More Americans are struggling to make their car payments on time. The numbers, while still low, are definitely on the rise.
According to the latest State of the Automotive Finance Market report from Experian Automotive:
- 60-day loan delinquencies in the second quarter of 2014 increased by 7 percent (from 0.58 to 0.62 percent) from the previous year.
- The rate of auto repossessions in the second quarter took a significant jump — up more than 70 percent (to 0.62 percent) from a year earlier.
“The rosy glow of perfect payment performance in the automotive space is beginning to tarnish,” said Melinda Zabritski, senior director of auto finance at Experian Automotive.
The increase in payment problems was expected as the number of loans to subprime borrowers has grown following the Great Recession, Zabritski said.
Her advice to car buyers is simple: “When you buy a car, make sure it’s something you can afford, something that truly meets your budget. That way you won’t end up as one of these delinquency statistics.”
To get the best loan deal, you need to do your homework. Here are five things you should do:
1. Check your credit reports.
Get a report from each of the three major credit reporting agencies: Experian, Equifax and TransUnion. Use the website annualcreditreport.com, which was set up by the federal government for this purpose.
“You want to check all three because you don’t know which one the lender will use and you want to give yourself time to fix any mistakes,” explained Gerri Detweiler, director of consumer education for Credit.com. “I found a mistake when I went to buy a car a few years ago, and if I hadn’t straightened it out, it would have cost me a lot of money.”
Detweiler suggests that you also check your credit score. The interest rates you’ll be offered – if you can get a loan at all – will be based on your score.
You can get your credit score for free from a number of sites, such as Credit.com, CreditKarma and CreditSesame. Some credit card issuers also provide it. This will not be the exact same score the lender uses, but it will give you a good idea of where you stand.
2. Shop around for the best rate.
You shop around to get a good deal on your new vehicle, so why wouldn’t you shop around for the loan to pay for it? Most people don’t. They go to the dealer without doing any homework.
“That just means you have a target painted on your back,” said Liz Weston, personal finance columnist and author of the book, "Deal with Your Debt." “Bad things are going to happen to you when you haven’t done your research and you don’t have your loan lined up before you start shopping for a car.”
Eight out of 10 car buyers finance at the dealership, according to the nonprofit Center for Responsible Lending. Maybe it’s the convenience or the lure of ads that offer incredibly low-interest rates. Just remember, those super-low rates are only for customers with excellent credit scores.
Credit unions and community banks are the best place to start. They typically offer the best rates on car loans.
“A lot of people just assume they’re getting the best rate and terms from the dealer, and that’s the last assumption you should make,” Weston said. “You can apply for that loan, have it all set up, and then pull the plug at the last minute, if the dealer’s offer is better.”
3. Choose the shortest loan you can afford.
As cars have become more expensive, car loans have gotten longer. You can now finance that new set of wheels for seven, eight or possibly nine years. The longer term reduces the monthly payment, but it will also drive up your total cost.
“You definitely pay more in the long run because these long loans typically have high-interest rates,” cautioned Mike Quincy with Consumer Reports Autos. “Try to limit your car loan to about 48 months. That’s the optimal amount of time you should pay for your car.”
Yes, that means a higher monthly payment, but you’ll get out of debt faster.
The Federal Trade Commission has a worksheet that helps you compare different financing offers with different terms.
4. Beware of the yo-yo finance scam.
You sign all the paperwork, get the keys to your shiny new car and drive it home, assuming the deal is done. A few days or weeks later, someone from the dealership calls and says they were unable to get the financing approved at the agreed-upon price.
You must return the car to the dealership, they say, or negotiate a new loan at a higher interest rate. If you don’t, you could lose your deposit and trade-in, and you may even be charged a rental fee for the time you had the vehicle. Faced with this situation, most people cave.
How can they do this?
“Most dealers, don’t consider the sale final until the money is in their account and that could be anywhere from a few hours to a couple of days,” said Chris Kulka, senior vice president at the Center For Responsible Lending.
Chances are this was disclosed somewhere in all the paperwork you signed in the dealer’s financing office.
“The only way to protect yourself is to either get your financing elsewhere or tell the dealer that you’re not going to take the car until the financing is deemed final,” Kulka said.
The trade association for automobile dealers said: "The National Automobile Dealers Association is not aware of any credible evidence which indicates that fraudulent 'yo-yo' transactions are prevalent in today's marketplace and none was presented to the Federal Trade Commission when it thoroughly examined this issue during a series of motor vehicle roundtables in 2011."
5. Don’t get hung-up on the monthly payment.
A lot of people assume that if they can afford the monthly payment, they got a good deal on the car.
“That’s a huge mistake,” said Jack Gillis, author of "The Car Book 2014."
Buying a new car typically involves three different negotiations. There’s the price of the vehicle, the value of your trade-in and the financing. And they need to be kept separate.
“If you just look at the monthly payment, you’ll have no idea what you’re being charged for the car, you won’t really know what you’re getting for your old vehicle and you won’t know what the interest rate really is,” Gillis warned. “The artificially low monthly payment will disguise the fact that you’re paying more than you should for the car and financing and getting less than you could for your trade-in.”
The salesperson will probably ask how much you can afford to pay each month – they’re trained to do that. Gillis says there’s no need to answer.
Keep in mind: If you are pre-approved for the loan before you head to the dealership, you can concentrate on haggling for the lowest price for the car and highest amount for your trade-in without the added pressure of negotiating the interest rate and other details of your loan.