” Jominy told the Free Press.
Those monthly payments continue to rise for many reasons. One is that the values of vehicles being traded in are eroding faster than interest rates are dropping for auto loans, he said. So what a customer might have gotten for a trade-in even a year ago is much less today, which keeps the monthly payment on a new car higher.
"So affordability is not just MSRP and average transaction prices: It’s monthly payments," Jominy said.
According to J.D. Power's data, the average monthly car payment in November 2024 was $740, $15 more than November 2023. It is a whopping $150 more than the average monthly car payment in November 2019. The average annual percentage rate on a new car loan in 2019 was 5.1%. Today it’s 6.4%, Jominy said.
"Usually, it’s $7 per every $500 borrowed," Jominy said. "So if we see a $2,000 transaction price drop from November of 2022 to November of 2024, then that monthly payment should be $28 less per month. But during that time, we saw vehicle average transaction prices go down $2,000 and monthly payments go up $24. So something else is going on."
What can consumers actually do
Part of the problem is that many carmakers have inflated the manufacturer's suggested retail prices, Jominy said. Then the automakers throw incentives at it to entice car buyers, but "all the incentives they are giving is just wiping out that increase" in MSRP. Then, with weaker trade-in values, the monthly car payment remains high. In addition, car buyers don't want longer loans, which could help lower their car payments.
"So you’ve chosen a vehicle and maybe you can choose a cheaper vehicle, but your only real lever you can control is your loan term and extend it from a 72- to an 84-month loan," Jominy said. "We’re not seeing consumers pull the one lever they can pull, which would be to extend the loan and bring down payments modestly.”
Another problem lies in what the industry defines as affordable, he said. Often it's tagged as the cheapest vehicle in the lineup, but for certain consumers that vehicle might as well not even exist.
"If you need a three-row crossover for your family, consumers don’t care if you have an entry-level hatchback. Consumers need to find their vehicle that fits their budget in that three-row crossover segment," Jominy said. "That’s the other challenge of it. You could probably move down a segment, but if you really need a three-row crossover, you can’t really go down to a compact crossover."
Opting to lease
In December, during its 2024 final forecast media briefing, Cox Automotive Senior Economist Charlie Chesbrough said one of the big stories of the year was affordability. That issue is "what’s in the forefront of what consumers are looking for this year.”
Chesbrough said affordability issues drove leasing up by 19% from January through November 2024 compared with the same period a year before. Part of that increase comes from electric vehicles because carmakers are applying the $7,500 federal tax incentive to EV leases. But there's more to it. There was a 5% drop in car buying between January through November as consumers opted to lease, he said.
"Folks are actually going out and buying that vehicle and trying to finance it and finding that the monthly payment is just a little bit out of reach," Chesbrough said. "Leasing is pulling over a few purchasing customers because that leasing monthly payment is usually less than that purchasing payment. So people are looking for affordability even in the way that they’re trying to finance a vehicle because leasing is probably the most affordable option out there."
Also, compact cars, compact SUVs and subcompact SUVs saw gains in market share whereas midsize SUVs, midsize cars, and full-sized trucks all lost market share.
“Not coincidentally, the vehicles that had the biggest gains this year also had the lowest price points in the marketplace, about $21,000 less than some of the larger-sized vehicles," Chesbrough said. "Consumers are out there looking for the most affordable products, and they appear to be shifting towards the slightly smaller version of vehicles because they want to keep the functionality, but they need to find a lower price point.”
Reasons to buy now, reasons to wait
Still, Cox experts predict that with growing new-vehicle inventory, affordability will improve this year and that 2025 will be the best year for the market since 2019. It forecasts new-vehicle sales reaching 16.3 million units, a 3% increase from 2024, but said profitability will continue to be squeezed. Still, the consumer and economy are expected to be healthy and support growth.
One prediction is that the holdout buyers from years ago might finally return to dealership lots, said Ivan Drury, Edmunds' director of insights. His hunch is based on seeing average trade-in ages increase. In December 2024, the average age of vehicles traded in for a new car was 5.7 years old, up from a low of 4.5 years old back in December of 2021.
The good news for buyers reentering the market is that inventory has improved, which has eliminated dealers' ability to mark up prices over sticker as some did during the post-COVID-19 supply chain shortage.
"There are two major deterrents for consumers," Drury said. "Average transaction prices have increased at a nearly exponential amount (since 2019) and interest rates for new cars are looking more like used cars even as we anticipate more Fed (interest rate) decreases through the year."
But for buyers who have held out, if President-elect Donald Trump follows through on threats to put high tariffs on imported vehicles and parts could nudge them into buying sooner rather than later if they worry that carmakers will pass along the cost of those tariffs to buyers.
"But consumers who aren’t feeling pressured might benefit from automakers’ attempts to sell down outgoing model-year inventory and effectively kick the new year off with a bang," Drury added.
Some car buying advice for 2025
If you do choose to get a new ride, you can take steps to buy wisely. First of all, Jominy recommends that if you lease a vehicle, do not put any money down. It's tempting to put down, say $2,000, to get a smaller monthly payment, but do not do it.
"You don’t want to put any money down on it because if you total your car, any insurance will only cover the value of the vehicle, and you’re out that deposit," Jominy said. "I don’t ever put anything down on a lease."
Keep in mind that many new cars now are equipped with new safety features and technology that might cost more but will keep you safer compared with an older vehicle, he said.
“Cars today can do so many great things so there’s a lot of valid reasons to buy new cars these days, but they certainly are more expensive," Jominy said. "So do your homework before you go to a dealership."
By homework, he doesn't mean to just research the vehicle and all its features. Jominy said to research your own credit rating and find out what interest rate you qualify to get and then secure a loan at the best rate you can find before ever going to the dealership.
"Credit unions offer some of the best deals out there, and will get you the best rates," Jominy said. "A lot of consumers seem to believe, 'If I show up with all cash, I’ll get a great deal.' Dealers make money by securing your financing, so you might not get a deal. But if you know your creditworthiness and the best interest rate you can get, a dealer might beat your best rate."
Also, don't limit yourself geographically. Jominy said dealers in the Plains states and Upper Midwest usually have the best deals.
“So if you are willing to get on a plane … dealers in Iowa and Nebraska, Wisconsin and Minnesota … were dealing below MSRP during the supply chain crisis in 2022 when everyone else was charging so much more.”
That's also where basic supply and demand come in: A dealer with one Toyota RAV4 on the East Coast might have 5,000 buyers for it and can charge more, but a dealer with one RAV4 in Nebraska might only have 50 buyers for it. Afraid to fly? Use the internet and have the vehicle shipped to you, he said.
Still, Jominy said, with the threat of tariffs potentially causing higher prices on goods including cars, "I don’t think we’ll stop talking about affordability in 2025. We have a ways to go. Look how quickly our payments have risen, $150-plus since pre-COVID. If car monthly payments stay where they are and don’t match wage growth, affordability will remain a topic."
Contact Jamie L. LaReau: jlareau@freepress.com. Follow her on Twitter @jlareauan.