As of 2018, the average amount of money that consumers need in order to buy a brand-new vehicle increased by nearly 2 percent, setting a record high. This puts the estimated average transaction price (ATP) for a brand new light vehicle at $36,113. For consumers who can’t afford a brand new car, they can buy a reliable used vehicle for under $10,000. For some people, however, this is still a lot of money, which means taking out an auto loan is the only way for them to buy a new or used vehicle.
When taking out a car loan, there are some things consumers should know and understand.
Know About FICO Auto Scores
Most lenders look at the consumer’s credit score when a consumer takes out a loan. There is another number, however, called the FICO auto score that is specific to auto lending. This is one number that consumers should know before taking out an auto loan.
This score ranges from 250 to 900 and looks at a consumer’s credit behavior for the last 30 months. The FICO auto score, which can be found on a consumer’s annual credit report, takes specific information into account, such as whether or not credit card balances and credit utilization ratios are increasing or decreasing.
Know the Pre-Approved Loan Amount
When shopping for a new vehicle, most people find the car they love, and then proceed to try to get the loan for it. Experts recommend doing the exact opposite, which is to get pre-approved for the loan first, and then go shopping.
Doing it this way helps car-buyers to stay within their budget when buying a vehicle. It’s also a way to gain leverage with an auto dealer. When the dealer knows how much the consumer has to spend, this information is very beneficial when it comes to negotiating the price of a vehicle.
Know the Car Payment Amount
Consumers should always ensure they will be able to afford their car payments and one convenient way to do this is by using a car payment calculator. This type of calculator allows consumers to input vital pieces of information, such as the purchase price of the vehicle, the amount of the down payment, the trade-in value, the interest rate on the loan, and the repayment time.
When figuring out an affordable car payment, it’s important to remember the 20% rule. This simply means that the car payment plus auto expenses, should not exceed 20% of a consumer’s take-home pay.