Is overspending on car loans becoming a problem? Americans purchased 17.6 million vehicles in 2016, and auto sales reached a record high for the seventh year in a row. The average purchase price for new cars and trucks came in at a cool $34,077, putting vehicle prices 2.7% higher than they were in 2015 and 12.6% higher than in 2011. Meantime, the average sticker price for a used car in 2016 was just over $19,000. 

For many consumers, paying that much out of pocket for a new car just isn’t feasible; financing is the affordable option. According to a new study from WalletHub, however, drivers in some cities are finding themselves much more overextended to purchase a new set of wheels. An unsavory mix of factors that pile on to car buyers is to blame. Understanding them can help you figure out how much it makes sense to spend on keeping a car in your garage.

Where Drivers Overspend on Car Loans the Most

The cities that rank in the top 10 for drivers who are overspending the most on cars are a mixed bag geographically. Four cities are located in Texas, but the rest are relatively diverse, geographically speaking. The rankings were determined by dividing the average car-loan debt by residents’ income. With that in mind, here’s how the WalletHub list shapes up, starting with the city that had the highest debt-to-income ratio for car loans.


Car-Loan Debt


Debt-to-Income Ratio

Ruston, La.




Williamsburg, Va.




Ellensburg, Wash.




Morgantown, W.Va.




College Station, Texas




Rio Grande City, Texas




Kingsville, Texas




Warrensburg, Mo.




Milledgeville, Ga.




Mercedes, Texas




At the other end of the spectrum are the cities where drivers are spending the lowest percentage of their income on a car. When you compare the two tables, what’s immediately obvious is that the overspending drivers earn significantly less than drivers who have the lowest debt-to-income ratio for car loans. In Scarsdale, for example, the city with the best debt-to-income ratio, driver incomes are more than eight times higher than those in Ruston, which ranked the worst for overspending. You'll also notice that most tend to borrow less, which likely means that they pay significantly higher down payments on their cars. (For more, see Car Shopping: New or Used?)


Car-Loan Debt


Debt-to-Income Ratio

Manhattan Beach, Calif.




McLean, Va.




Los Altos, Calif.




Lexington, Mass.




Bronxville, N.Y.




Chevy Chase, Md.




Saratoga, Calif.




Hoboken, N.J.




Cupertino, Calif.




Scarsdale, N.Y.




Poor Credit Contributes to Overspending

There’s another dimension to consider: the interest rates drivers are paying. In a separate report, WalletHub examined car-financing trends, specifically, how a car buyer’s credit impacts the overall cost of purchasing.

That study revealed several interesting findings. First, despite the Federal Reserve’s decision to raise the federal funds rate in December, interest rates for new cars are at their lowest point in the past three years. This was not what used-car buyers encountered: The average new-car loan charges 16% less interest than the average used-car loan. That suggests that used-car dealers may be more inclined to sell to subprime borrowers, whose credit scores don’t qualify them for the lowest, most favorable interest rates.

But bad rates didn't apply to every used-car buyer. The study also found that now is an opportune time for buyers with excellent credit to take on a used-car loan, as their average interest rate on such loans has fallen nearly 28% since the beginning of 2014. A buyer who only has a fair credit score, on the other hand, is likely to be charged more. On average a buyer with fair credit will spend six times more to finance a car, which adds up to roughly $6,400 in additional interest for a $20,000, five-year loan. (For more, see 6 Steps to Getting a Car Loan With Bad Credit.

When you look at the average credit scores by state, it becomes easier to see a clearer picture of what may be happening in cities where drivers are spending more on car loans. According to research from ValuePenguin, three of the states that rated the worst for overspending – Georgia, Texas and Louisiana – had populations in which at least 40% of residents were considered subprime. In contrast, some of the states that rated the best, including California, New York and New Jersey, had higher credit scores on average.

The Bottom Line

There are some basic conclusions that can be drawn from both the WalletHub studies and an examination of each state’s average credit scores. First, drivers with subprime credit are more likely to pay higher interest rates on car loans. Second, those drivers may also be taking on larger loans because they have less income to save toward a down payment. The end result is a much heavier financial burden compared to drivers who have higher incomes and better credit scores. 

If you’re planning on applying for a car loan anytime soon, there are two specific things you can do to land the best rate possible. First, check your credit report. Familiarizing yourself with what’s in your report can give you an idea of how likely you are to qualify for a loan and what type of rate you might pay. The second step is comparison shopping. Taking time to review loan offers from different lenders or financing companies can help you narrow down your options to the loan that best fits your budget.



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