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Client Log InA Guide to Auto Loan Debt
Auto loans are nothing short of huge business in the United States. At the end of 2016, the aggregate amount of auto loans in the U.S. approached $1.2 trillion, with the average new car loan exceeding $30,000 and offering a duration of five to seven years. Given that auto sales comprise approximately 20% of all U.S. consumer spending, it follows that auto loans have become a significant driver of a record U.S. household debt level that now exceeds $12.7 trillion.
Auto Loans Debt Relief
Auto debt relief may include a debt consolidation or debt management program. Debt consolidation may reduce your payments on your auto debt. Instead of paying the auto debt separately, it would be included with the rest of your loan payments. A debt management plan may help you organize your debts and plan out the payback, including that of your auto debt.
Auto Loans Debt Help
Two Main Types of Auto Loans
Most auto loans charge a simple (as opposed to compound) interest rate based on the outstanding balance that is repaid on a monthly basis and offer the option to be repaid in excess of the standard monthly payment. The advantages here are twofold – as simple interest expense is always less than compound interest expense, and having the option of paying beyond the standard monthly amount represents an opportunity to reduce interest expense over the life of the loan.
Meantime, a pre-computed car loan is one in which total interest expense for the life of the loan is added to the principal borrowed and divided by the number of months of the loan to arrive at a regular monthly payment amount. Pre-computed car loans do not offer the borrower the advantage of paying back in excess of this monthly payment amount and are therefore almost always more expensive than simple auto loans.
Where to Go for an Auto Loan
The most common outlets for securing an auto loan are banks, credit unions and auto dealerships themselves. Working with a bank is often the best solution for getting the most favorable terms and lowest interest rate, though the process will likely take longer than working directly with an auto dealership. However, the convenience of working directly with an auto dealer comes with a price – as dealers are in the financing business to turn a significant profit – and the interest rate a car dealer charges will often be higher than that charged at a bank or credit union. If you are a member of a local credit union, that could represent a happy medium, as securing an auto loan there could prove both reasonably convenient and a good value.
Credit Requirements for Auto Loans
Though many lenders don’t have specific down payment requirements, depending upon your credit score, it can help significantly to make a down payment exceeding 10% of the automobile purchase price. Given that the value of a new car typically depreciates by over 10% as soon as an owner drives it home for the first time, making such a down payment reduces the lender’s risk and the probability that a borrower will owe more than the car is worth shortly following purchase.
If you are unable to make a significant down payment, you may want to consider an auto lease. Leasing does offer the appeal of a lower down payment and lower monthly payments, but comes with the major drawback that monthly payments won’t actually result in eventually owning the car, as is the case in monthly loan payments. Interest rates for auto loans are calculated inversely with credit scores, so those with excellent credit scores in the 700s can anticipate securing an interest rate at or below 4%. In fact, those with pristine credit scores above 750 should pursue zero-percent and low interest rate loans directly from dealerships.
A Few More Things to Know
However, if your score hovers in the mid-600s and below, you probably should avoid dealerships and work with a bank or credit union to secure a mid-single digit interest rate or even higher – possibly exceeding ten percent depending on the severity of the credit score weakness.
Auto loans are a form of secured debt, meaning that the vehicle will serve as collateral and can be repossessed in the event of non-repayment. Additionally, if you’re finding it difficult to secure a reasonable interest rate, try pursuing a short-term loan of 48 months or less, and be sure to avail yourself of all dealer incentives and rebates that can help reduce the overall cost of purchase. Finally, even if the interest rate on your car loan is high, look for opportunities to re-finance your auto debt following two years of making consistent monthly payments and any improvement in your credit score.
