People Are Paying More Than Ever for Their Car Loans
The average monthly payment for a new car was $474 in the first quarter, the highest it’s ever been since Experian Automotive started publicly reporting the data in 2006. The average new auto loan term has also increased to a new high of 66 months.
Longer loan terms lower the borrower’s monthly payments, but that can lead to paying more in the long run, as the loan accrues interest. Of loans originated in the first quarter, 24.9% of them had 73- to 84-month terms, which is up 27.6% from the first quarter of 2013. On top of that, drivers are borrowing more: The average new vehicle loan was $27,612, nearly $1,000 more than at the start of 2013. In a news release about the data, Experian Automotive’s Senior Director of Automotive Credit Melinda Zabritski said it makes sense for loan terms to lengthen as vehicle prices rise, but borrowers should make sure they’re balancing short- and long-term affordability when considering their options. Thinking about monthly payments rather than overall cost is one of the worst mistakes car buyers make (here are some others).
“The benefit of a longer-term loan is the lower monthly payment,” Zabritski said. “However, the flip side of that is consumers can find themselves paying more in interest or being upside-down on their loan if they seek to trade their vehicle in early. It is definitely a choice that consumers will want to weigh carefully before making a final purchasing decision.”
The ultimate cost of an auto loan will depend on several factors, like the value of the vehicle and how much cash you can put down on it, so you should go into the purchase knowing your budget and what you can pay out of pocket. You’ll also want to have an idea of your credit standing.
It has gotten easier to access a new vehicle loan since last year: The average credit score of new auto loans originated in first quarter 2013 was 722, and this year, it was 714 (on the VantageScore 3.0). Lending standards may be easing, but average interest rates rose, from 4.47% to 4.54%.
The lower your credit score, the more likely it is you’ll have a higher interest rate, and with a long loan term, that interest rate could translate into paying more than you expected. Well before you head out car shopping, check your credit scores and see if there’s anything you can do to improve them in the short term. You can get two of your free credit scores (including the VantageScore 3.0) on Credit.com.
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