Are you thinking of purchasing a new car? While visions of family road trips, highway joyrides, and that new car smell may be filling your head, chances are you will have to think about something a lot less fun before you drive your new set of wheels off the lot: paying for it. Most Americans who live in cities where driving a car is necessary are also finding it necessary to take out an auto loan when they purchase that car: in 2015, more than half of all used cars and a full 85.9 percent of new cars were financed through a loan. Unfortunately, the rising cost of purchasing an often very necessary vehicle without proper preparation has also led to rising delinquency rates on auto loans in many states. If you’re thinking of purchasing a new car and taking out an auto loan, it’s important to understand the factors that go into determining your average monthly car payment so that you can determine what sort of loan makes the most sense for you.
Comparing Types of Car Loans:
There are two primary types of auto loans: direct loans and dealer financing. A direct loan is a traditional loan through a bank or financial institution, while dealer financing is a loan obtained through the dealership — sometimes referred to as "buy here pay here" (BHPH).
Factors That Determine Your Car Payment:
No matter whether you choose to obtain a loan through your bank or through the car dealership, your monthly payment will be determined by the same factors:
- Your income, credit score, and debt. Your debt to income ratio is an important factor that lenders use to evaluate your creditworthiness. If you have a high income and relatively low debt, you will be more attractive to lenders and may come away with better lending terms.
- Age of the car. It may seem counter-intuitive, but the newer the car, the better the terms of your loan could be. If something should happen that makes you unable to pay your loan and your car to be repossessed, the bank or dealership will have an easier time re-selling a newer car than an older car — and thus have more of an incentive to take a risk on backing this asset.
- The length of the loan. Shorter loans generally come with more favorable terms because it signals you have a higher ability to pay off your debts in a reasonable period of time. However, a shorter loan will generally come with higher monthly payments because you’ll be paying off the balance in a shorter amount of time.
- The size of the loan and the amount of the down payment. Putting down a large down payment signals to lenders that you are serious about this investment and may lead to a more desirable interest rate. A larger loan, especially if you have a high debt to income ratio, will likely come with a steep interest rate, while a small loan will likely come with favorable terms.
- Annual Percentage Rate (Interest Rate). The annual percentage rate (APR) is the interest rate you will pay each year on your loan. Loans on older vehicles generally come with higher interest rates because they have a lower resale value. A variety of factors go into determining the APR you will be offered, including your credit history, market conditions, and special offers. While it is uncommon to have an APR that changes over the life of an auto loan, pay attention to the fine print because a variable rate could cost you! Learn more at https://auto-loans-online.wixsite.com/theblogger/home/how-much-can-you-afford-when-it-comes-to-buying-a-car
