There are many indications that Americans’ personal finances aren’t in the best shape right now, and one of the most recent pieces of evidence comes from auto loan delinquency rates. The latest data from Fitch Ratings shows that 6.1% of subprime borrowers were at least 60 days past due on their car payments — the highest percentage since 1994.
Two factors are causing an increase in late car payments: the rapid rise of car prices over the past few years and high interest rates.
Kelley Blue Book says the average cost of a new car was $47,899 in September, an increase of 23.6% from three years ago. Making matters worse is the fact that the current interest rate for a new auto loan is 7.5%, up from 4.2% three years ago.
To put all of this in plain terms, the average monthly car payment is now a staggering $725 per month, according to Experian. And data from Edmunds says a record 17.5% of borrowers have payments of $1,000 or more.
If you’re looking for some help covering the cost of your car payment, along with your other monthly expenses, here are a few tips.
This may be easier said than done, but implementing a debt snowball method to pay off smaller loans and then working up to larger ones may be a good strategy. Using a debt payoff app can also help you figure out where your money is going and how to set up a plan to get out of debt.
If you have a lot of loans with varying interest rates, consider a personal loan to consolidate your debt into a single payment with a potentially lower interest rate. This strategy may not work for everyone, but debt consolidation could be a good option if you have a lot of high-interest debt.
You may still need a car, but do you need the exact one you’re currently paying for? Selling your car back to the dealer may be the simplest and fastest way to improve your financial situation. Then, figure out what type of car you need and what you can afford to keep your car payment low or, ideally, buy the car with cash.
If you’re looking to buy a new car, one way to score the best deal on your car payment is to have a good credit score. The best way to improve your score is to pay your bills on time. Doing this accounts for 35% of your FICO® Score.
Auto lenders want to see that you’re reliable at paying off your current debt obligations, so paying your bills on time indicates you can make car payments on time. As such, you may get a lower interest rate on your car loan with a strong history of on-time payments.
You’ll also want to pay down some of your credit balances. Your credit utilization — how much credit you’re using in relation to how much is available to you — makes up 30% of your credit score. That’s why paying down credit card balances and other debt is essential when you want to boost your credit score.
Making these two moves will do the most to help improve your credit score, but it’s also worth noting that the best way to have the lowest car payment is simply to buy a cheaper car. This may mean buying a used vehicle; just make sure you do your homework before buying a pre-owned car.
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