Cars were once a financial engine of America’s middle class. Now they’re a ‘wealth killer.’

In other words, many people aren’t just spending a lot on cars — they are also losing a lot on them.

The average selling price for a new car in September was more than $47,000; for used cars, it topped $27,000, according to data from the car-buying site Edmunds. Even nine-year-old cars were selling for nearly $15,000 on average.

As a result, the average monthly payment on new cars is now over $700, and nearly one in five monthly payments now exceed $1,000. The average used-car payment has risen to about $550.

For most Americans, these costs are too high. Based on average incomes and expenses, the typical U.S. household can afford a $400 monthly car payment, Cox Automotive Chief Economist Jonathan Smoke said last year.

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Cars, like housing, have become a financial burden for many Americans struggling with rising prices overall. “It really is what’s keeping the middle class [in the] middle class,” Jade Warshaw, a financial coach and co-host of the Ramsey Show personal-finance podcast, told MarketWatch of people’s car payments.

While cars are a practical necessity in many parts of the U.S., many people also see their vehicles as a trophy for their hard work. “I 100% understand that,” Warshaw said. But “the truth is, the car doesn’t serve any purpose in a wealth-building journey — because it’s a depreciating asset.”

Carrion, the Wisconsin mother, receives public assistance for food and child care, making the car her second-biggest expense after rent. If her car payment were lower, she said, “I’d be saving [the extra money] for sure.” She noted that she has about $500 in her emergency savings account at the moment.

Although the majority of Americans use cars to commute to work, many personal-finance experts argue that car owners today are paying off large debts on these depreciating assets for too many years, reducing their ability to save and invest thousands of dollars that could help them build wealth during that time.

When people need to trim budgets to achieve savings, retirement and debt-payoff goals, their car payment should be the first thing they look at, Warshaw said. She noted that if a person was able to save and invest the equivalent of the average monthly payment on a used car ($549) into an index fund that tracks the performance of the stock market — which has increased by an average of 15% annually over the last five years — they could have grown that money to nearly $50,000 over that time.

“When a car payment eats up that much of your paycheck, it can be tough or even impossible to save, invest, or start building and maintaining an emergency fund,” Tori Dunlap, the founder of Her First $100K, a personal-finance media platform geared toward women, told MarketWatch in a statement. “And it comes down to a tough choice — the financial health they need or the car they rely on.”

For example, to cope with high prices, more car buyers are taking out longer loans: 18.5% of loans are now for a term of 84 months, up from 14.2% in February 2020. Based on the average amount financed on a new vehicle — $40,888 with a 7.1% interest rate — an owner pays almost $9,000 in interest with a 69-month term. According to Bankrate’s auto-loan calculator, someone with an 84-month loan would pay more than $11,000 in total interest. Five years ago, when car prices and interest rates were lower, the average interest paid over the life of the loan was closer to $5,800, according to Edmunds.

From the archives (August 2024): Car loans could get cheaper after a Fed rate cut. But when will car prices drop?

“A car can be a necessary purchase, but the high costs associated with financing and maintaining a vehicle can keep people in a financial cycle that’s hard to break,” Dunlap said.

Brian Preston, co-host of the Money Guy Show podcast, called cars “wealth napalm” in an episode earlier this year. While people need reliable transportation, many car buyers’ “eyes get bigger than their wallet,” said co-host Bo Hanson, noting that having debt on depreciable assets stunts efforts to build wealth.

Radio and podcast host Dave Ramsey, who often comments on American consumers’ unsustainable car-buying habits, said in one episode: “The way you know someone’s going to stay middle class is when they have two very nice cars that are obvious $500, $600, $700 payments sitting in front of a middle-class house.”

These influencers generally advise that people buy used cars instead of new — and, if possible, set aside savings specifically for a car so they can pay with cash. Many encourage car buyers who need financing to put down about 20% so they borrow less. It’s best, they say, to agree only to a monthly payment that is below 10% of take-home income on a loan that can be paid off in three to four years.

Yet such advice sits in stark contrast with the reality of how people pay for their cars today. Many can’t pay in cash: In the second quarter of this year, 80% of new-car buyers and 36% of used-car buyers used financing, according to Experian.

And despite well-intentioned budgeting guidelines, low-income households who own a vehicle still spend 38% of their net income on transportation, according to the Bureau of Transportation Statistics. For most of them, there is no other option, as “owning or having regular access to a car is necessary for daily mobility and economic security,” according to a 2023 Transportation Research journal study about car ownership among low-income households. About 45% of Americans have no access to public transit. And for daily commuting, using ride-hailing apps like Uber likely costs even more than owning a car, according to Rocket Money.

As car ownership continues to drag down Americans financially, there is little hope the situation will improve for those who need relief now. If implemented, President-elect Donald Trump’s proposed tariffs could further worsen affordability, auto-industry researchers say.

Experts on the auto industry, who have warned about affordability issues for years, do not expect prices to fall meaningfully in the near future. First, it takes years for automakers to shift production. “Automakers typically work on a three- to five-year cycle,” Erin Keating, executive analyst at Cox Automotive, told MarketWatch. “[They] cannot just immediately switch back around.”

It is possible for carmakers to start planning lower-cost vehicles with fewer features that still eke out a profit. But based on Americans’ historical preferences, automakers “also know that once interest rates go down or people are feeling better about the economy … they’re going to want the nicer, bigger vehicle,” said Ivan Drury, Edmunds’s director of insights.

Car prices shot up over the last few years as a result of pandemic-related supply-chain disruptions, the global chip shortage, and higher raw-material and energy prices, as well as “rising borrowing costs and wage bills due to inflation,” according to a report by Bain & Co. Automakers got through “the supply shortage by focusing production on the highest-margin models and raising prices.” Their average profit margin shot up from 4.9% in 2019 to 8.5% in 2023, the Bain & Co. report said.

These manufacturing issues then increased demand for used cars, leading to higher prices in the used-car market as well.

When car buyers started taking out longer loans in response, it worsened problems with negative equity, a term that refers to when owners owe more than the trade-in value of their cars. That’s because in the earlier years of a loan, most of the monthly payment goes towards interest, and it only starts meaningfully chipping away at the balance later on. Meanwhile, the value of the car keeps declining each year.

As loans get stretched out for longer periods, as they have been the last four years, people are now owing more on the loan than the car is worth for longer periods of time, said Edmunds’s Drury. If an owner trades in their car — including if they are trying to trade down to something cheaper — any remaining balance that they can’t pay off gets rolled over into a new loan, which perpetuates affordability issues.

In the third quarter, about one-fourth of trade-ins toward new-vehicle purchases had negative equity, according to Edmunds, and about 22% of consumers with negative equity owed more than $10,000.

Even car owners with manageable payments are making big financial compromises to own a car. A resident in the outskirts of North Carolina’s Triangle area who just bought a new $34,500 Toyota GR86 is one example. The 32-year-old, who asked to be identified by only his first name, Grant, said his old paid-off 2007 Subaru that his parents handed down to him “was struggling.” So he put down 25% on the Toyota, financed the rest at 5.49% for 48 months, and now has a monthly payment of $547 — roughly 9.5% of his and his fiancé’s take-home pay.

Although Grant tried to follow the well-known affordability rules of thumb and benefited from a good credit score, the couple’s total vehicle expenses are still above the recommended 10% level when including gas and insurance. But “there’s no mass public transit here,” and his commute to work is 50 minutes by car, Grant said. “I just had to bite the bullet, and figured if I keep waiting, [a new car would] only go up in price more.” To minimize the impact of the new car on their monthly budget, he plans to sell his discounted company shares from his job’s employee stock-purchase program, which he could otherwise keep invested.

Many inflation-battered Americans have been holding off on buying a car, and the average car on the road is now a record 12.6 years old. Many people are still trying to save up for a vehicle by deferring vacations and cutting back on basic necessities, according to an Edmunds survey — even medical procedures. Others plan to work more hours.

Yet others are borrowing more than they could reasonably pay off as certain lenders loosen standards. The Federal Reserve recently noted an increase in auto-loan delinquencies, specifically on those originated since 2022, and said this is primarily a result of larger loan amounts rather than higher interest rates.

The Fed report also noted that as borrowers demanded larger loans, certain lenders “appeared to relax their credit standards,” as subprime and near-prime borrowers account for almost all delinquencies. As banks pulled back on auto loans, independent finance companies — which are not affiliated with carmakers and tend to focus on riskier borrowers — stepped in and accounted for a higher share of delinquencies.

Used cars often save people thousands of dollars, and for those looking to buy new, there are dozens of models for sale that may be more budget-friendly, said Cox’s Keating. He noted that there are about 37 models for sale now for less than $35,000, including the popular compact SUVs Chevy Trax and Toyota Rav 4. (About one-third of new cars sold in July were $35,000 or less, including 6% that were $25,000 or less, according to Edmunds).

At any price point, people should “take time to research low-interest financing options and compare lenders to find the best rates,” Dunlap said. Banks or credit unions may offer better rates, for example.

There are also some low-cost lease deals right now, particularly for electric vehicles, Keating added. The electric Nissan Ariya, for instance, can be leased for as little as $169 per month, according to the carmaker’s website. Personal-finance experts warn that leasing typically ends up costing more over the long term, especially if a person never gets out of the cycle of having monthly payments — but “if affordability is truly the challenge and they need a car today, there are some really good options in electric vehicles,” Keating said.

Even those who can afford their car payments are looking for lower-cost alternatives. Seattle resident Colin O’Keefe, who pays $600 a month for his Hyundai Tucson, describes it as “a terrible value” and “a hassle,” despite his payment meeting the 10%-of-income affordability standard. Because he works from home, he only uses the car a few times a month when he and his wife want to go someplace that isn’t accessible by electric bike or public transit, or when the weather is bad.

O’Keefe prefers to use his e-bike, which cost $1,200, and wishes there were better infrastructure for other kinds of vehicles besides cars. “There’s a ton of incentive: I don’t have to pay for parking, it’s much cheaper, it’s much more enjoyable, I’m seeing my neighborhood more,” he said of shifting to the electric bike. “I’m seeing the people out in the world more.”

In many parts of the country, “you do feel like you have to have [a car],” particularly if you have children, he conceded. Nonetheless, O’Keefe said, the actual value of car ownership today compared with what most people are paying for it “is just way out of whack.”