U.S. auto sales in 2024 inched up just over 2% compared with the previous year.
Initial projections for 2025 painted a brighter picture, with some analysts expecting new vehicle sales to hit their highest level since 2019.
That optimism has since diminished, as new tariffs and economic uncertainty cloud the outlook — and considering last year’s sluggish market growth, Americans’ auto-related debt still surged.
The Federal Reserve Bank of New York’s recent household debt report shows that auto-loan balances climbed by $13 billion in the second quarter of 2025.
Regional trends vary widely, though. To understand how drivers are stretching their budgets, in a recent report, WalletHub analyzed median auto-loan balances across more than 2,500 U.S. cities.
Related: Dave Ramsey has blunt words for Americans buying a car
Buying a car presents opportunities — and potential mistakes to avoid
WalletHub acknowledged that buying a car is more complex than many everyday purchases.
“(Car buying) involves multiple steps and requires prior research, a reasonable budget and some negotiating skills,” the report stated. “But buying isn’t for everyone, either.”
The report raised a number of key questions, including:
- What are the most common mistakes people make when shopping for a car?
- Generally, what percentage of take-home pay should go to car payments?
Tackling the question about mistakes car buyers make, Barton College Professor of Economics John Bethune offered his perspective.
“The most common mistake is when people buy more car than they can comfortably afford. Virtually everyone that finances a car becomes upside down after it is driven off the lot. This is no big deal if you can easily make the payments but can become problematic if your funds are stretched too thin.”
Car buyers often overlook the hidden cost of long-term loans
Kim Vierra, senior instructor for personal finance and financial planning at OSU-Cascades (Oregon State University), focuses on long-term car loans as compared to shorter-term loans.
“While stretching payments over six, seven, or even eight(!) years may seem like a smart way to afford a nicer vehicle, it often results in spending more than necessary. Longer loan terms come with lower monthly payments, which can be tempting, especially when you’re trying to stay within a monthly budget. But here’s the catch: the longer you take to pay off the loan, the more interest you’ll pay overall.”
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Vierra offered her view about why short-term car loans are financially more beneficial in the long run.
“A car should be a tool that gets you where you need to go, not a financial burden that will follow you for a decade. By choosing a shorter loan term, you will not only save money but also gain financial freedom sooner.”
Vierra explained other risks of long-term loans and also some advice on smarter car-buying strategies.
More risks faced by people with long-term car loans
- Negative Equity (Underwater): You may owe more than the car is worth for much of the loan term.
- Maintenance Costs: As the car ages, repair costs increase — yet you’re still making payments.
- Limited Flexibility: Long-term loans can limit your future financial options.
Related: Scott Galloway has bold words for Americans on Social Security
Car buying strategies that make sense
- Choose the shortest term you can afford: Even if the monthly payment is higher, you’ll save overall.
- Make a down payment: This reduces the loan amount and total interest paid.
- Shop around for better rates: Credit unions and online lenders often offer more competitive terms than dealerships.
A take-home pay perspective for car buyers
Prospective car buyers can make poor decisions if they decide they want a specific car before they run the numbers, wrote Eric Young of the economics department at Loyola Marymount University.
Young would prefer it if people did not have a car payment at all. But he put a number on the percentage of take-home pay a person should tolerate for their monthly car loan payment if they do.
“You shouldn’t have a car payment. A shiny new car is a fine thing, but financing a depreciating asset with long-term debt isn’t the wisest move, considering the opportunity cost of the interest you’ll pay. That said, if you do finance your car purchase, aim for a loan term of four years or less, keep your monthly loan payment under 10% of your take-home pay, and keep your total car-related expenses (loan payment, fuel, insurance, maintenance, etc.) under 15% of your take-home pay.”
Related: Tony Robbins sends warning message to Americans on IRAs, 401(k)s
