Car prices and profit rates down, but monthly payments aren’t. Here’s why.

The average American’s ability to afford a recent car has never been more challenging and more complicated to address than it is correct now.

That’s because the issue is more nuanced than mere sticker shock, experts said.

On the surface, there are reasons for optimism. Automakers are offering recent vehicles for seemingly affordable prices of around $25,000, such as the Chevrolet Trax subcompact SUV, for instance. And the average swap worth consumers have been paying to buy a recent car has been sliding lower in recent months. According to Edmunds.com, the average swap worth from January through November 2024 was $47,465, a 0.8% reduce 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 shock, given that the average swap worth then was $37,310.

In addition, the Federal safety net has cut profit rates, which should make borrowing money for a recent car cheaper. And, with higher recent-car inventory on dealer lots now compared with a few years ago, many carmakers have been offering incentives.

Yet affordability of recent cars continues to be one of the biggest challenges the industry faces in 2025, industry watchers declare.

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“It’s a large, 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 issue comes down to how most car buyers define affordable, which often depends on a lot of factors beyond the manufacturer’s suggested retail worth pasted on the window.

“The way we view consumers encounter 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 profit 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 settlement on a recent car higher.

“So affordability is not just MSRP and average swap prices: It’s monthly payments,” Jominy said.

According to J.D. Power’s data, the average monthly car settlement in November 2024 was $740, $15 more than November 2023. It is a whopping $150 more than the average monthly car settlement in November 2019. The average annual percentage rate on a recent 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 view a $2,000 swap worth drop from November of 2022 to November of 2024, then that monthly settlement should be $28 less per month. But during that period, we saw vehicle average swap prices leave down $2,000 and monthly payments leave up $24. So something else is going on.”

What can consumers can actually do

Part of the issue 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 boost” in MSRP. Then, with weaker trade-in values, the monthly car settlement remains high. In addition, car buyers don’t desire longer loans, which could assist lower their car settlement.

“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 issue lies in what the industry defines as affordable, he said. Often it’s tagged as the cheapest vehicle in the lineup, but for sure consumers that vehicle might as well not even exist.

“If you require a three-row crossover for your household, consumers don’t worry if you have an entry-level hatchback. Consumers require to discover their vehicle that fits their budget in that three-row crossover segment,” Jominy said. “That’s the other test of it. You could probably shift down a segment, but if you really require a three-row crossover, you can’t really leave down to a compact crossover.”

Opting to contract

In December, during its 2024 final approximate media briefing, Cox Automotive elder Economist Charlie Chesbrough said one of the large 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 boost comes from electric vehicles because carmakers are applying the $7,500 federal responsibility 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 contract, he said.

“Folks are actually going out and buying that vehicle and trying to finance it and finding that the monthly settlement is just a little bit out of reach,” Chesbrough said. “Leasing is pulling over a few purchasing customers because that leasing monthly settlement is usually less than that purchasing settlement. 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 alternative out there.”

Also, compact cars, compact SUVs and subcompact SUVs saw gains in trade distribute whereas midsize SUV, midsize car, and packed-sized trucks all lost trade distribute.

More:Consumers shift to smaller, cheaper vehicles in 2024 as affordability reshapes auto trade

“Not coincidentally, the vehicles that had the biggest gains this year also had the lowest worth 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 desire to keep the functionality, but they require to discover a lower worth point.”

Reasons to buy now, reasons to wait

Still, Cox experts forecast that with growing recent-vehicle inventory, affordability will enhance this year and that 2025 will be the best year for the trade since 2019. It forecasts recent-vehicle sales reaching 16.3 million units, a 3% boost from 2024, but said profitability will continue to be squeezed. Still, the customer and economy are expected to be well and back growth.

One prediction is that the holdout buyers from years ago might finally profit to dealership lots, said Ivan Drury, Edmunds’ director of insights. His hunch is based on seeing average trade-in ages boost. In December 2024, the average age of vehicles traded in for a recent car was 5.7 years ancient, up from a low of 4.5 years ancient back in December of 2021. 

The excellent information for buyers re-entering the trade is that inventory has improved, which has eliminated dealers’ ability to mark up prices over sticker like some did during the post-COVID supply chain shortage.

“There are two major deterrents for consumers,” Drury said. “Average swap prices have increased at a nearly exponential amount (since 2019) and profit rates for recent cars are looking more like used cars even as we anticipate more Fed (profit 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 expense of those tariffs to buyers.

“But consumers who aren’t feeling pressured might advantage from automakers’ attempts to sell down outgoing model-year inventory and effectively kick the recent year off with a bang,” Drury added. 

Some car buying advice for 2025

If you do choose to get a recent ride, you can receive steps to buy wisely. First of all, Jominy recommends that if you contract a vehicle, do not put any money down. It’s tempting to put down, declare $2,000, to get a smaller monthly settlement, but do not do it.

“You don’t desire to put any money down on it because if you total your car, any insurance will only cover the worth of the vehicle, and you’re out that investment,” Jominy said. “I don’t ever put anything down on a contract.”

Keep in mind that many recent cars now are equipped with recent safety features and technology that might expense 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 recent cars these days, but they certainly are more expensive,” Jominy said. “So do your homework before you leave to a dealership.”

By homework, he doesn’t cruel to just research the vehicle and all its features. Jominy said to research your own capital rating and discover out what profit rate you qualify to get and then secure a loan at the best rate you can discover before ever going to the dealership.

“capital unions propose some of the best deals out there, and will get you the best rates,” Jominy said. “A lot of consumers seem to depend, ‘If I display up with all money, I’ll get a great deal.’ Dealers make money by securing your capital, so you might not get a deal. But if you recognize your creditworthiness and the best profit 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 arrive in: A dealer with one Toyota RAV4 on the East Coast might have 5,000 buyers for it and can expense 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 ponder we’ll stop talking about affordability in 2025. We have a ways to leave. Look how quickly our payments have risen, $150-plus since pre-COVID. If car monthly payments remain where they are and don’t match wage growth, affordability will remain a topic.”

Contact Jamie L. LaReau: [email protected]. pursue her on Twitter @jlareauan.