In the market for a new or used car? US auto sales have been on fire over the past few years. Sales for new cars totaled over ~17.25 million and used car sales reached ~38.5 million for 2017. There’s a few things you should consider before you dive in. Factors like new versus used, the loan amount, your interest rate, and the repayment time frame all have an impact on your car payment. We’ll look at strategies to help you get the best deal.
Here’s an example of the impact your credit score and the interest rate have on your monthly car payment:
|
Credit Score Range: 661 – 780 |
Credit Score Range: 601 - 660 |
|
|
Cost of Car |
$22,000 |
$22,000 |
|
Down Payment |
$2,000 |
$2,000 |
|
Loan Amount |
$20,000 |
$20,000 |
|
Loan Term |
60 months |
60 months |
|
Interest Rate |
4.79% |
9.88% |
|
Monthly Car Payment |
$376 |
$424 |
There are a few key factors that determine the monthly payment of your loan.
Interest Rate
As you can see in the example above, a strong credit score can really have an effect on your interest rate. From a monthly perspective, the payment difference is only $48/month, but if you add that up over the life of the loan, it’s a $2,880 additional cost! To change the view point, you’re paying $2,256 in interest on the lower car payment ($20,000 vs $22,560 = $376 * 60 months). But, on the higher interest rate loan, you’re paying ~50% more in interest, roughly $5,440 ($20,000 vs $25,440 = $424 * 60 months). That’s why it’s always critical to make sure you get the best interest rate possible.
Down Payment & Loan to Value Ratio
Your down payment also has an effect on your interest rate. When your “loan to value” ratio is lower, your Interest rates are typically lower. The loan to value ratio on the scenario above is 91% with $2,000 down on a $22,000 car (1- $2,000/$22,000 = 0.91). If we were to put more down, $8,000 for example, our loan to value ratio would be 64%, which would most likely have a lower interest rate (1-$8,000/$22,000 = 0.64)
Loan Amount
We highly recommend purchasing a vehicle that’s at least 1 to 2 years old at a minimum. New cars can depreciate as much as 25% as soon as they’re driven off a dealer lot. That means big savings opportunities for you. Why pay more for a “brand new” car versus a used one that’s probably just as good with a few miles on it. You can utilize that purchase price savings to get a lower loan amount which would mean lower monthly payments. Be sure to compare the cost of the vehicle against Kelly Blue Book, Edmunds, or True Car to get an idea of the approximately value of the car before making your offer.
Repayment Term
Auto loans generally range from 24 to 84 months (2 to 7 years). While it’s convenient to have a longer loan term with lower payments, your overall interest payment for the vehicle increases. Lenders entice consumers with lower interest rates on shorter terms because there is less risk on your ability to make your payments. It’s also difficult to predict what your specific financial situation will be in 7 years, so we recommend to make the repayment term as short as you can without feeling uncomfortable.
Refinancing could lower your payment and help you restructure if your needs change. Maybe you’re having a child and you need to save as much as possible and extend your term. Or, maybe you received a bonus from work and you’d like to put those funds to work against your loan and reduce your term.
Could refinancing be right for you? Check your rate in minutes and instantly see what offers you qualify for.