A car is necessary, but a 68, 72 or 84-month loan isn’t. The average car loan, term length and monthly payment each hit new highs in the first quarter of 2016, but car loan inflation doesn’t need to affect your next purchase.
The average used car price has risen to $18,838 (Edmunds) and the new car average is $34,428 (Kelly’s Blue Book). The average car loan is $30,032 with a $503 payment for the next 68 months.
That’s five years and eight months before your car is paid off. That doesn’t look good, which is why leasing is now responsible for 31 percent of new cars driving off lots.
Of course, leasing doesn’t look too good either. Two years of slightly smaller payments account for nothing when your term is up, not to mention the restrictions.
The first quarter in 2016 was the first time the average car loan has broken $30,000, the first time the monthly payment has broken $500, and the longest average term ever.
Only 14 percent of new car buyers were able to pay up front for their car, while 45 percent of used car buyers were able to foot the bill without financing. With every part of buying a car increasing in price, here’s how to save yourself money when you’re buying a car.
Look at the total price
Salesmen will focus on what monthly payment you want. It won’t help you when you’re “only” paying $300 for the next eight years. They’ll frame it in terms of your monthly payment, but the lower you keep the total amount, the lower you’ll be able to pay per month. The difference between $15,000 financed and $20,000 financed is a lot more than $5,000 if you’re letting interest be calculated for the majority of the next decade.
Pay for your car with cash…
You don’t have to have a car loan. It may be one of the easiest loans to qualify for, but buying a car doesn’t have to be an eight-year process. The money you have saved for a car plus what your trade-in is worth gives you a budget to shop for a car with the cash you would have on hand.
Don’t spend more than that and you’re set. A new car for you and no financing. This can take planning and may not be possible to pull off tomorrow, but if you can plan to not finance your next car it’s a goal that is well within reach.
…Or pay as much as possible so you finance as little as possible
If paying cash just isn’t possible, then make sure you’re financing as little as possible. If you’re financing a large chunk of the price it can be three years at least before you owe less than the car is worth. There’s a lot that can go wrong in three years that could you leave you owing more on a car that you no longer use.
The less you finance, the better off you’ll be. You hopefully won’t be underwater for long and you’ll be able to find a shorter loan.
Keep your term short
While the price of cars rose, those with higher credit scores took out shorter loans. There was a 100-point difference in average credit score between those who had three to four year loans and those who had six to seven year loans.
The longer the loan, the more in interest you’ll be paying. No wonder those with better credit histories take out shorter loans. A third of the new loans that were taken out were for between six years and 84 months.
Even if you don’t think you can take out a shorter loan, try to find extra money to pay off your car sooner and save on interest that way. Be careful, though. Ninety-seven percent of people don’t pay extra on their loans, even when they say they will, so lip service won’t get you far in saving on interest either. Make a plan, find extra money in your budget, and pay off your loan as soon as possible.
Shop for the best rate if you are financing
The difference between having a credit score above 660 and one below 600 was on average 7 percent or $70 for every $1,000 borrowed. That’s $2,240 extra dollars on the average car loan. Imagine having that money in your budget each month.
Do your homework and get quotes from multiple institutions. Always have a pre-approved rate when you get to a dealer, so they’re having to beat a rate for you to use their financing. Otherwise, you’re kind of stuck if you’re deadset on getting that car.
Need help finding money to save for your next car? Mvelopes can help with creating and keeping a budget so you can put money toward paying off you current car or stashing money away for your next one.