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It is no secret that car loans can be expensive. In fact, people are borrowing more this year than ever.
This is not a recent problem, though. Car payments have grown dramatically over time. They now take a significant chunk of one's monthly income.
These expensive car loans can make buying a car hard, so let’s break down what is going on.
The car loan problem
A Car and Driver article discussed a Consumer Reports survey of 858,000 car loans from 17 major auto lenders. It found that auto lenders were charging a lot of interest even when a borrower had good credit.
This is partly due to the rising costs of cars. In fact, car prices have reportedly risen from an average of $25,000 in 2009 to $33,000 to $34,000 in 2021.
There isn't much oversight of the lending, either. The result is that car loans have increased by 25% in the past 10 years. The average monthly payment on a car loan is now $600.
As a result, Americans have a car debt of $1.4 trillion. The loans that make up this debt can have high annual percentage rates—some as high as 25%. They are often money pits that cause people to pay way more than advertised for a car.
Problems with a high car loan
Consumer Reports found one person whose average loan APR should have been 4.5% based on their credit report. The person's car loan APR was 19 percent. As a result, their 2018 Toyota Camry, which they bought used, would cost them $59,000 by 2025.
Another person with excellent credit wound up with 13.55% APR. This meant that the 2019 Chevrolet Suburban they bought would cost them $122,000, and their monthly payment is $1,628. It is worth $71,148.
One in 12 borrowers were more than 90 days late with their car payments. The average discrepancy for these loans was $3,700.
Almost 25% of borrowers had payments bigger than 10% of their monthly budget. About 50 percent of subprime borrowers were sinking more than 10% of their monthly income in car payments. People stuck with these unfavorable loans are more likely to lose their cars.
This means that in 46% of the vehicle loans in the Consumer Report's survey, people owed more than what their car is worth.
What should you do?
Lenders are charging what they can, and having a good credit score has little impact on the interest rate. However, you can negotiate the terms of your loan.
When you negotiate the loan, try to keep the payments under 10% of your monthly income. Pay attention to the total cost and interest rate too. The key is comparison shopping for the best loan rate and terms instead of agreeing to whatever the auto loan company offers.
Other ways to keep right side up on a loan are to pick a car with better value, make a down payment, and base your loan on how long you plan on keeping the car. Buying used is a good idea, too.
You should also shop around for the best insurance plan for your new car to keep it affordable. Jerry can help. The app compares car insurance quotes to find you the cheapest rate.