The average monthly car payment is rising. In 2017, the average monthly payment on a new vehicle was $479, which is a four percent increase compared to 2016. As the average monthly payment amount is expected to continue to increase, the average loan term is also getting longer.
What Determines Your Monthly Payment?
Requirements for auto financing vary by lender, and different factors affect how much you’ll pay each month. If you’re dealing with poor credit, you’ll typically need financing through a subprime lender.
Besides your credit score, there are five other things that go into determining a monthly payment:
- Income – Most lenders want you to earn at least $1,500 a month before taxes, and they’ll base your ability to pay by calculating your monthly bills compared to your income (called the debt to income ratio) and your expected car payment compared to your monthly bills (called the payment to income ratio). Ideally, you’ll want a debt to income ratio below 50 percent (including your car payment and insurance) and a payment to income ratio of no more than 15 to 20 percent.
- Vehicle price – Newer cars will generally cost more than used or pre-owned versions of the same model – even though the loan term may be longer and the interest rate lower.
- Loan term – The longer the loan term, the lower the monthly payment. But a longer loan term increases your total cost because you end up paying more in interest charges. Longer loans also put you at risk of being upside down for a longer period of time.
- Down payment – You’ll usually be required to put money down when taking out a subprime loan. Although the minimum requirement varies, you should expect to put down at least $1,000 or 10 percent of the vehicle’s selling price, whichever is less. Down payments have many positive effects on a loan, one of which is lowering the amount you have to finance – which lowers your total cost and monthly payment amount.
- Interest rate – When dealing with a subprime auto loan, you can expect to pay a higher interest rate. Although having a higher interest rate isn’t ideal, you may be able to refinance once your credit score has improved down the road.
Know Your Budget
Once you understand what goes into your monthly payment, it’s time to budget. There are many online tools you can use to help estimate what your monthly payment might look like. One of these is our auto loan monthly payment calculator. You’ll need to know the price of the car you want to finance, how much money you plan on putting down, your approximate interest rate, and the length of the loan.
The Bottom Line
How much you’re willing and able to spend each month on your car depends on your current financial situation, which is different for everyone. If you need a car loan but worry your credit will get in the way, let Auto Credit Express help.
We work with a nationwide network of special finance dealers that have the lending resources to work with people in many difficult situations. Fill out our free, no-obligation auto loan request form online to start the process today!