Most people who have a steady income now want to own a new car and there are good reasons to have such a dream.
- First, there are several sources to avail such a loan
- Second, the lending policies now are more liberal
- Third, the good economic condition and better borrowing power of the consumers.
However, not all borrowers end up repaying their loans within time and without any defaults and there are several good (or bad) reasons for that as well. This is primarily the reason for the rising amount of auto loan debts and delinquencies.
The debt figures
In order to have a better understanding of the car loan scenario, you will need to start right from the basics. It is needless to explain that given the price of modern cars, it is not possible for an average American to own a car without possibly availing a loan from traditional or non-traditional sources.
However, the question is exactly how much can a person borrow to buy a car given the fact there may be other existing loans against his or her name already such as:
- Student loan
- Medical bills and
- Personal loans.
With all these loans and an auto loan added to it, most of the people end up struggling with their monthly bills and household expenses. They are forced to either look for a suitable debt relief option at sources like NationaldebtRelief.com or file for bankruptcy, with each having its own characteristic pros and cons.
Research says that:
- In 2016, Americans racked up $564.6 billion in car loans
- By the end of 2017, this number reached up to $568.6 billion and
- More than 4.1% of the active car loan accounts end up as delinquent for 90 days or more by the end of 2017.
The natural and obvious inference of these facts is that the auto loan industry has been growing consistently showing considerable gains. Just like there is no sign of it slowing down, the number of car loan accounts that missed payments or turned to be delinquent also showed no sign of declining for the same time interval.
The background of auto loans
Auto loans provide a person with an opportunity to own a car and get behind the wheel and still not have to bear the entire cost of the car. In fact, you may walk into a dealership, pay a nominal amount, if the lender wants it as a down payment, and drive off in a brand new car.
It may sound good but the fact that most of these loans will come with other appendages such as different types of fees and interest, you must be wary a little bit before you opt for one. This is because when you take out a loan for say $20,000 you will need to repay it to the lender within a fixed period of time say for 3 years along with something extra as interest say $3,000.
This extra amount is the income of the lenders which you repay along with the principal amount borrowed as ‘gratitude’ towards the lenders for allowing you to use their money for your satisfaction. It is actually the price you pay for them making a sacrifice not using their money in some other channels.
In order to avail such a loan, you will need to qualify for it. The common parameters considered by the lenders to evaluate your eligibility include:
- Your income and source
- The present financial status and current loans
- Your credit score.
Typically, a credit score of 700 will make your eligible for any type of car loan but there are a few lenders who offer to people having credit scores much lower than that. These are called loans with bad credit or loans to subprime borrowers. Typically, these are the people who:
- Fail to repay the loan on time
- Find them in debt
- Become delinquent and in turn
- Raise the debt amount of the country affecting its economy on the whole.
These loans are usually offered by banks, credit unions, dealerships, and online lenders. These loans are considered to be secured loans as the car itself acts as collateral.
The Secured Aspect of Car Loan
This ‘secured’ aspect of a car loan has different meanings for different parties. For example:
- For the lender, they feel safe as they can repossess the car and sell it to recover the loan amount in case you fail to repay and
- As for you, a borrower, it means that you stand to lose your car anytime on the road in case you miss out a couple of bills.
However, the fact that the value of a car starts depreciating at a fast rate once it is driven out of the showroom is a point of worry for that lender. It may be that the amount owed by the borrower may be more than the current value of the car, especially if it has gone through heavy repairs after an accident. It is for this reason these loans are offered for a much shorter tenure.
On the other hand, being a secured loan, it means that as a borrower you can get lower APRs as compared to any unsecured loan options. This will save you money in the long run.
Stacking up of loans
The loan statistics will show you how car loans stack up every year. You will be surprised to know that more than 44% of American adults who are currently paying off their car loan. It means, nearly half of the entire population of America rely on auto loans to finance their car!
With the number of loan accounts and amounts for both new and used car increasing in the US each year it seems that the Americans do not have any problem or do not think twice before signing on the contact to finance a vehicle, irrespective of the cost, both financial and otherwise.
This perception in people has to change first in order to bring down the worrying amount of auto debts in the US.
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