If you were to guess what the average new car price is nowadays, what would you guess? I guessed $23,000, since my Honda Fit is sweet for an economy car and only costs $19,600 new. Given I’m frugal, leaving a 20% upside pricing buffer seemed logical. Too bad I was way off!
According to the valuation analysts at Kelley Blue Book reported the estimated average transaction price for a light vehicle in the United States was $37,876 in 2021. Expensive! Back in 2020, the average new car price was almost $38,000.
It gets worse. According to Edmunds.com, the reported that the average new car price is over $39,950 in 2021. That’s nut! The average new car price has risen partially due to production shutdowns and supply chain issues during the global pandemic.
For 2022, the average new car price is definitely over $40,000. With inflation running at over 8.5% and continued supply chain issues, the cost of a new car will likely remain elevated. Thankfully, used car prices are finally fading in 2022 after surging since the pandemic began.
I guess we must all be quite wealthy because I don’t know many people with a median household income of $68,000 who can afford such an average new car price.
What’s also surprising is that the average used car price has skyrocketed as well. Due to the pandemic, more people are buying used cars and taking less public transportation.
Related: Is It Possible To Use A Credit Card To Buy A Car?
The Average New Car Price Is Crazy High
Take a look below at the most popular car brands and models on the market today and their prices. The data comes from Kelly Blue Book to get the average car price of $37,876 for 2020. Again, the average new car price in 2022 is over $40,000.
It really seems absurd that the average new car price is $37,876 according to Kelly Blue Book. However, who am I to deny their millions of data points? It’s what so many people who read my 401k by age chart do when they aren’t on track. They go in denial.
I’ve come to accept the reason why the average new car price is so high now is because demand is so strong and the average American is so rich! Forget the great recession and the pandemic. The economy is booming and people have money to spend. If people weren’t cashed up, prices would fall instead of rise to astronomical levels.
Below is a chart showing the average new car price of $39,950 and the averaged used car price of $23,169 in 2021. Mainly due to inflation and continued innovation, the average new car price continues to increase.
Related: What Your Car Says About Your Investing Style And Money Making Acumen
The Average Price Of Used Cars
Here’s a more amazing stat. The average price of used cars is up even more! Due to supply-chain issues, the pandemic, and greater demand, there are simply not enough cars to meet demand.
You could literally lease or buy a car for three years and come out even based on a 40% increase in used car prices.
The Average New Car Buyer Is Rich
Given everything is rational, we can also assume the average new car buyer makes around $200,000 a year, or 5X $40,000, based on a 50% discount to my 1/10th rule for car buying.
If all new car buyers followed my 1/10th rule, they’d all be making ~$400,000 a year. But, I’ve still got a long ways to go to convince people not to throw too much of their money down the toilet, despite Financial Samurai being around since 2009.
With so many people from public train janitors to 26 year old programmers to food bloggers making $250,000+ a year today, $190,000 a year for the average new car buyer can’t be too far off.
There’s a bull market in the stock market. Meanwhile, real estate prices have recovered to pre-crisis levels and then some in some cities like San Francisco, LA, and New York City.
Don’t Spend Too Much On A Car
To spend more than 20% of your gross salary on a car when you could be making mega bucks investing is completely irrational. Nobody I know would choose owning a new car over being able to retire years earlier.
Besides, those who don’t make $190,000 a year will simply buy a used car for less. That’s what I did for all but one of the previous cars I’ve owned. Everybody knows that a car is one of the worst financial independence inhibitors.
Therefore, it’s clear that all new car buyers are making around $190,000 a year. Used cars buyers make much less because cars depreciate very rapidly.
Take a look at the chart below. In five years, a $30,000 car is worth about $12,000 using an average depreciation rate. Therefore, one can rationally assume the average buyer of a $12,000 car is making ~$60,000 a year, very near the median household income today.
Average Auto Loan Size Is Absurd
Unfortunately, it turns out that most new car buyers are probably not making anywhere close to $190,000 a year. The reason why I know this is because the average auto loan is now $30,032!
Holy hell. Who on Earth goes out and buys a $38,000 car and then borrows $30,032 of it? Are consumers really that financially irresponsible? Borrowing lots of money to buy a depreciating asset is the best way to financial destruction. At least when you borrow money to buy a house, the house has a chance of appreciating long term.
The last salvation of hope for Americans is that maybe the $30,032 loan is paid back over a very short period of time, like 1-2 years. Nope. The average term for an auto loan is 68 months (5.7 years) – the longest average term ever! In case you’re wondering, the average auto loan payment per month is $503, for a total payment of $34,204 over the 5.7 years.
The Opportunity Cost To Borrow Money To Buy A Car Is High
The $30,032 borrowed today for a car would be worth ~$50,293 in 10 years. This is based on a 5.3% annual growth rate if invested in the S&P 500 instead. If we use a 7.2% growth rate for the S&P 500, the $30,032 invested would be worth $60,140 in 10 years. Opportunity cost is truly a car buyer’s worst enemy.
Even if the borrower decided to invest his average auto loan monthly payment of $503 in the S&P 500 for 68 months, he would probably have over $40,000 invested given 68 X $503 = $34,204.
Is there any wonder why those who are frugal or follow my 1/10th rule for car buying end up much farther head financially than those with zero financial discipline? In 10 years, the $34,000 car will be worth less than $10,000 due to a ~70% depreciation schedule. The investor of the $30,000, however, could have investments worth 5-6X more!
What’s Bringing Up The Average Car Price?
It still baffles my mind that the average net car price is about $38,000 in the new decade. As someone who drove a $8,000 used Land Rover Discovery for 10 years and more recently, a $20,000 Honda Fit, the average new car price of $40000 figure is hard to grasp.
Undeterred, I kept on looking for a reason for such a high average new car price when I came upon the SF Bentley dealer and their new Bentayga SUV for $235,000 MSRP, $250,000 nicely equipped.
The car sales people told me they can’t keep them in stock because demand is off the charts. It’s the same for their colleagues at the Ferrari, Lamborghini, Mercedes, BMW, and Maserati dealers.
In other words, forget about the top 1% who can barely afford a $250,000 vehicle. It’s the super rich who have gotten super richer due to the raging bull market!
The top 0.1% are converting more of their funny money into real assets before it all goes poof like the last downturn. The super rich are also seeing folks like George Michael die at 53 with mega millions. As a result, they’re telling themselves to live it up while they still can.
Money Out The Tail Pipe
So there you have it. The super rich and the middle class who don’t read Financial Samurai are spending like there’s no tomorrow. The super rich don’t care about rising interest rates. They pay in cash or lease vehicles as a business expense.
The middle class don’t care if they’re spending a lot for a new car because they don’t know any better. Eventually, the middle class will get crushed again, but for now, let the good times roll!
If you have a business, you might want to consider getting a heavy SUV or truck so you can deduct it’s cost. This is one way the typical American business owner can lower the cost of a new car.
Achieve Financial Freedom With Real Estate
Instead of spending money on the average new car price, invest in real estate instead. Real estate is my favorite way to achieving financial freedom. It is a tangible asset that is less volatile, provides utility, and generates income.
The easiest way to invest in real estate is through a publicly-traded REIT, private REIT, or real estate syndication. Take a look at my two favorite real estate crowdfunding platforms. They are free to sign up and explore:
Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eREIT. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing. For most investors, investing in a diversified eREIT is the way to go.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations and higher rental yields. 18-hour cities also have potentially higher growth due to job and demographic trends.
I’ve personally invested $810,000 in real estate crowdfunding across 18 projects. My goal is to take advantage of lower valuations in the heartland of America. My real estate investments account for roughly 50% of my current passive income of ~$300,000.
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The average new car price will keep going up post-pandemic due to supply bottlenecks. Inflation is likely going to last longer. Therefore, it’s important to invest to ride the inflation wave while keeping prices down.
It’s very similar here in the UK with the average new car price at approximately £25,000 (US$ 35,000).
One of the craziest statements I have heard from someone who was borderline broke, was “a new car was all I could afford”.
So they purchased a 10K car and lost about 2K driving it off the forecourt.
But at least they could afford the payments.
They just see the monthly repayment figure, which soon adds up to the equivalent of buying a half-decent used car within just a few months.
Our current car we purchased at 3 years old and paid cash.
I hope my kids do something similar as the eldest is coming up to the driving age. Save up £1K and pay in full. Start saving for the next one.
I question this entire article since you said a Honda Fit is “sweet”.
It is pretty sweet for its class. I also think my Range Rover Sport is sweet too. Can’t wait to see what the newly redesigned 2022 model has for us.
Related: Own One Car For Dough, One Car For Show
As others have noted: Stupid packages, utterly useless and completely unreliable “technology”, plus the requirements for same promulgated by our “benevolent OverLords” have not only driven acquisition costs through the roof, but maintenance costs as well. I’m “done” with new cars, I don’t want the stupid “technology” – I don’t want to pay for it, I don’t want to maintain it, and I certainly don’t want to deal with it. I refuse to own a vehicle with a screen in the dashboard.
I’ll keep driving my 36 year old Mercedes Diesel. No microprocessors, no exploding dashboards, no touch screens, no garbage, no stupidity. Cheapest car to own/run I’ve every had!
Obg! It’s like you read my mind. I’ve been backing up without a camera for over 30 years. I just bought a 2020 Subaru Crosstrek. Can’t wait to get rid of it. I think my next car might be a 57 Chevy
Apparently, our OverLords think that Americans can’t back up safely. Unfortunately, they’re probably right as everyone has their face glued to a stupid smartphone – something else I refuse to have anything whatsoever to do with!
Nothing wrong with new technology, as long as it doesn’t interfere with driving and it works right (is it possible???). Simple is best, I agree. Bought a 2003 Toyota Tacoma standard cab 2WD in 2009 with 33K miles. Paid $7700. Has 83K now, and have never had an operational problem with it. It’s a keeper.
Exactly!!! And if something’s goes wrong I’ll fix it myself! I’ll rebuild this whole damn car if I have to… Model T still running strong 100 years later!
I was wondering what a chart of joy/pleasure of ownership/driving of an automobile is vs. price but could not find anything. I was thinking that an AMG Mercedes is not 5 or 8 times more pleasurable than a Mazda3 or something like that, maybe 2 or 3x but probably not more.
I read another financial guy’s blog and he was/is so proud of his old Honda CRV with a driver’s side window that doesn’t work, no air conditioning and other things.
Here is the thing. None of you know if you are going to survive until retirement. You want to drive a POS so you can retire early, have at it. I buy used cars generally and they have worked well for me. I am very mechanically inclined, so that helps a lot. Bought a new 2013 hyundai Santa Fe. It has been flawless. So, I will spend some money on things I enjoy while I am here. Oh, we live out in the middle of nowhere so no public transit. Never will be.
I’ve owned a couple of Hyundai’s in my years. I love this brand. Amazing quality in manufacturing.
“Nobody I know would choose owning a new car over being able to retire years earlier.”
Choosing to never retire helps the math. I do have a few rainy day funds but don’t ever see myself not working.
I remember going to bar trivia pre-pandemic, and there was a question about average car cost. Everyone else in my group wanted to say 20-25k, but I stuck to my guns with an answer of 35k, because I knew the high value vehicles would bring that figure up a bit. My point is that even though for most people, cars are a purely rational thing, they are not for some people. Logic should apply to HOW you pay for it (interest, budget), but not necessarily WHAT you buy. People buy plenty of things they enjoy– RVs, boats, pools, vacations, etc. Think I’m in the minority here (seeing a lot of frugal/puritan types), but I think you should buy what lets you live your best life so long as it works with your other financial plans.
How true that is. Went into cardiac arrest at 41yo (42 now). And while I’d love to think we will all be around until we are 83, it just isn’t so. Life is short.
Nothing more pathetic in my book than someone that skimps and scrounges their whole life to die with 5 mil in their bank account. Love don’t cost a thing (if you believe that), But all the other cool stuff in this world sure does. So yep, my advice is don’t be frugal sometimes.
Moral of the story. Balance in all things is good.
May I ask the reason for going into cardiac arrest at 41? Glad you are OK.
I’m 44 now and am trying to stay in shape, but it is a struggle.
I’ve always found the used car versus new car a tough one. I initially bought used cars. I had a used Subaru that I got for just under $10,000. It had 90,000 miles on it at the time. The engine went out after a few years and it was worth about $5,000 at the time so I pulled the trigger and spent a large part of the value to replace it. The engine went out again after a month and the shop said they would work with me. Ended up paying about the same cost for the second engine. I spent about $10,000 that year on the vehicle and ended up paying more for that car by the end of its’ life then I would have if it was purchased new and the repairs were covered on the warranty. I had a similar issue with a Toyota Camry where the seller lied about flood damage and the door fell off, I spent a ton on that car fixing it. There was a used Plymouth Voyager where the A/C went out after the first week. We did better on that car but fix-its persisted. I spent $6,000 on fixing a 2005 Toyota Sienna in the past two months because things kept falling apart. Why would I spend more on a car than it was worth? It broke three separate times and each time there were different issues. Cars are a crap shot, I’ve bought two new cars in my life and I financed them for cheaper than the used ones. The Toyota was 0% financing. I’m going to drive the new 2015 Toyota Sienna into the ground, the 2014 Ford Focus maybe not. I’ve been through a double-clutch every 20,000 miles because Ford designed the 2014 poorly and I may not want to put up with that lingering issue. That said, all repairs were free under the warranty. It has been easier for me to budget a new car that doesn’t hit me with surprise fix-it costs than the rough luck I’ve had with used cars. I’ve also looked at some of the depreciation schedules on used versus new cars. Look at a three year old Rav4 versus a new one $20,280 at our dealership for a 2018 with 42,985 miles on it or buy a new 2021 Rav4 for $26,000 to $27,000. This is effectively $2,000 of depreciation a year. The $6,000 in savings can get eaten up fast with things like a timing belt and new tires. Not everyone has great luck or has an uncle who sells them a cheap used vehicle every few years. There are a lot of decisions people make when buying a vehicle and used vehicles have by far exceeded the 1/10th rule for people.
In 2009 I bought a barely 3 year old Porsche Cayman S for 35k$, all cash. God, times have changed.
How in the world do u supposedly make $250,000 a year? Especially being retired? We’re you born with a silver spoon or did you achieve this outrageous amount of alleged income on your own? Because I would love to figure out a way to make half that and I’d work if I had to but would love to make that retired as you somehow do!! What’s your secret?
Took a while. See these posts:
The Secret To Your Success: 10 Years Of Unwavering Commitment
The First Million Might Be The Easiest
How To Build Passive Income For Financial Independence
Paying cash = appetite control.
Helps you say no to all the add ons and be happy with what you have.
Cash brings a sense of pride when you realize many people driving around status symbols are actually just driving the banks car.
Financing removes you from the actual cost/value balance and makes your financial thinking about cars fluffy and irrational.
Even though several have argued that it is better to finance at 1-2% and invest rather than pay cash, I cannot help but wonder
(1) did you still get the same car you would have bought with cash and
(2) how many people actually invest that entire sum of $ instead of get a new itch and spend it elsewhere (I know I would)? Seems like a risky business.
My thought is that the best ROI is paying cash because that creates the most likely scenario that you will buy reasonably, avoid the trap of expensive luxuries, negotiate aggressively, and not overspend.
I think you are right. When you pay cash rather than finance, it is easier to compare to your salary, and judge whether it is worth it. I have to work long and hard to save 45K. I’m not blowing it on a car.