Everyone wants to peel off the lot in a new car. But not all buyers can peel back their stack of cash and hop in the driver’s seat without some type of financing.
Turns out when it comes to buying cars, a lot of us need a financial jump-start.
How much debt do Americans take on to get behind the wheel?
In 2016, Americans applied for and racked up $564.6 billion in auto loans. By the end of 2017, that number had jumped to $568.6 billion.
The auto loan industry has seen consistent gains with no signs of slowing over the past six years. Still, many of us appear to be missing payments: 4.1% of active accounts were delinquent 90 days or more at the end of 2017.
A brief background on auto loans
A car loan allows a buyer to get behind the wheel without fronting the full cost of the vehicle. Sounds good, right? Well, most loans come with fees and interest that you pay back over the course of the loan.
For an idea of the credit score auto loan companies look for, 707 is middle of the road. But even if your score is lower, you’ve got options for borrowing loot to buy a car. Many banks, credit unions, online lenders and dealerships specialize in auto loans.
Many auto loans are secured by your car, using it as collateral for the loan. Secured loans can mean lower APRs than unsecured options, saving you money in the long run. But you run the risk of the lender repossessing your car if you’re unable to pay it back.
How many Americans have car loans?
If you were in the hot seat, could you guess the percentage of Americans that are currently paying off a car loan? A high 44% of American adults — nearly half of us — are relying on an auto loan to pay for our car.
Americans appear to have no problem signing on the dotted line to finance a vehicle, no matter the cost.
How much we’re borrowing differs by where we’ve shopped for our new or used car:
The average loan amount for a new car was $31,099 in 2017, averaging a $515 monthly payment.
The average loan amount for a used car purchased at a franchise was $21,375, resulting in an average monthly payment of $398.
The average loan amount for a used car purchased at an independent dealer was $17,002, resulting in an average monthly payment of $348.
Your new car loan could come in a low average interest rate of 5.11%, depending on your creditworthiness. However, franchise cars average a loan rate of 7.68%, while an independently used car’s rate averages 11.48% — more than double that of a loan on a brand-new car.
Average loan amount, monthly payment and rate by car type
For the lowest rates and fees, most auto loans require you to meet eligibility — your credit score the most important factor. Consumers with credit scores of 601 to 780 make up the demographic auto lenders deal with most.
In the auto loans market, credit scores are typically broken down into five categories: deep subprime, subprime, nonprime, prime and super prime.
Here’s how each group borrows for their set of wheels:
Percentages of deep subprime, subprime and nonprime auto loan originations decreased in 2017. But prime and super prime auto loans increased.
Where do Americans get their auto loans?
Consumers with prime credit scores represent the majority of borrowers. But who’s lending the most when it comes to auto loans?
The total active loan amount across all lenders for 2017 was $1.129 trillion. 😬
Statistics reveal that people prefer the comfort of banks when borrowing for a car. In 2017, banks reported an astonishing $368 billion in open car loans — that’s equal to the price tag of about 4.9 million Model S Teslas! Credit unions report the second-highest open auto loan balance at $313 billion, followed by captive auto companies at $259 billion and finance companies at $189 billion.
What’s a captive auto company?
A captive auto company is a subdivision of a car manufacturer that offers auto loans — think companies like Ford, Honda, Toyota, Chrysler and so on.
The whole car-buying experience takes place house at the dealership. It’s a win-win for the parent company, because it’s not only selling you a car but also making money off the financing.
Total open balance amount by lender type
We gathered the total open balance amount for each type of lender over the past few years.
Even as the unemployment rate dropped to 4.1% in 2017 from 4.8% in 2016, Americans appear to be struggling to keep up with their finances. Or are they taking on too much at once?
Either way, the last thing you want to do is let your car loan account drift into delinquency. Late or missing payments can punish your credit score and expose your vehicle to repossession by the lender.
Video commentary by Kyle Morgan, auto expert
4 tips to avoid defaulting on a car loan
Setting up autopay is just one way to avoid missing a due date or payment. Other steps you can take to avoid defaulting on your car loan include:
Ask about deferment. By explaining your situation to your auto loan provider — no matter how tough the conversation — it might be willing to defer payments for a specified period, giving you time to catch up on your other financial obligations.
Sell your car. It’s a tough decision. But if you consistently struggle to make monthly payments, consider selling your car and using that money to pay back the loan.
Get professional help. If you can’t figure out how to make your payments work, a financial consultant can guide you through planning a budget to get back on track.
Consumers default on their auto loans for reasons that include expensive fees, high interest rates or monthly payments that don’t realistically fit into a working budget. And loan approval doesn’t mean that you can afford the car you want, especially for subprime applicants approved for sky-high rates.
There’s no denying that Americans are leaning on auto loans. But while unemployment is down, delinquent car loan accounts are at their highest in the past five years.
On a road map to financial freedom, think of your credit score as the oil in your car: You must properly maintain its levels to perform at maximum efficiency.
By responsibly managing your finances, you can improve your creditworthiness, resulting in lower interest rates, stronger negotiating power, higher lines of credit and better chances of approval that can ultimately help when you’re trying to secure financial help from a lender down the road.
Kyle Morgan is a producer for finder.com who has worked for the USA Today network and Relix magazine, among other publications. He can be found writing about everything from the latest car loan stats to tips on saving money when traveling overseas. He lives in Asbury Park, where he loves exploring new places and sipping on hoppy beer. Oh, and he doesn't discriminate against buffalo wings — grilled or fried are just fine.
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