What to Look for in an Auto Loan, how to get the best rates, and what amount of loan should you take to match your salary.
Auto loans are one of the most popular loans and advance product in the US, and they come in the form of secured loans, as your vehicle is hypothecated to the bank or credit house that extends you the loan, till such time you pay off the loan fully, and then obtain your No Objection Certificate.
The popularity of auto loans can be assessed from the fact that they have reached to a total of 1.52 trillion USD, in the third financial quarter of 2022.
When you are thinking of an auto loan , the first thought that comes to your mind is that what is auto loan EMI I will be able to afford, and which should be the comfortable repayment EMI for you, which will not stress you financially.
Well, there is a thumb rule. Just make sure that the loan EMI amount is in between 10% to 15% (on the higher side), of your monthly take home salary, the salary that you get after paying off all your taxes, and previous loan commitments, committed savings etc.
Cars come with fat price tags, just the average of a new car in the United States, in early 2022, was around 46,000 USD. Used car market was a breather though, where they averaged around 27,000 USD. It is natural for you to think and evaluate all your options, as buying a car is a major financial decision.
First, you need to consider the following factors:
After you have decided on your cars, visit some of their showrooms, to find out more details on the kind of expenses you will be having, and exact EMI amounts. If you have a fair idea of the interest rates you are entitled for according to your credit scores, you can check the auto loan calculator below to get a fair idea of your outlay:
Loan EMI and Interest Calculators
You can also use the calculator given above to have a better idea, with more options.
These amounts are the median for the US car industry, and most card sold and purchased are in this category. If you take a ballpark interest rate of 8% ( it may be half of that for those with good credit scores), then a 30,000 USD loan will about $700 monthly repayment commitment, while a 40,000 USD car loan will bring it up to $1000. (We are taking a period of 5 years, or 60 EMIs, to pay back the loan, for this calculation.)
Always remember that paying of your auto loan by EMIs is just one part of the car ownership expenses. You would want to use your car to maximum possible to get the complete benefits, and additional expenses like fuel expenses, tax insurance, registration, repair and maintenance costs will also pile up over the years, and you should have a budget for the same as well, to keep yourself safe, comfortable, and without any financial stress.
You can also refer to the following table as a quick guide to know your auto loan limits, as per your take home salary, to stay without any financial stress, after you have taken the loan:
|Post Tax and Interest, Monthly Take Home ($)||Your Comfortable Loan Repayment EMI amount ($)|
|1500||150 - 225|
|3000||300 - 450|
|4500||450 - 675|
|6000||600 - 900|
|7500||750 - 1125|
|9000||900 - 1350|
You can also use the calculator given above to have a better idea, with more options.
You will need to assess yourself on the factor of loan payment period, or how long would you like to draw the loan repayment period. A shorter duration will increase your EMI amount, but will greatly reduce your outgoing interest, while a longer duration gives you relief of smaller EMIs, but you pay more on outgoing interest outlay.
Budgeting tips, on buying for your car, and for your ongoing car auto loan, to save you money:
First, when you take the loan, make sure there are no prepayment charges, for paying off the loan in advance, whether in part or in full.
Once you have made sure of this, you will have many options, to save you serious money, as following:
Tax refunds are common at one time of the year, as it is generally money that you haven’t accounted for as a gain. Use that money to make a part prepayment to your loan’s principal.
The expense of a loan to you is the accumulated interest. If you make an extra payment every mid month, or mid period of the loan in an average, it greatly reduces your principal, as well as your interest burdens. It’s all about financial discipline. Save thousands in the long run, by spending hundreds in the short run.
Different kinds of fuels run a car and each have different insurance costs, which are annual in nature. While buying, consider the number of miles or kilometres you expect to drive every month, and then decide on the type of fuel you would be looking for. Do a little research on your choices, to save you in the long run.
Carefully evaluate the complimentary services and service periods offered by different car dealerships, and the average costs to service their cars after the complimentary services are over. Again, for complete knowledge, search is car forums, where owners would have shared their experiences, and would also be happy to answer your specific questions. Research!
Car manufactures across US gives discounts on purchase of their vehicles at different times of the year, December being one such period. These discounts will help you greatly to save money, which you can also choose to utilize in a bigger down payment. Quite a few states do not charge any tax on these discounts either, like at Montana, Nebraska, New Hampshire, Alaska, Arizona, Massachusetts, Minnesota, Missouri, Delaware, Rhode Island, Texas, Utah, Vermont , Iowa, Kansas, Kentucky, Louisiana, , Oklahoma, Oregon, Pennsylvania, and Wyoming.
If you are already owning a car, and looking forward to change the same and upgrade, then you will get a resale price of your car, which you can utilize for your down payment. Not only at car dealerships, but also list has your old car at different car selling portals, to get a fair priced of your car.
WORD of Caution: Please get all your transfer of ownership verified, whether you get it from your car dealer or otherwise. This will save you for any untoward legal harassment in the future. Also get no objection certificate from your finance provider, as soon as the loan is repaid.
There may be a time when you may be feeling financially stressed in servicing your auto loan, along with other loans and credit card payments. In that scenario, approach a bank for a consolidation loan, to pay off all your loans in one go, and to consolidate them into a single, cheaper, EMI. You can learn more on how to take a consolidation loan here.
If you miss a payment, it is going to cost you dearly with manifold effects. You will be paying fines, tension, your credit scores will go down, and you will have difficulty in sourcing any kind of loans, including auto loans, in the future. Avoid non payment at every cost, do all your calculations beforehand. One good way is to make the auto debit in your salary account itself, so that you do not have to take the effort to remember and pay on time.
Word of Advice: Check the Consumer Financial Protection Bureau to know about your rights, items that you can negotiate and the best place to source your auto loans. You can visit their website at https://www.consumerfinance.gov/consumer-tools/auto-loans/.
If you are already into an auto loan, and are facing issues, then also you can visit them for a redress and to file a consumer complaint.
You may be approached for credit insurance when you take an auto loan, by your insurer or your car dealer. Please understand that taking such insurance is totally optional, and the decision to take it or not to take it is dependent on you. These policies are generally expensive, and you may get the same coverage and benefit at a much lower rate if you take them out yourself, separately, if at all you want them. If you are being forced in any way, just report the same to your state's attorney general.
Always remember that money has alternative usage, and any money you do not spend on a particular object or service, can be utilized for another object or service, or for your savings for your future use. Hence, before buying your car, new or pre owned, consider carefully if it is really required, or if your existing car can be serviced and serve the purpose. Whether you can reuse, recycle and reduce your usage. Not only does it save the environment from another car, but also, it leaves you with increased cash, more over a period of time, and money, that you can judiciously in more important things, like paying a good part of the principle of your mortgage loan or credit card loan. End of the day, it is your decision, and you should take the decision that suits YOU the most.