Nov 19, 2024
Transportation once came with relatively basic costs. Not anymore: the average price of a new car in the U.S. has skyrocketed to $50,000 — just $9,000 less than the average annual salary.
Affordable new models under $20,000 have all but vanished from dealer lots, pushing many buyers toward used cars. While prices for used vehicles are falling, high loan rates remain high.
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Why can’t automakers produce budget-friendly new vehicles anymore? The answer might be found in a perfect storm of rising production costs and the industry’s shift toward electric vehicles (EVs) and SUVs.
Why affordable cars are disappearing
A decade ago, budget-conscious shoppers could easily find sedans and reliable hatchbacks for under $20,000. Buyers may have had to settle for cheaper models, with manual windows and cheap seats. But those have all but disappeared as automakers shift their focus to more profitable SUVs and trucks.
The transition to EVs isn’t helping: Automakers are investing billions in new technologies, including advanced batteries and in-car software — expensive innovation that’s passed to buyers.
Production costs have also risen. Aluminum prices have increased, and labor costs have been affecting vehicle prices. Economy cars historically operate on razor-thin margins, making them less appealing to manufacturers compared to high-margin SUVs and luxury vehicles. Additionally, tariffs on Chinese automakers — which could theoretically fill the gap with affordable imports https://www.experian.com/blogs/ask-experian/what-is-the-average-length-of-a-car-loan/ limit competition in the U.S. market and help keep prices high.
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Reshaping consumer behavior
As vehicle prices climb, Americans have longer loan terms with higher rates to afford them.
Today, the average auto loan is about 68 months — nearly six years — making monthly payments more manageable but increasing the total cost due to interest. With interest rates now exceeding 6% for many borrowers, financing a car can add thousands of dollars to the price tag. For example, a $40,000 car financed over 72 months at a 6% interest rate will cost nearly $52,000 — including sales tax, registration and other costs — by the time the loan is paid off.
Sales of cars priced at or below $25,000 have fallen by nearly 80% in the last five years, according to the Kelley Blue Book. Automakers offered 36 car models within that price range, as of five years ago. That number dropped to 10 in 2023. Kelley said cars priced at $60,000 and up jumped 163%.
“This trend induces automakers to focus on profitable products for consumers who can afford to buy, which keeps less affluent consumers out of the new vehicle market altogether and limits what is available and possible in the used market for years to come,” said Jonathan Smoke, Chief Economist for Cox Automotive, the parent company of Kelley.
The struggle to build budget cars
While the market demand for SUVs and EVs has reshaped priorities, producing affordable cars comes with challenges.
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Building economy vehicles requires significant cost-cutting, which can compromise quality and features. In a competitive landscape driven by innovation, automakers are hesitant to introduce stripped-down models.
The push for EV adoption also limits resources for developing low-cost, gas-powered vehicles. EV battery technology is expensive, and manufacturers are focusing on scaling production to meet emissions regulations and consumer demand. Until battery costs decrease significantly, EVs are likely to remain priced above what budget-conscious buyers can afford.
International competition could theoretically lower prices, but Chinese automakers face heavy tariffs when entering the U.S. market. The incoming Trump Administration is signaling it has no plans to let up on Chinese tariffs.
Shopping around for loans through banks, credit unions and online lenders can yield better terms than what dealerships offer. Some automakers also provide promotional financing for specific models, though these deals are often limited to higher-priced vehicles.
Ultimately, navigating today’s auto market requires a strategic approach. By comparing financing options and exploring incentives, buyers can mitigate some of the challenges posed by soaring car prices and high loan rates. While affordability may feel out of reach, taking the time to research and negotiate can help ensure that purchasing a vehicle aligns with both your needs and your budget.
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Chris Clark is a Kansas City–based freelance journalist covering personal finance, housing and retirement. A former Associated Press editor and reporter, he writes plainspoken stories that help readers make smarter financial decisions.
