40 Facts About Car Finance

Source: Tpfcu.com

Ever wondered how car finance works? Whether you're buying your first car or looking to upgrade, understanding car finance can save you money and stress. From average car payments to the impact of your credit score, there's a lot to consider. Did you know the average car payment for new vehicles in 2024 is $734 per month? Or that Americans owe a staggering $1.626 trillion in auto loan debt? With loan terms averaging around 68.5 months and interest rates influenced by your credit score, it's crucial to know your options. Let's break down these 40 essential facts to help you make informed decisions.

Key Takeaways:

Car payments for new and used vehicles can vary based on factors like age, credit score, and interest rates. Understanding these factors can help you make smarter car finance decisions.
Americans owe a staggering $1.626 trillion in auto loan debt, with delinquency rates on the rise. It's important to balance loan terms and monthly payments to avoid financial strain.

Table of Contents

Understanding Car Finance Basics

Car finance can be a maze of terms, numbers, and options. Knowing the basics helps you make better decisions.

Average Car Payment for New Vehicles: In the second quarter of 2024, the average car payment for new vehicles was $734 per month. This is a slight increase of 0.1% from the same period in 2023.
Average Car Payment for Used Vehicles: For used vehicles, the average car payment decreased by 2.1% to $525 per month in the second quarter of 2024.
Average Car Payment for Leased Vehicles: Leasing a new vehicle cost an average of $586 per month, a 2.3% decrease from the previous year.
Total Auto Loan Debt: Americans owe a staggering $1.626 trillion in auto loan debt, making up 9.1% of all consumer debt in the U.S.
New Auto Loans Originated: In the second quarter of 2024, Americans took out $179.1 billion in new auto loans.

Age and Auto Debt

Age can influence how much debt people take on for cars. Here's a breakdown.

Age Distribution of Auto Debt: Americans younger than 50 took out $104.5 billion in auto debt during the second quarter, while those 50 and older took out $70.8 billion.
Average Auto Loan Term: The average loan term is 68.5 months for new cars, 67.4 months for used cars, and 35.9 months for leased vehicles.
Auto Loan Delinquency Rates: Delinquency rates have increased compared to the previous year, indicating more borrowers are missing payments.

Credit Scores and Car Payments

Your credit score can significantly impact your car payments and interest rates.

Credit Score Impact on Car Payments: Individuals with credit scores between 601 and 660 (nonprime or fair ranges) and 501 to 600 (subprime or poor and fair ranges) saw the highest average monthly payments for new vehicles at $765 and $749, respectively.
Interest Rates for New Cars: New car interest rates reached 5.97% for a 60-month loan in November 2022, while a 36-month loan was 6.18% for used cars.
Monthly Payment Example: Financing $40,200 for 60 months at 5.97% interest results in a monthly payment of $777, with a total interest paid over five years of $6,397.
Impact of Lower Interest Rates: Reducing the interest rate from 5.97% to 4.97% lowers the monthly payment to $758 and reduces total interest paid to $5,284.

Types of Car Financing

There are two main ways to finance a car: loans and leases. Each has its pros and cons.

Types of Car Financing: There are two primary ways to finance a car: through a loan or by leasing.
Loan Term Variability: Loan terms can vary from 36 months to 84 months, with most lasting between three to six years.
Interest as Part of Monthly Payments: Monthly payments include interest, sales tax, and other fees.
Average Loan Term in 2022: The average number of months for a car loan in 2022 was 69 months, similar to the previous year.

Factors Affecting Interest Rates

Several factors determine the interest rate you'll get on a car loan.

Factors Determining Interest Rates: Interest rates are determined by factors such as credit score, credit history, loan amount, and term length.
Shopping Around for Lenders: Shopping around for lenders can help individuals find better interest rates and terms.
Car Financing with a Loan: The majority of car purchases involve financing with a loan, which typically includes a down payment or trade-in, loan amount, term length, and interest rate.
Car Financing with a Lease: Leasing involves a long-term rental agreement where the borrower never owns the car and pays based on its expected value at the end of the lease.

Leasing and Loan Terms

Leasing and loans have different terms and conditions. Understanding these can help you choose the best option.

Leasing Share of Retail Sales: The leasing share of retail new vehicle sales was projected to be 19% in 2022.
Key Terms in Car Loans: Key terms include annual percentage rate (APR), loan term, interest rate, principal amount, amortization, down payment, taxes and fees, and total car cost.
APR vs. Interest Rate: APR includes lender fees, while interest rate does not.
Loan-to-Value Ratio: The loan-to-value ratio (LTV) measures the value of the car compared to the loan amount and affects the loan rate and approval.

Making Smart Loan Choices

Knowing how to balance loan terms and monthly payments can save you money.

Understanding Loan Applications: Familiarity with car loan terms is essential for comparing offers and choosing the best loan.
Balancing Loan Terms and Monthly Payments: Borrowers should balance the shortest term possible with monthly payments that fit their budget.
Recommended Monthly Payment Percentage: NerdWallet recommends spending less than 10% of take-home pay on a car payment.
Car Loan Calculator Usage: Using a car loan calculator can help borrowers see different payment scenarios based on various loan amounts, rates, and terms.

Total Car Cost and Debt

Understanding the total cost of a car and the growing auto loan debt can help you plan better.

Total Car Cost Calculation: The total car cost includes principal, interest, down payment or trade-in, and taxes and fees.
Average Car Loan Amount: The average car loan amount is $26,162.
Average Monthly Car Payment: The average monthly car payment is $467.
Growing Auto Loan Debt: Americans currently owe more than $1 trillion on their cars, with this debt growing annually.

Demographics and Market Share

Different age groups and types of lenders dominate the car loan market.

Gen Xers and Car Loan Debt: Gen Xers carry the most car loan debt among age groups.
Percentage of New Cars Financed: More than 85% of new cars are financed, with a similar percentage for used cars in 2019.
Average Credit Score for Borrowers: The average credit score for auto borrowers is 710, indicating a high creditworthiness among borrowers.
Bank Market Share in Car Loans: Banks hold the biggest market share in car loans, with 30.7% of Americans preferring banks over other options.
Credit Union Market Share: Credit unions come in second, with 28% of Americans preferring them for car loans.

Interest Rates and Predatory Lending

Interest rates and predatory lending practices can affect your car finance experience.

Interest Rates Stabilization: Average car loan interest rates have stabilized at around 4.74%, with slight oscillations over the past few years.
Impact of Credit Score on Interest Rates: Borrowers with the best credit scores (781 to 850) receive lower interest rates compared to those with lower credit scores.
Predatory Lending Practices: “Buy-here, pay-here” businesses, known for predatory lending practices, capture up to 16.5% of the used car financing market.

Final Thoughts on Car Finance

Car finance can be a maze, but knowing the facts makes it easier to navigate. From the average car payment for new and used vehicles to the impact of credit scores on interest rates, these details help you make smart choices. Whether you're considering a loan or a lease, understanding terms like APR, loan-to-value ratio, and monthly payments is crucial. Remember, shopping around for the best rates and terms can save you money in the long run. Keep in mind that interest rates and loan terms vary, so balance what you can afford with the shortest term possible. Use tools like a car loan calculator to see different scenarios. With over $1 trillion in auto loan debt, being informed helps you avoid pitfalls and make the best decision for your financial health.

Frequently Asked Questions

QWhat exactly is car finance?

Car finance refers to various financial products that allow individuals to acquire a car without paying the full amount upfront. Essentially, it's a way to spread the cost of a vehicle over time, making it more manageable for buyers. Options include loans, leases, and hire purchase agreements, each with its own set of terms and benefits.

QHow does car financing affect my credit score?

Applying for car finance can impact your credit score in a few ways. Initially, lenders will conduct a credit check, which might slightly lower your score. However, making timely payments can positively affect your credit, demonstrating financial responsibility. On the flip side, missed or late payments can harm your score, making future borrowing more challenging.

QCan I get car finance with bad credit?

Yes, getting car finance with bad credit is possible, though options may be more limited. Some lenders specialize in bad credit car loans, but these often come with higher interest rates. Improving your credit score before applying or offering a larger down payment can increase your chances of approval and secure better terms.

QWhat's the difference between leasing and buying a car with finance?

Leasing a car means you're essentially renting it for a set period, usually with a limit on mileage. At the end of the lease, you return the vehicle. Buying a car with finance, like a loan or hire purchase, means you're working toward owning it outright. Payments on a lease are typically lower, but buying gives you freedom from mileage caps and the ability to sell or modify the car.

QHow long does car finance approval take?

Approval times for car finance can vary widely depending on the lender and your financial situation. Some online lenders and dealerships offer instant or same-day approval, while traditional banks might take a few days to a week. Having your documents ready and a good credit score can help speed up the process.

QCan I pay off my car finance early?

Most lenders allow you to pay off your car finance early, but it's essential to check if there are any early repayment charges. Paying off your loan early can save you money on interest, but the total amount saved will depend on the loan's terms and any potential penalties for early repayment.

QWhat happens if I can't make my car finance payments?

If you're struggling to make car finance payments, it's crucial to contact your lender as soon as possible. Many lenders are willing to work with you to find a solution, which might include adjusting your payment plan. Ignoring the problem can lead to repossession of the vehicle and a negative impact on your credit score.

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