What Is the Average Car Payment? What to Expect
Several factors affect your monthly car payment, such as whether the vehicle you’re buying is new or used and the amount of your down payment, among others. If you’re considering buying a car, it’s understandable if you want to know how much you’ll owe each month. In this guide, we will show you how payments are determined so you can plan ahead. With this information, you can effectively adjust your budget accordingly to ensure that you can make your payments on time.
Average Car Payment
Both car loan debt and monthly car payments are at an all-time high. Based on research by Experian , there are some $1.2 trillion in outstanding vehicle loans. What’s more, the average car payment for a new vehicle is over $550, while used car payments are over $390. Again, these are only averages, so it’s possible that your monthly car loan payment will be higher or lower. It’s important to know what you’ll be paying ahead of time, especially if you’re on a tight budget. If you’re close to paying off your car and plan on trading it in for a better one, it helps to ensure that you’ll continue owing similar monthly payments. In doing so, you can avoid budgeting issues. Conversely, you might be in a position where you’re making more money and can afford a significant upgrade. As always, you should thoroughly examine your budget to see what you can comfortably afford before committing to an agreement.
Determining Factors
As mentioned, several factors play a role in determining your monthly car payment. Let’s take a moment to discuss each one so you’ll have a better understanding of what you’re paying and why. Credit Score Your credit score gives lenders some insight into your spending habits and money management. As such, it’s usually the easiest way to determine whether a borrower will be a risk. Typically, the higher the credit score, the less risk to the lender. Moreover, there’s a good chance that you’ll qualify for a lower interest rate, bringing down your monthly payment. Conversely, a low credit score may cause your interest rate to skyrocket, thus increasing your monthly payment. Loan Size Knowing exactly how much money you are borrowing is vital. After all, it’s what you’ll be responsible for paying back. The amount of your loan equals the price of the vehicle, tax, interest, and fees. It doesn’t include your down payment and the value of your trade-in if you had one. Depending on where you got your car, you may also have to pay for an extended warranty and other service add-ons. Loan Term The term of your loan determines how long you’ll have to make repayments toward your debt. Typically, if you want a shorter term, you can expect to make higher monthly payments. On the other hand, a longer term will often ensure a lower monthly payment. You’ll want to keep in mind, though, that the longer your repayment term is, the more you’ll likely be paying interest fees. If you are concerned about being in debt and can afford a higher monthly payment, a short-term loan will be the better option. Income & Debt-to-Income Ratio Lenders will also consider your income, as it tells them your ability to repay your loan each month. However, it’s your debt-to-income ratio (DTI) that tells lenders the most about your spending habits. Your DTI is how much of your gross monthly income that you use to pay off debt. The lower your DTI percentage, the more likely it is that lenders will give you a lower interest rate and monthly payment. If your debt-to-income percentage is high, you can, fortunately, take action to lower it. Keep reading to learn the best way to go about this so that you get an affordable average car payment.
How to Get an Affordable Loan
As you can see, much goes into calculating your monthly car payment. Fortunately, you have some say in the result when you take control of certain factors. Let’s look at which components you can control and how they’ll affect your car payment. Car Cost Even though you might be approved to buy a pricier car, you may want to rethink things if it’s ultimately going to put you in financial straits. In short, just because you’re approved to buy a brand new car doesn’t mean you should. You can still get a nice vehicle and save a sizable sum of money at the same time. It’s understandable to want a brand new vehicle, as there are fewer mechanical risks involved. But if you’re not financially stable, it could end up costing you a great deal in the long run. If you are at all uncertain about being able to make your average car payment, it’s probably best to avoid a costlier investment. Down Payment Putting a down payment on your new or used vehicle can significantly lower your monthly payments and interest. If your goal is to pay as little as possible each month, it will behoove you to save up for a sizable down payment. Just don’t expend all of your savings to put down a bigger payment. Doing so could result in your being in even more debt, negating your efforts to the contrary. Credit Score As we just discussed, your credit score is one of the biggest contributing factors in determining your monthly payments. As such, it makes sense that you would want to work on improving your credit. You might not be in the best position to do this if you need a car as quickly as possible. However, if time permits, building your credit can have a big payoff when you’re ready to get new wheels. Both your interest rate and total monthly payment stand to benefit, thereby giving you financial freedom. Debt If you have current debt, it will serve you well to chip away as much of it as you can. If you remember, a lower debt-to-income ratio will go a long way in securing an affordable monthly payment. If you can afford to pay off debt, lenders will see that you can manage a higher loan and be more apt to accommodate you. If you’re unsure where to start, speak with a financial counselor before jumping into new debt. The last thing you want is to take on more than you can handle. Not only will your credit suffer, but you risk having your vehicle seized if you fail to meet your monthly agreement. Loan Term You might not be comfortable owing a steep monthly payment. If necessary, you can ask to be put on a longer term for repaying your loan. For many people, this is the easiest way to ensure a lower monthly payment. Just keep in mind that you’re going to be paying more in interest fees over the course of your loan term. If your goal is to get out of debt as quickly as possible, however, you’ll want to opt for the shortest loan term available.
Consider Your Finances
If you need to borrow money for a car, it’s important to consider your current financial responsibilities. This may seem like a no-brainer, but it’s easy to overlook a payment or two when you’re figuring out your average car payment. You, therefore, want to be thorough in your budget. You may want to speak with a financial counselor if you have difficulties managing your money. Taking on new debt when you’re already struggling with others might not be the wisest move without guidance. What’s more, you may discover that you’re better off purchasing an older model car in order to meet your financial commitments. Making some concessions now could help you become more financially stable later – where you can afford to buy the car of your dreams. You want to be certain that you can make your monthly payments on time. Failing to do so will negatively affect your credit score and put you in an even more difficult position. If you determine that you can’t comfortably afford to take on a new loan at present, you should consider other options.
Summary
Do you need assistance securing a loan? We can help! Feel free to reach out to our financial specialists . We’ll work hard to make sure that you get the best rate and term for your needs. You’ll also want to check out the rest of our blog section . We have a vast resource of articles that can help you get your finances on track, refinance your car loan , start a business, and much more. If you have any questions or would like to speak with someone about getting a loan, please don’t hesitate to contact us . We look forward to serving you! Sources https://www.experian.com/blogs/ask-experian/research/auto-loan-debt-study/ https://www.myfico.com/credit-education/credit-scores https://www.consumerfinance.gov/ask-cfpb/what-is-a-debt-to-income-ratio-why-is-the-43-debt-to-income-ratio-important-en-1791/