Consumers are looking for affordable monthly car payments, and for good reason. Car loan balances are at an all-time high, according to a new consumer debt study from Experian, totaling $1.27 trillion in 2018. Not only that, but the average monthly auto payment, according to the study, hit a new record in 2018. It now hovers around $523.
And as those monthly totals go up, it might be no surprise that there’s an increase in the number of auto loans and leases that are past due.
Earlier this year, the Federal Reserve Bank of New York reported that more than 7 million Americans with auto loans were 90 or more days late paying their bill at the end of last year. That’s more than 1 million more late payers than in 2010 when the rate of troubled borrowers were at their worst, according to the Federal Reserve.
So, who are these troubled borrowers? According to the Federal Reserve, they are younger borrowers and those with lower credit scores.
About 4% of borrowers age 18 to 29 hadn’t covered their loan or lease payment in the last 90 days, according to the Federal Reserve. But older car buyers aren’t immune. The total number also is creeping up for older borrowers.
And more than 8% of people with credit scores less than 620 had not sent in a car payment in the last 90 days, according to the Federal Reserve. Often, these borrowers have signed so-called subprime auto loans. These loans are available to those with lower credit scores, but they typically come with higher fees and rates than traditional loans.
If you’re in the market for a new or used car or truck, here are three ways to help ensure you find affordable monthly car payments.
Consider the percentage
As you consider how much vehicle you can afford, the rule of thumb is generally between 10% to 15% of your monthly take home pay. But that percentage doesn’t just include your car payment. It also factors in other transportation costs such as gas, repairs and insurance.
The average cost of car insurance in 2019 is about $1,621 per year, or about $135 a month, according to NerdWallet.
Annual gas costs will depend on where you live and how much you drive. According to Business Insider, American spend between $400 and more than $1,300 a year on gas each year. AAA reports that it will cost about $1,186 a year to maintain and repair a new car.
As you consider how much car you can afford, it’s critical to add these other expenses into your calculations before you agree to a monthly payment at the dealership.
Think about boosting your credit score first
If your credit score is less than 620, your only choice when borrowing money for a car may be a subprime loan. While it may seem like an appealing option to those who desperately need a car, it’s not necessarily an affordable one.
Consider these numbers from NerdWallet’s car payment calculator:
A borrower with a top credit score of between 781 and 850 will pay an interest rate of just 3.68% on a new car. For those with a score of between 501 and 600, their average rate would shoot up to 11.89%, adding thousands more dollars to the total cost of the car.
It may be time to think about ways to boost your credit score before you buy a new car.
Another consideration to ensure affordable monthly car payments -- avoid financing through a car dealership if you possibly can. Always check with your bank or credit union before shopping for a car and see if they can pre-approve you for a loan. You will typically pay far less in interest through a bank than a car dealer, and that lower interest rate can make a huge difference in your monthly payment.
Consider other options
If your credit score is low and you already have trouble covering your other expenses, it might be worth considering alternative transportation options before you buy a new or used car.
Can you, for example, make do with what you have now? Are there public transportation options that will get you the places that you need to go? Can you trade in your current vehicle for a less expensive, but more reliable ride? Can you carpool to work?
When car shopping, make smart choices now to get the most affordable monthly car payments. It means you won’t face payments you can’t afford later.
The CESI Team is committed to helping you reach your financial goals. If debt keeps you from living the life you dream of, contact us for a free debt analysis today and get started on the road to a brighter future!
Consumer Education Services, Inc. (CESI) is a non-profit service provider of comprehensive personal financial education and solutions for all life stages and for all of life’s milestones. Our goal is enhanced economic security for everyone we serve.
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