Auto Loans

The average cost of a new vehicle in the United States is $33,560. The price of a new vehicle costs more than some people make in a year, and few individuals can spend that much on a single purchase without financing.

For this reason, many Americans need to get a loan before purchasing a new car. However, that can come with some risks. Because these purchases are so expensive, the loans can last for as long as eight years.

That is a long time to pay off a loan, which means you want to choose your loan carefully and understand all the intricacies of car financing. The information below will provide you with what you need to know about financing your car.

The Cost of Your Auto Loan

The total cost of an auto loan is determined by a number of factors. The two biggest factors are:

  • How much you need to borrow
  • The interest rate

Determining how much you need to borrow requires that you look at a number of elements. First, you need to take into account the cost of the car you are looking to buy. The more expensive a vehicle costs, the more money you will require to purchase it.

While a loan allows you to spread out payment over a number of months, you still have to be realistic about how much you can afford to pay per month and choose your vehicle accordingly.

Once you have determined how much you are comfortable with paying for the length of the loan, you should take into account the amount of money you are able to pay when you buy the car. This is called the down payment.

The bigger your down payment is, the less you will need to borrow, and thus the less your monthly payments will cost every month. A bigger down payment also makes it easier to get your auto loan approved, which in turn makes it easier to find a car loan with terms that are favorable to you.

The interest rate for your car loan, often expressed as the annual percentage rate (APR), is the amount of money that the borrower needs to pay the lender on top of the amount they borrowed. It is a percentage of the amount borrowed, and this percentage will vary based on a few factors.

One of the biggest factors is the borrower’s credit score. The average APR is 4.21% for a 60-month loan, and most APR rates usually vary between three percent and 10 percent.

Individuals with a credit score that of 760 or higher may be approved for a two percent interest rate on a car loan, while the average interest rate for an individual with a credit score of 500-589 is 15%.

If you have a low credit score, you have a few options. Your best option is to hold off on buying the car until you improve your credit score and qualify for a better interest rate. This gives you time to reduce your debt by making regular payments that prove your trustworthiness to financial institutions.

You may also consider consolidating your debt to help you manage it more efficiently. However, this will not be an option for everyone. If you need a car, you may not be able to wait. In this case, you will want to make the term of the car loan as short as possible.

This makes your loan more likely to be approved, and it reduces the number of months you will be required to pay a high interest rate.

Finding Pre-Approved Financing for Your Vehicle

It can be helpful to find financing for your vehicle before you shop for it. There are several reasons for it. First, it helps during the negotiation.

If you are shopping for a car at the same time you are shopping for financing, your salesman could draw you in with an impressively good deal on one of those items while holding back on extending you a better deal on the other item. Many dealerships may offer attractive deals on financing, but this can mean that you may not get the best deal on the auto you plan to finance.

That said, you do not need to find the perfect financing offer before shopping for a car. Simply being approved for any type of finance can push the salesman to find a deal that will be attractive. Pre-approved financing also helps your own position.

It reminds you of your budget and makes it harder for the seller to try and convince you to buy a car that is above your preferred range. This is especially important if you are a bad negotiator or you are buying your first car, as it simplifies the normal haggling process that occurs in dealerships.

How to Make Your Car Payments

Once you have purchased your vehicle and have obtained the right loan, you need to understand how the loan will impact your ownership of the car. First, you will usually be required to have insurance, as this protects both you and the lender.

If you do not have insurance, they may buy some that you are forced to pay for. This insurance protects them, but it does not protect you, and as they do not have an incentive to find a cheap insurance policy, the cost of their insurance can be undesirable.

You will also want to make your payment on time. A single late payment could cause you to be charged as much as $100. It can also negatively impact your credit. And while you can ask your lender to forgive a single late payment, the lender is only likely to do so if you have a good credit.

If your lender does not forgive the late payment, you will not simply miss that single payment. The next payment you make will apply to the one that you missed, which means you will continually be making payments one month late until you catch up. This can have a negative effect on your credit.

The further you fall behind on your car payments, the more likely your car is to be repossessed. 6.3 million Americans are a minimum of 90 days late on their car payments, which mean late payments are a common phenomenon that you need to be prepared to avoid.


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