Nerdwallet recommends spending less than 10% of your monthly take-home pay on a car payment, which can still be pretty significant when the average cost of a new car has skyrocketed to $45,000. Due to a shortage of car parts, the surge in demand for used vehicles means the average price is more than $27,000. So how can you determine how much you can afford for a new car?
Auto loan calculators are an excellent tool that provides essential information on how much you can spend on your next car. They use information about the life of the loan, the car’s price, down payment, and the car loan rates to create monthly payment estimations. You can adjust the term, interest rate and down payment to determine exactly what you can afford.
If you are in the market for a new car, here are some tips on what you should know when using a car loan calculator, so you can determine a realistic target price that fits your budget and financial goals.
Get Familiar with the Car Loan Calculator
A car loan calculator designs your car loan by factoring in a down payment, your car’s trade-in value, the price of the new purchase, and a loan’s interest rate and term. Once it calculates your loan, it displays your payment schedule.
Down payment
The down payment is the money you pay upfront for your automobile purchase. Adjusting this number significantly impacts the monthly rate and total loan amount. The higher your down payment, the lower the monthly loan payment, and the more likely you will be approved for a loan.
For a new car purchase, strive to make a down payment of at least 20% and 10% for a used vehicle. While many people put less money down, the more you can put down on your car, the better the financial position you will be in over the life of the loan.
Trade-in value
You can check your car’s trade-in value with online car quoting services such as the Kelley Blue Book, Auto Trader, and Edmunds. The different values give you a negotiation range that could net you an extra couple of hundreds to a thousand dollars in trade-in value.
Your trade-in value is similar to a down payment and reduces the overall loan amount.
Interest rate
The interest rate is the percentage of the loan that adds to what you owe every month. Your credit score largely determines what interest rate you qualify for on your loan.
Current trends have automobile loans growing in size, with their interest rates shrinking to an average of 4%. This could be because a growing number of auto loans have long terms (74-84 months). Also, more than 56% of new loans are for SUVs which on average cost more than sedans.
Due to inflation, interest rates are set to rise in 2022, meaning you will pay more for your vehicle over the life of the loan. It is more important than ever to find affordable car loans. At T&I Credit Union, we have interest rates lower than national averages no matter the loan term.
Loan term
The loan term is the number of months it takes to pay off a loan. At T&I Credit Union, we offer 60, 72, and 84-month loans for new cars and 60-month for used vehicles. Shorter loan terms come with higher monthly payments but reduce the interest you pay. A longer term reduces the monthly payment but increased interest payments result in a more expensive vehicle purchase.
The loan term you choose may be determined by your monthly budget and long-term financial goals.
Improve Your Credit Score
The first step in getting a car loan is checking your credit score and report. Credit scores that are prime (661-780) or super-prime (781-850) earn lower loan rates than prime (601-660), subprime (501-600), or deep subprime (300-500) credit scores. If you do not need a car immediately and have a low credit score, try to raise your credit score before applying for a loan.
T&I Credit Union offers members financial counseling services to help raise their credit scores. We offer free credit score analysis that locates areas of improvement. Money Manager, our online finance tracker, gives you the tools you need to track your loan and debts, create a budget calendar, and set monitorable financial goals.
You can decrease your credit utilization ratio and catch up on overdue payments to increase your credit score. Keep your credit utilization ratio in the single digits for a higher credit score. That means if you have a credit limit of $5,000, spend $500 or less every period. Also, if you find errors on your credit report that hurt your credit score, you can dispute them.
If you can not raise your credit score before you need to purchase a car, consider using a cosigner with your loan. A cosigner is an individual with a high credit score who guarantees you will make your loan payments. If you fail to make payments, the cosigner must pay them. You can also save money using a cosigner because you may get a lower interest rate on your loan.
Once you have narrowed it down to a few lenders, apply for pre-approval. Apply to all lenders within the same two-week span to minimize the impact on your credit score.
Pre-approval requires most businesses to do a hard credit pull which temporarily decreases your credit score. Multiple hard pulls within a two-week period only count as one toward your credit score. T&I Credit Union can do a soft pull credit check for pre-approval, which will not harm your credit score.
When you are pre-approved, your lender gives you an accurate loan quote that you can use in a car loan calculator. Pre-approval gives you negotiating power with the dealership because you have a budget.
Ensure your loan covers the car’s total cost
When you shop for a car, remember that the price tag at the car dealership is not the total amount of the vehicle. Michigan collects a 6% tax on all vehicle sales and has a multi-faceted registration fee calculation.
According to Experian, the average monthly car payment for a new car in the third quarter of 2021 was $609. But this figure doesn’t include car insurance, gas, or maintenance and repairs. Expect your car loan payment to increase further if you purchase add-ons like anti-theft devices, tinted windows, and all-season floor mats.
Accurately representing your car’s price in a loan calculator ensures you get a loan that covers the cost of your vehicle and that you can afford.
T&I Credit Union Auto Loans
T&I Credit Union members have access to low loan rates and customer-friendly services like the GAP insurance program. If you are already a member, we can pre-approve you for a car loan in as little as 20 minutes. Contact us today if you would like to become a member or learn more about our services.
