Rochester Voice 1:14 p.m.
Friday, June 6, 2025 1:14 pm

With the average auto loan debt as high as 44% of the median income in some states, the personal-finance website WalletHub today released its report on the States Where People Overspend the Most on Carl Loans to highlight where consumers are struggling.

To identify the states where people overspend the most on car loans, WalletHub divided the median car-loan debt by residents' income in each of the 50 states and the District of Columbia.

To view the full report and your state's rank, please visit:
https://wallethub.com/edu/states-where-people-overspend-the-most-on-car-loans/148623


"With vehicles having become progressively less affordable in recent years, many consumers have unfortunately been forced to take out auto loans that are too large relative to their incomes. Borrowing too much for cars has led to many people having trouble paying back their debts as a result. This is evident in the fact that the states where the average auto loan debt is the highest relative to the median income are also among the states with the highest auto loan delinquency rates."
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"Mississippi is the state where people overspend the most on cars. Mississippians have the eighth-largest average auto loan debt, at $20,816, while also having the lowest median household income, at $46,865 per year. As a result, the average car loan debt in Mississippi is 44% of the median income, the highest ratio in the country. For comparison, the average auto loan debt in the District of Columbia is only 18% of the median income."

- Chip Lupo, WalletHub Analyst


Expert Commentary

What tips do you have for consumers looking to buy a car without putting a strain on their finances?

"Before buying a car, try a 'test run' of the financial commitment. Spend a few months setting aside the exact amount you expect your monthly car payment to be. This simple habit does two important things: first, it shows you how the payment fits into your actual budget - if you find it hard to set aside that money, the car may be more than you can realistically afford. Second, it helps you build a down payment while you wait. A larger down payment can lower your loan amount, reduce interest costs, or even help you qualify for better financing terms. During this trial period, also track related costs like insurance, gas, and maintenance to get the full picture. By planning ahead and testing the impact, you'll make a smarter, less stressful purchase - and possibly end up with a more affordable and sustainable vehicle choice."
Stephen Heath - Professor, College of San Mateo


Is leasing a smarter option than buying? Why?

"Leasing a car might seem appealing because the monthly payments are often lower, but it's important to look at the bigger financial picture. When you buy a car, your loan eventually gets paid off - meaning one day, you'll own the car outright and no longer have monthly payments. With a lease, payments never stop if you keep leasing, and you never build any equity. It's like renting - you're always paying for something you don't own. Over time, this can cost significantly more than buying, especially if you maintain your car well and drive it for many years after the loan ends. Owning also gives you the flexibility to sell, trade in, or keep the car long-term. Leasing often comes with mileage limits, wear-and-tear charges, and other fees that add up quickly. If you're thinking long-term and want to get the most value for your money, buying usually makes more financial sense."
Stephen Heath - Professor, College of San Mateo


What are the most common mistakes among car buyers?

"When buying a car, it's essential to negotiate the right things - specifically, the price of the car, the interest rate on the loan, and the length of the loan term. Never base your negotiation on the monthly payment alone, which is the mistake many buyers make. While a low monthly payment might seem attractive, it can hide the true cost of the vehicle and lead to predatory lending practices. Dealers can manipulate the numbers by extending the loan term or inflating the interest rate, making the monthly payment appear affordable while dramatically increasing the total amount you pay over time. Focusing only on the monthly payment can also prevent you from seeing how much you're really paying for the car or whether you're getting a fair deal on financing. You may end up overpaying for the car or locking yourself into a long-term loan that leaves you owing more than the car is worth - a situation known as being 'upside down' on your loan. Instead, start by negotiating the purchase price of the vehicle, just like you would any other major purchase. Then shop around for financing options, comparing interest rates and loan terms. By understanding and controlling each piece of the deal, you protect yourself from hidden costs and long-term financial strain."
Stephen Heath - Professor, College of San Mateo

"Many car buyers do not realize all of the associated costs that accompany buying a car. Some examples of additional costs include car insurance, mandatory liability insurance in some states, higher costs to repair after the warranty expires, the cost of the car loan, and higher gasoline prices, depending on your location."
Dr. Sandra Poirier - Professor, Middle Tennessee State University


What percentage of take-home pay should a consumer preferably aim for on a car payment?

"A common guideline is that your car payment should be no more than 10 - 15% of your monthly take-home pay. While this can be a helpful starting point, it's not the most reliable way to determine what you can truly afford. That's because incomes and financial obligations vary widely from person to person. For someone with high fixed expenses - like rent, childcare, or debt payments - even 10% may stretch the budget too thin. On the other hand, someone with minimal expenses might comfortably spend a bit more. A better approach is to do a 'test run.' Before buying a car, set aside the amount you expect your monthly car payment to be for a few months. See how it impacts your budget, whether you're able to save, cover your bills, and live comfortably. This not only helps gauge affordability in real-life terms but also gives you a head start on building a down payment."
Stephen Heath - Professor, College of San Mateo


Tips for Saving Money on Car Loans

1. Buy a used car: Since used cars are less expensive than new cars, you won't need to take out as large of a loan, and your down payment will go further. However, interest rates on used cars can be higher than those on new cars, so make sure that you will actually end up paying less in the long run before signing a loan.
2. Make a larger down payment: The more money you're able to put toward the car upfront, the less you'll have to borrow, which means you'll also pay less interest over the life of the loan. In addition, the larger your down payment is, the lower your interest rate is likely to be.
3. Get a shorter loan: Paying your car loan off over 24 months will require much higher monthly payments than paying it off over 72 months, for example. But you'll also accrue far less interest, saving yourself potentially hundreds or thousands of dollars.
4. Practice good budgeting skills: In preparation for buying a new car, strive to set aside money in your budget each month toward a down payment or future installment payments. It's also a good idea to build an emergency fund you can dip into if you suddenly need a new car or car repairs. In order to build a significant amount of savings, you may need to at least temporarily cut back on some luxury spending.
5. Shop around: Different car dealerships can have vastly different prices for cars. You should also consider a variety of different car models if you're not loyal to a particular brand. In addition, you may want to shop for cars around holidays when dealerships tend to offer big money-saving promotions.