Although car affordability has improved this year, prices are still much more than what the typical consumer can afford.
In an earnings call, Tesla CEO Elon Musk stated that the business is attempting to address "the fundamental affordability question" and that "the vast majority of people are living paycheck to paycheck." "It actually matters if the monthly lease or financing cost is $10 in one direction or another."
The New Tesla Models 2025
Tesla has expedited plans to produce more inexpensive EVs, but the firm chose not to comment on reports of an entry-level $25,000 model. It said this week that it will reduce the cost of its Model Y, Model X, and Model S automobiles by $2,000 each in the United States.
An auto-insurance app called Jerry just released a study titled "Car-ownership affordability crisis," which it claims consumers are facing. The average price paid by new automobile purchasers in March was above $47,000, as reported by Kelley Blue Book.
According to corporate materials, almost half of homes are able to make a $400 monthly payment. Car payments should not account for more than 10% of take-home income, according to a common budgeting guideline. "If a household allows for the reality of what housing costs are today and other forms of debt, ten percent is the max," Smoke stated. Middle-class households might consider $400 to be a "magic payment" level since they can afford vehicle payments between $300 and $600, he explained.
The FICO loan calculator shows that at the current interest rates for new automobiles, a buyer could only borrow up to $20,000 on a 60-month loan if they wanted to have their monthly payment close to $400.
Limited Options for Affordable Cars Spark Industry Reflection
According to Kelley Blue Book, by 2024, Americans would only have five choices for less than $20,000: the Nissan Versa, Hyundai Venue, Mitsubishi Mirage, Kia Rio, and Kia Soul. The Kia Rio and Soul were ranked as the top vehicles in that price range by U.S. News and World Report.
Nowadays, the average payment is $744, as per Kelley Blue Book. Although it is less than the $400 pricing range, which is "a sweet spot for a lot of first time buyers," according to Cox Automotive's head of industry research Mark Schirmer, the market is still underdeveloped. It was $795 in late 2022.
When borrowing rates were low, consumer demand for more expensive automobile models increased, and several manufacturers began developing more expensive models in 2021 and 2022 in response to the worldwide scarcity of computer chips. According to Schirmer, "it made sense to make your most profitable model or to favor profitability if you could only make a certain number of cars."
The increase in the cost of new automobiles has encouraged more people to purchase old cars, especially electric cars, which are now roughly half as expensive as they once were. 1.66 million used cars were sold by dealers in March, a 10.9% increase over the same month last year. However, the normal loan amount for a used automobile is around $27,800, and the interest rate on a used car is usually greater than that of a new car. Based on statistics from Edmunds, the average monthly payment for a used car is $549.
Automakers are observing a resurgence of interest in more affordable vehicles. This week, Ford informed investors that it hopes to turn a profit on an EV sold for between $25,000 and $30,000.
