A Quick Guide to How Much Car You Can Really Afford

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If you’re planning a car purchase, and even if you’re in the middle of financing your car, a few tips from financial experts can help you save money (and hopefully guard against becoming “underwater” on your loan).

Paying off a car is, of course, a highly individual process dependent on many different personal factors like credit score (you can view two of your credit scores, updated every 14 days, for free on Credit.com), financing rate, down payment, and how much you can afford to pay each month.

When budgeting, it’s also critical to consider expenses such as your auto insurance premium, gas, and maintenance into the total cost of ownership of your vehicle.

Still, there are some general guidelines that most people can follow:

  • Financing: Experts The Zebra spoke to said they recommend auto loans not exceed 10% (for just the loan) to 20% (for the loan plus related expenses like gas and insurance) of a consumer’s gross monthly income.
  • Timeline: You should take the shortest term you can afford for two reasons: Shorter terms come with lower interest rates and they allow vehicle equity to build faster, Bob Harwood, vice president of Carloan.com in Richmond, Virginia, said. Experts cited four or five years as the ideal balance of affordable monthly payments and reasonable total interest. If you have to spread your payments out over six years (72 months) or more to get monthly payments you can afford, you might want to consider a less expensive car.

“Your goal as a consumer is to decide what works best for your monthly budget so you can decrease the long-term expense,” banker Deric Poldberg from American National Bank in Omaha, Nebraska, said.

Hypothetical Financing

The Zebra asked three financial experts from around the country for their input about what type of loan over what time period a person living in Texas making $50,000 a year (the average statewide income) should expect to pay for a 2016 Honda CR-V LX (one of the most popular cars in the U.S.) for $23,000 (a little below the MSRP).

The Verdict(s): You’ll pay between $400 and $500 per month, depending on your credit and how quickly you can/wish to pay the vehicle back. Here are three ways of getting there:

  • Per Poldberg: “For this customer, the interest rate is going to be between 4.79% – 5.49% based on the U.S. average credit score (687). Because most people finance their vehicles for five years, that would lock our customer into a rate of 4.99% for 60 months, making the monthly payment $433.93. During the term of the loan the customer would end up paying an extra $3,035.97 in interest, bringing the total out-of-pocket expense to $26,035.97. Financing your vehicle for the least amount of time possible will save hundreds or even thousands of dollars in the long run, but often people just want a lower monthly payment and disregard the long-term cost of the loan. If you financed that same CR-V for the maximum 75-month term, you’d end up paying $3,820.11 in interest (quite a bit more). But most consumers just look at the low monthly payment of $357.60 and think it’s a better deal.
  • Per Rob Jupille, president of RTJ Financial in Santa Monica, California: “Assuming a relatively ‘normal’ level of other debt, when doing a budget, generally target your auto loan to be in the neighborhood of 10% of gross pay (excluding other auto-related costs like gas, maintenance, insurance, etc.) and put at least 20% down to reduce the likelihood of being ‘upside down’ on your loan. This way, you’d look for a monthly car payment not exceeding $400 and we’d recommend shopping for a combination of interest rate and term to stay within that number.”
  • Per Harwood: “Considering that your monthly car expense (including insurance, gas, etc.) should be no more than 20% of your take home pay, we can assume that an annual income of $50,000 translates to about $3,300 in take-home pay monthly after taxes. Budgeting around $250 for secondary auto expenses leaves room for a payment of around $450. For a consumer with decent credit, the $23,000 financed over 60 months at an interest rate of 6.9% lands the payment at $454 per month. (Of course, everyone should pay off their car loan as quickly as they can, but this is a realistically affordable scenario.)”

The bottom line: For a smart financing deal, pay the most you can for the shortest amount of time and after you’ve paid off your car loan, keep saving for your next car – or for a “rainy day.”

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The post A Quick Guide to How Much Car You Can Really Afford appeared first on Credit.com.

The Average New Car Loan Payment Is $499

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New car loans continue to set all kinds of records — average monthly payments are now essentially $500 — and a long-feared subprime lending bubble has yet to show signs of popping. But suddenly slumping auto sales raise plenty of questions about the overall health of the car sales market.

The car loan market expansion has been remarkable. Total outstanding loans have jumped from $840 billion in 2014 to just over $1 trillion last quarter, according to Experian’s latest State of the Automotive Finance Market report. The average monthly payments on new car loans is now $499, up from $483 last year. And the average new car loan size is up, too — $29,880, up $1,356 from last year’s $28,524.

Car sales have been juiced partly by the continued embrace of buyers with less-than-perfect credit. The fastest-growing segment of buyers are deep-subprime borrowers, who have the lowest credit scores, Experian said. Deep subprime borrower loan volume grew nearly 12%, compared to about 8% among other credit segments. Late payments among subprime borrowers have grown slightly, Experian found. Still, they represent only a tiny fraction of total outstanding loans, lowering the systematic risk to the auto market, Experian said.

“Automotive lenders seem to be keeping cool heads when it comes to how much risk they are willing to take with subprime and deep-subprime customers,” said Melinda Zabritski, senior director of automotive finance for Experian, in a statement. “Yes, subprime and deep-subprime loans are growing, but the entire market is growing from a volume perspective across all risk tiers. In fact, the subprime loans have actually dropped as a percentage of the total market. That, combined with only a slight uptick in delinquencies, makes clear that the sky is not falling.”

The sky might be falling on the auto sales market, however. Record auto sales and the strength of the new car market have been a big success story in the otherwise lackluster economic recovery.

But August turned out to be a bummer of a month for auto makers, with sales falling 4.2%. Lower sales hit all major manufacturers; many started waving the white flag in stories on the bad news, conceding that the years of record-setting sales may be over.

“We had a period of several years coming out of the financial crisis when growth in auto sales outpaced broader economic growth, and that period is over,” Bryan Bezold, Ford’s senior U.S. economist, told Bloomberg News. “We’re no longer in a period where we have a lot of pent-up demand.”

Used Cars Are Popular 

Sluggish new car sales don’t necessarily indicate any additional risk of an auto loan bubble that might burst. It will be tempting for auto lenders to move even deeper into the subprime market to keep up transaction volume, however — particularly as buyers abandon the new car market for other alternatives.

Drivers are clearly returning to the used car market in response to high prices and other factors. The average used vehicle loan reached an all-time high of $19,101 in Q2 2016, up from $18,671 in Q2 2016, Experian said. The average used car loan payment was $364 a month.

In a bit of a surprise, customers with good credit scores are now hustling to the used car market. According to Experian, 43.3% of super-prime consumers selected a used vehicle, which represents a 10% increase over 2015. Among prime consumers, 59.9% chose used, a 6.6% increase over the previous year.

“One of the biggest trends we continue to see is the shift to used vehicles by customers with excellent credit,” Zabritski said. “As vehicle prices continue to rise, savvy consumers are looking for ways to control costs. That appears to be pushing more customers toward used vehicles.”

Overall, used vehicle loans also reached a new peak, accounting for 55.61% of all vehicle loans during Q2 2016.

Used car loan terms are also up, with the average loan term now lasting 63 months (the average new car loan is 68 months). Long-term used car loans are generally a bad idea, as drivers are often upside-down on the car loan throughout its life — meaning it has no value at trade-in. Also, used car loans have far higher interest rates — the average new rate is 4.82% versus 8.97% for used — so the costs of borrowing for five years or longer is much higher.

Drivers are looking for other ways to lower monthly payments, too, as vehicle leasing continues to surge — in both new and used car markets. New car leases jumped from 26.92% last year to 31.44% this year. Even used car leases, while still rare, are growing fast. Last year, they represented 3.26% of all leases; this year, that rose to 3.71%, Experian said.

Remember, having a good credit score can help you spend less on a vehicle since it will generally qualify you for the best interest rates. You can see where your credit currently stands by viewing two of your scores for free each month on Credit.com. And, if you’re credit is looking second-rate, you may be able raise your scores by paying down high credit card balances, limiting credit inquiries and disputing errors on your credit reports.

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What Is the Average Used Car Loan Rate?

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More people are opting to lease their new set of wheels instead of purchase them, according to Q1 2016 data from Experian.

The number of auto loans grew to an all-time high, with leasing surpassing 30% of all new consumer vehicle sales. But the interest rates consumers are getting on these loans has stayed low, especially for used cars. In fact, Experian reported that average loan rates saw some increases, but still remain historically low.

Loan rates for a new car in Q1 of 2016 was 4.79%, up from 0.08% a year prior. Franchise used rates are 7.81% (down from 8.03% in Q1 2015) while independent used rates are 12.22% (down only 0.01% from Q1 2015).

The Experian Automotive scoring deems prime consumers as those with scores of 661 to 850, nonprime users with scores of 601 to 660, and subprime users as those with scores of 300 to 600. Consumers on all risk tiers are increasingly choosing to lease over purchasing cars, according to the report.

The number of prime consumers choosing used vehicles increased from 31.5% in Q1 2015 to 36.3% in Q1 2016. The number of nonprime and subprime consumers also saw increases, from 30.1% to 34.2% and 22.5% to 27.2%, respectively.

Experian reported that the increased number of prime consumers choosing used vehicles resulted in “score increases, greater percentages of used financing in the prime risk tier and lower average used rates.”

Getting a Car Loan

If you’re thinking about buying a used car and taking out an auto loan to do it, it’s a good idea to review your credit first. Having a good credit score can help you qualify for better terms and conditions on your financing. (To find out where your credit stands, you can see two of your credit scores for free, updated each month, on Credit.com.) And when you’re figuring out how much you can afford, remember to consider not only how much your monthly car payment will be but also how much the loan will cost you in the end, by considering the interest rate and length of the loan term. (The longer the loan term, the more interest you will pay.)

If you aren’t happy with what you see, don’t worry — you may be able to improve your credit scores by paying down any big credit card balances, disputing errors and limiting credit inquiries until your score has had time to rebound.

[Offer: Denied from a loan? It may be because of a low credit score due to errors on your report. Lexington Law can help you navigate the credit repair process so you can get back on track. Learn more about them here or call them at (844) 346-3296 for a free consultation.]

More on Auto Loans:

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The post What Is the Average Used Car Loan Rate? appeared first on Credit.com.

What Is the Average Used Car Loan Rate?

average-used-car-loan-rate

More people are opting to lease their new set of wheels instead of purchase them, according to Q1 2016 data from Experian.

The number of auto loans grew to an all-time high, with leasing surpassing 30% of all new consumer vehicle sales. But the interest rates consumers are getting on these loans has stayed low, especially for used cars. In fact, Experian reported that average loan rates saw some increases, but still remain historically low.

Loan rates for a new car in Q1 of 2016 was 4.79%, up from 0.08% a year prior. Franchise used rates are 7.81% (down from 8.03% in Q1 2015) while independent used rates are 12.22% (down only 0.01% from Q1 2015).

The Experian Automotive scoring deems prime consumers as those with scores of 661 to 850, nonprime users with scores of 601 to 660, and subprime users as those with scores of 300 to 600. Consumers on all risk tiers are increasingly choosing to lease over purchasing cars, according to the report.

The number of prime consumers choosing used vehicles increased from 31.5% in Q1 2015 to 36.3% in Q1 2016. The number of nonprime and subprime consumers also saw increases, from 30.1% to 34.2% and 22.5% to 27.2%, respectively.

Experian reported that the increased number of prime consumers choosing used vehicles resulted in “score increases, greater percentages of used financing in the prime risk tier and lower average used rates.”

Getting a Car Loan

If you’re thinking about buying a used car and taking out an auto loan to do it, it’s a good idea to review your credit first. Having a good credit score can help you qualify for better terms and conditions on your financing. (To find out where your credit stands, you can see two of your credit scores for free, updated each month, on Credit.com.) And when you’re figuring out how much you can afford, remember to consider not only how much your monthly car payment will be but also how much the loan will cost you in the end, by considering the interest rate and length of the loan term. (The longer the loan term, the more interest you will pay.)

If you aren’t happy with what you see, don’t worry — you may be able to improve your credit scores by paying down any big credit card balances, disputing errors and limiting credit inquiries until your score has had time to rebound.

[Offer: Denied from a loan? It may be because of a low credit score due to errors on your report. Lexington Law can help you navigate the credit repair process so you can get back on track. Learn more about them here or call them at (844) 346-3296 for a free consultation.]

More on Auto Loans:

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What Credit Score Do I Need to Get a Car Loan?

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Having a bad credit score can seem like a huge obstacle when you want to make a large purchase, and in many situations, it’s a deal-breaker. For example, getting a mortgage with a credit score lower than 600 (on a 300 to 850 score range) would be extremely difficult in the current market. With auto loans, things are a bit different.

“There is not a minimum score I could say,” said Rich Hyde, chief operating officer of Prestige Financial, an auto lender. “There are many lenders, many different opportunities, and there are many factors that go into an auto loan other than your credit score.”

Those things include your debt-to-income ratio, income-to-payment ratio, employment history and past experiences paying auto loans. Your ability to get a car loan also heavily depends on the kind of car you’re trying to finance, how much it costs and how much of a down payment you can make. The overall cost of the loan will vary depending on your monthly car payment and the loan term. Given the right mix of these elements you can still find auto financing despite having bad credit.

In the last few years, consumers with lower credit scores have increasingly found access to auto financing. In the last quarter of 2015, loan borrowers buying new vehicles had an average credit score of 711, down from 712 the previous year, according to data from major credit reporting agency Experian. (Experian uses the VantageScore 3.0 model, which has a scale of 300 to 850.) That average has gone down 6 years in a row, from its peak of 736 in 2009. People buying used cars tend to have lower credit scores than those buying new, but those borrowers’ average credit scores are also down from the in-recession peak of 659. In the fourth quarter of 2015, the average credit score on a used loan was 649, up a point from last year.

“We’re seeing the market kind of flatten out a bit,” said Melinda Zabritski, Experian Automotive’s senior director of automotive financing. “More consumers with lower credit score [are] able to get financing. Really the market has returned to what you would see pre-recession.”

Applying for Auto Loans

With so many auto lenders out there, each with a focus on different credit tiers, the issue with auto loans isn’t so much getting one as it is finding one that’s affordable. The lower your credit score, the higher your interest rate will likely be, and you’re probably also going to be limited in how much you can borrow.

If you want your pick of vehicle and auto financing, shoot for a credit score in the 700s, Zabritski said.

“Anything over 700, you’re much more likely to have a wide variety of offers, and typically if you’re above 720, typically you get the best offers,” she said. That’s when you start seeing incentives like 0% down or a promotional financing period.

Many common credit scoring models allow you to shop around for auto loans and count multiple inquiries in a short period of time as a single hard inquiry on your credit report. (Lots of hard inquiries can hurt your credit score.) Before you start looking at cars, see where your credit stands to get an idea of how you might look to a lender. You can see two of your credit scores for free each month on Credit.com. If your score is in bad shape, you may be able to improve your credit by disputing any errors on your credit report, finding out why your score is low and coming up with a plan to address those problems.

Once you are ready to secure financing, take the time to compare various offers to make sure you find a deal that’s best for your short- and long-term budget.

More on Auto Loans:

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