Buying a new or used car with a loan is becoming even more important for consumers as car prices continue to rise. In the fourth quarter of 2016, the average amount borrowed to pay for a new vehicle rose by more than $1,000 to reach $30,621, according to Experian. The average loan for a used vehicle during the same period was $11,292. With such large amounts of money at stake, it is essential to get the best loan available for your financial situation when buying a car.
One of the biggest mistakes a car buyer can make is not knowing their credit score before they begin the financing process. According to research from LendingTree, 59.1 percent of Americans don’t know their credit scores. Buyers with less-than-perfect credit end up spending up to six times more to finance a vehicle than those with excellent credit. A better credit score will enable you to qualify for a better rate on your car loan, leading to you paying significantly less for your car over time.
While there are various products using the name “credit score”, the most widely used credit score in the United States is the Fair Isaac Corporation (FICO) score. FICO Scores are calculated from many different pieces of credit data in your credit report and rank-orders consumers by how likely they are to pay their credit obligations as agreed. Most of the major credit card companies provide their customers with access to their official FICO score as part of their account benefits. You can also get your credit score from www.myFICO.com for $19.95.
It is also important to correctly evaluate your ability to make the payments before signing any car loan documents. If the payment amount will eat up most of your available disposable income, a single financial hiccup could derail your ability to repay the loan. According to Experian, 2.44 percent of borrowers were 30-days delinquent on repaying their loan in the fourth quarter, a slight increase compared to the same period in 2015. The percentage of loans with 60-day delinquencies saw a minimal increase to 0.78 percent.
Most car loans are secured by the vehicle itself, so if you cannot make the payments on your loan, you may find your car repossessed. This gives the creditor the right to take back your car without going to court or warning you in advance. No refunds are given for repossessions, so you will lose the car and lose all of the money you paid for it. There may even be a device installed on the car that allows it to be remotely disabled when the borrower falls behind on repayment.
Because financing a car means committing to a monthly loan payment for a period of time, your monthly budget plays the biggest role in deciding how much to spend on a car. In order to minimize the chances that the cost of the car will create a financial hardship, use the following metrics to assess affordability.
- You should be able to put at least 20 percent of the price down as a down payment.
- The total monthly vehicle expense should be no more than 10 percent of your gross monthly income when principal, interest, and insurance are included.
- The payments should be affordable with a loan term of no longer than 48 months.
Since a car is one of the biggest purchases you’ll ever make, you’ll want to carefully weigh all of your options. Take your time, shop around, and see what possibilities are available to you. With the wide range of cars available at various price points, you are sure to find one that you can love for years.
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