Labor Day is 'good timing' for car shoppers looking for a $400 monthly payment

By Venessa Wong

Holiday deals on financing can bring down payments on several popular car models to levels that more families can afford

Car dealerships looking to make room for new models this Labor Day will be offering incentives to help move vehicles - and that could mean opportunities for car buyers.

"For shoppers, this could be good timing as dealers may begin to feel the pressure to sell down the current model-year vehicles, especially for vehicles with significant 2025 model-year redesigns or other updates," Ivan Drury, Edmunds's director of insights, told MarketWatch.

These sales are welcome news for car buyers, who have faced affordability issues for several years as the average sales price on new cars rose to $48,424 and auto-loan rates ticked up to about 6.73% for new cars. These increases brought the average car payment up to $753 per month, according to Cox Automotive - far more than what most Americans can afford.

Personal-finance experts typically recommend that people spend less than 10% of their take-home pay on car payments. Based on typical household incomes and expenses, Cox Automotive Chief Economist Jonathan Smoke estimates that about half of households can afford only a $400 monthly car payment.

About half of car sales are financed, while a quarter are leased, according to data from Edmunds. While paying all cash is the most cost-efficient way to buy a car, it's a big purchase and only about one-quarter of car sales are all cash.

What makes a car affordable?

But the amount of the monthly payment isn't the only factor to consider when car shopping. While it's possible to get a lower monthly payment by taking out a longer-term loan, this can end up costing the buyer thousands of dollars more in the long run than a loan with a shorter term.

There are a range of recommended ratios when financing a car, but generally, financial advisers recommend putting down 20% and paying off the loan within four years. By contrast, the average car loan is now 67 months. Drivers can also get lower upfront costs and monthly payments by leasing, but do not build any equity.

Budget-focused shoppers seeking a $400 payment do have some options, even if they are few and far between in this market. While Americans usually default to larger vehicles, first-time buyers and families, in particular, are increasingly "gravitating toward cheaper options" such as smaller cars, Drury previously told MarketWatch.

Timing can be important, too

A slowdown in sales due to affordability issues has also left many dealers with "a glut of supply. As a result, we can probably expect many dealers to offer financing incentives [over Labor Day weekend] to help lower monthly payment costs for consumers," said Pat Ryan, chief executive of car-buying app CoPilot.

"The end of any month is usually a good time for consumers, as salespeople are looking to meet their quotas - so you may be able to get a good deal, particularly in the earlier part of Labor Day weekend this year," Ryan said.

Additional relief for car buyers may come after the holiday as well, as the Federal Reserve is widely expected to cut interest rates in September, which will likely lower auto-loan rates. Still, the anticipated quarter-point reduction by the Fed "might not be enough to send shoppers into the must-act-now camp" if they are holding off on buying due to long-standing affordability issues, Drury said.

Those who spot a good deal over Labor Day weekend "shouldn't necessarily wait," Ryan said. "The impact of a [Fed] rate cut on consumers will likely be more long term."

For those looking to buy a car this Labor Day, Edmunds recommends doing your research - setting your budget, reading reviews and doing a test drive - before the holiday. The dealership may be busy during the long weekend, which comes with longer waits for salespeople and the financing office.

"Ideally, you want to do your research and test drive before the holiday and close the deal on the weekend," according to an Edmunds report. If a holiday deal is still active, you can also wrap up the transaction on the first day after the weekend to avoid the crowds.

With that in mind, here are some car picks with payments of about $400, after accounting for Labor Day financing promotions, that CoPilot shared with MarketWatch. Deals can vary based on location, availability and the buyer's credit score.

2024 Kia Forte (Average price: $20,596)Incentive of 4.25% APR for 60 monthsMonthly payment of $305.31 with 20% down or $391.48 with 10% down

2024 Kia Soul (Average price: $23,475)Incentive of 4.25% APR for 60 monthsMonthly payment of $347.99 with 20% down or $420.15 with 10% down

2024 Nissan Sentra (Average price: $24,174)Incentive of 4.9% APR for 60 monthsMonthly payment of $364.07 with 20% down or $409.58 with 10% down

2024 Nissan Altima (Average price: $28,964)Incentive of 3.49% APR for 60 monthsMonthly payment of $421.42 with 20% down or $474.10 with 10% down

2024 Honda Civic (Average price: $28,433)Incentive of 4.9% APR for 60 monthsMonthly payment of $428.21 with 20% down or $481.74 with 10% down

2024 Toyota Corolla (Average price: $25,625)Incentive of 5.49% APR for 60 monthsMonthly payment of $391.48 with 20% down or $440.41 with 10% down

2024 Toyota Corolla Hybrid (Average price: $27,113)Incentive of 5.99% APR for 60 monthsMonthly payment of $419.24 with 20% down or $471.64 with 10% down

-Venessa Wong

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08-25-24 1400ET

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