Borrowers with low credit standing should be cautious when taking out auto loans
Historically, people with low credit had difficulty financing a new or used car. In recent years, auto lenders have made it far easier for people with subpar credit to get a loan, but there are some caveats to consider before signing on the dotted line.
People having trouble repaying auto loans
Consumer Reports notes auto loans in 2018 averaged approximately $31,000 for new cars and $20,000 for used cars. It turned out many people couldn’t pay back these loans. By year’s end in 2018, over 7 million American consumers fell behind their car loan payments by 90 days or more. This number was 1 million more than the previous highest number of defaults that occurred in 2010 at the wake of the U.S. financial crisis. While lenders have made it easier for people with “subprime” credit standing to buy a car, this doesn’t mean it turned out well for them.
Be cautious when taking out auto loans
If you’re looking to buy a new or used car with a loan, Consumer Reports warns to be cautious about buying a car, stressing it’s important to ensure you can actually make the payments.
Don’t base your decision on how much a lender says you can borrow because this can lead to financial disaster. Be sure to look beyond the monthly payment and calculate the total cost of the car, including the amount you’ll pay in interest. Nerd Wallet reports typical new car loan interest rates according to credit score.
- 781-850 average 3.68%
- 661-780 average 4.56%
- 601-660 average 7.52%
- 501-600 average 11.89%
- 300-500 average 14.41%
If your credit score is on the low side, the first question to ask yourself as you shop for auto loans is do you need the car right now or can it wait? Before agreeing to any loan, you want to make sure you can still afford your other bills, including emergencies.
Tips for getting better loan terms
Paying down your bills, even for a few months, can make a huge difference in the type of interest rate you’ll qualify for. Here are some other steps you can take to help make your dream of buying a car a reality.
- Check and monitor your credit score
- Work to improve your credit score
- Shop around to see what other lenders will offer
- Get preapproved by other lenders before you visit a dealership (you’ll gain more leverage for better terms)
- Save money for a larger down payment
- Always read the fine print on any loan you’re considering
Also, be sure to compare the cost of a new vs. an old car. Older cars sold by dealers are usually inflated in price, come with higher interest rates, and offer less in terms of the warranty. A newer car might turn out to be the better deal.
If you’ve found yourself in a situation where your credit score has dropped, PRBC can help. Contact us today to learn more about our services and how we can help you gain a favorable status to be able to afford that new car.