Cars are fickle things that require a lot of maintenance. Oil changes, tire rotations, and yearly tune-ups are all part of owning a vehicle. Unfortunately, the financial aspect of purchasing a car can be equally fickle, especially if you’re in debt.
Debts are more of a factor than ever in purchasing a new auto: Experian just reported that Americans are borrowing more than ever for cars, even with the rise in interest rates. The average loan for a new vehicle stands at $31,099, while used vehicles hit a high of $19,598. That equals out to an average monthly payment of $515 for new cars and $371 for used. These amounts are based on the fact that auto loans are stretching over longer periods of time as well. New car loans average a length of 69 months, whereas used car loans are repaid over 64 months. That’s 4-5 years of payments.
Loans aren’t just becoming bigger and longer. More Americans are weighed down by auto loans than ever before. According to the New York Federal Reserve, 80 million Americans had car loans in 2012. By the end of 2017, the number of auto loans jumped up to 107 million. That’s an enormous increase over five years, and the number has worried economist by continuing to climb.
With numbers like these, you can’t afford to be frivolous in your vehicle purchases. After all, you’re trying to pay down debts while shopping for this new car. So how do you go about buying a vehicle the smart way?
The first step is to take a good hard look at your financial situation. Figure out what type of monthly payment you can afford and how much money—if any—you can pay down. The more you can put down, the lower your payments will be. Most importantly, it’s crucial to know your credit score. The average score for loans on a new car is 714, while used is 655. If you aren’t hitting these numbers you can still get a loan, but your interest rate could be much higher.
Next, do your homework on auto lenders. Don’t go for the first offer you can get. Shop around. The businesses with the best rates are often local banks and credit unions. And while dealerships may boast great interest rates with flashy signs and balloons, dealerships are rarely the best choice for loans. Despite this, 8 out of 10 consumers finance directly with the dealership and likely lose money in the process. A good solution is to shop for loans before you even begin the search for a vehicle. This will help you avoid the temptation of those slick-sounding loans offered by dealerships.
It’s important to negotiate the shortest-term loan you can afford. While the payments will often be higher on a shorter loan, the long-term costs are much lower. Simply put, the faster you pay off the loan, the less interest you’ll owe.
Buying a new car while in debt can be stressful, but if you take the time to research and do it right, you can be racing down the street in your (affordable, budget-appropriate) speedster in no time.