The UAW strike could raise car prices. They were already way too high for most Americans.

With the average annual percentage rate on a new-car loan at 7.4%, average monthly loan payments hit an all-time high of $736 in the third quarter, the car-buying site Edmunds said Tuesday. For used cars, the average APR was 11.2% in Q3, with an average monthly payment of $567.

Notably, the share of car buyers who have monthly auto payments of $1,000 or more hit a record 17.5% in the third quarter, up from the previous high of 17.1% in the second quarter, according to Edmunds. 

“If there is one reason for households being budget-constrained, it’s sitting in the driveway,” said Greg McBride, the chief financial analyst at Bankrate, a personal-finance website for comparing financial products. “Car payments are absolute budget busters. And a lot of households have more than one car payment.”

The monthly payment is only part of the financial burden of car ownership

On top of the monthly payment, car owners are facing higher costs this year for auto insurance, car repairs and gas. Not counting the monthly loan payment, it now costs an average of $12,182 per year to own a new car, according to AAA’s latest look at the ongoing costs of car ownership. AAA’s tally includes depreciation costs, finance charges, fuel, insurance, annual fees and taxes, maintenance, repairs and tires. 

That breaks down to $1,013 a month, said AAA’s director of automotive research, Greg Brannon. “Those are numbers that just a few years ago would have been rent payment in many, many markets,” Brannon said. Housing costs have traditionally been the biggest expense in a household’s budget, with cars coming in second, but the gap is closing between the two, he added. 

Want to buy a new car? You should probably make around $100,000.

“You have to make over $100,000 just to afford a new car,” Ford’s former chief executive officer said in a recent TV interview about the state of the auto industry. That’s not an exaggeration, if you’re a car buyer who follows traditional budgeting advice about car buying.

One common guideline about how much to spend when acquiring a new (or new-to-you) vehicle is the 20/4/10 rule, which suggests making a 20% down payment, taking out a four-year (or shorter-term) loan, and spending no more than 10% of your monthly take-home pay on car-related expenses. 

McBride, the Bankrate analyst, walked MarketWatch through a hypothetical car-buying scenario for an average-priced new car that cost $48,000. Taking into account the trade-in value of your existing vehicle, let’s say you knock some money off the sticker price and finance a $40,000 purchase price at 7.5% for five years. That’s an $801 monthly payment — which means you would need to make $96,100 a year if you wanted that payment to be 10% of your income. 

The personal-finance writer Sam Dogen, author of the Financial Samurai blog, takes a more extreme view, and says the purchase price of a car should be no more than one-tenth of your annual gross income. Following Dogen’s rule, people making the median household income of $74,580 should cap their car purchase price at $7,458. If you wanted to buy the average-priced car and stay within Dogen’s recommended guidelines, you would need to make more than $480,000 to afford a new car, or over $260,000 to buy a used one. 

Another common piece of advice is that the value of the car you can afford is roughly half your annual income, said Grant Meyer, a certified financial planner in Bloomington, Minn., and founder of GTS Financial. So if the average new-car price is around $50,000, that would mean a person with $100,000 of income would fall within that guideline, he said.

How many U.S. households can afford a new car?

According to any of the above budgeting guidelines, most U.S. households can’t afford a new car. If $100,000 is the annual income necessary, then about 37.5% of U.S. households can manage the purchase, according to the most recent Census Bureau figures.

Not surprisingly, car buying is increasingly a rich person’s game. The richer you are, the more vehicles you own on average: 2.6 per household for the wealthiest, compared with 1.0 per household for the poorest, according to the Bureau of Transportation Statistics. 

What’s more, car-related costs put less of a financial burden on richer households than lower-income ones: People in the highest income bracket, or those making $140,363 and above, spent 11.6% of their after-tax income on transportation costs in 2022. The lowest-income households, making $25,806 and under, spent 30.2% of their after-tax income on those expenses, according to the BTS.

Yet people still buy cars. How are they doing it?

Though their prices have made them into luxury items for many, cars are still a necessity for most households, with 76% of Americans using their cars to commute to work or school, according to the World Economic Forum. 

How are people still buying vehicles? In some cases they overspend, break their budgets, and “forgo other expenses in order to get the ride they want,” Cox Automotive chief economist Jonathan Smoke said earlier this year. Sometimes vehicle buyers take advantage of discounts offered by dealers, but those may become fewer and farther between. 

Car shoppers are also taking out longer loans to make their monthly payments smaller. The average loan term in the second quarter was 68.4 months for new cars and 70.1 months for used cars, according to Edmunds. 

Some buyers appear to be taking out loans they can’t afford. The rate of new auto-loan delinquencies is on the rise, hitting 7.28% in the second quarter, up 40 basis points from 6.88% in Q1, and 35 basis points above pre-pandemic levels, according to Moody’s Investors Service.

“Auto loans and auto-loan delinquencies have increased very quickly,” said Carl Tannenbaum, chief economist at the financial-services firm Northern Trust. “There’s been a bit of a stress and a spiral where cars get more expensive, some households have to take on ever-longer and ever-larger loans, and it does get harder for them to handle them.” 

How to save money when buying a car

How can car buyers lessen the damage to their wallets when shopping for a new vehicle? Here are some tips:

• Buy a car that works for 95% of your household’s use cases, rather than 1%, said Brannon of AAA. People often say they need a pickup truck because they take a once-a-year trip to Lowe’s
  LOW,
  -0.79%
  and haul a bag of mulch home, Brannon told MarketWatch. “If you don’t need a pickup truck, don’t buy one, because it costs you over a dollar per mile to drive one,” Brannon said. America’s favorite vehicles, full-sized pickup trucks like the Ford
  F,
  -1.42%
  F-150 and the Chevy Silverado, are the most expensive to drive, at $1.06 per mile, according to AAA’s calculations. That’s  compared with 59 cents per mile for a small sedan.

• Before you walk into a dealer, shop around for car loans and get pre-approved at a bank or credit union, AAA says. “Buyers can use their pre-approval to negotiate if the dealer offers a higher rate,” AAA noted. 

• Work toward getting off the “treadmill” of car-loan payments, said McBride of Bankrate. Car buyers should aim to keep their vehicles as long as possible and drive them until they’re no longer reliable. That way, they can pay off the loan and then start using the cash that would have gone toward car payments to build savings. Ideally, they won’t have to finance their next car. “Buying expensive depreciating assets is not one of the markings on the trail to financial security,” McBride said.

• Remember that cheaper vehicles do still exist, though they’re harder to find than they once were. Examples include the 2024 Nissan
  NSANY,
  +2.15%
  Versa, which sells for a relatively inexpensive $16,130. Used hatchbacks and compact sedans can also be had for under $20,000. MarketWatch asked the Big Three automakers about the issue of affordability. Only GM
  GM,
  -1.45%
  responded, with a spokesman saying, “Our focus at GM is on satisfying customers at many different price points, including many new models we offer today below $30K.” 

• Understand your personal situation, and remember all of the costs associated with car ownership, not just the monthly payment. A new car may appear to be a manageable expense if you only look at the monthly payment, especially if those payments are made smaller by an 84-month loan, Meyer said. “Go into the car-buying process with an understanding of your budget, rather than hoping to be able to afford a particular vehicle.”