The automotive industry thrives on the demand for buying new vehicles, but not everyone can afford to buy a new automobile on their own. This is where car loans come in; they are a decent way to get one’s hands on a vehicle without paying all the money at once. All this sounds great, but what’s the downside? Every loan comes with its own fees, interests, and other elements that one has to deal with over the course of the repayment:
The collateral generally used for auto loans is the automobile itself. Opting for secured loans means a lower APR than the unsecured options, which might save money in the long run, but an inability to repay the loan may lead to repossession of the automobile.
2. Loan repayment and interest rates
Regarding loan payments made by Americans in 2017, the average loan amount for a new car was over $31,000, which comes to over $500 per month. The interest rate for a new car could be as low as 5.11%, depending on the borrower’s credit scores. On the other hand, used car loans averaged out at over $21,000, resulting in an average monthly payment of almost $400 and an average interest rate of 7.68%.
When it came to independent dealers, the average loan amount for a used car was $17,000 at over $300 per month and an 11.48% interest rate, almost double as compared to a loan on a new car.
3. Credit score requirements
In order to get the lowest rates and fees, most auto loans have an eligibility list where the credit score is usually the most important factor. Auto lending is most prominent among consumers with credit scores between 601 and 780. A credit score of 707 is considered to be okay and somewhere in the middle, but having a lower credit score does not automatically mean that you cannot get an auto loan. An important factor considered by auto loan companies before issuing a loan is the borrower’s credit scores. Many credit unions, banks, dealerships, and online lenders provide various options among auto loans.
4. Loans through banks vs. credit unions
Numbers reveal that people prefer banks when it comes to getting a car loan. A total sum of over $350 billion dollars is what the banks were dealing with when it comes to open car loans in 2017. Next comes the credit unions that have an auto loan balance of over $300 billion, followed by captive auto companies at over $250 billion and finance companies at close to $190 billion. The total active loan amount was over a staggering $1.1 trillion!
In order to ensure that one is not caught up in the vicious cycle of missing their car loan payments, it is necessary to take care of the credit score. Managing the finances responsibly and efficiently can get one a better credit score, resulting in stronger negotiating power, higher lines of credit, and, most importantly, lower interest rates. Be smart, look at the terms of the auto loans carefully, and have contingencies ready in case things do not go as planned.