Understanding the surge in car loan deficits
Car loan defaults are on the rise, reaching an all-time high. Under the hood of this rising issue, many factors tie into the situation.
First off, car prices are higher than they used to be. And not only are they more expensive, average monthly payments have gone up too. In the third quarter of 2024, the average monthly payment for a new car was $737 and drivers had an average loan term of 68 months. For a used car, the average monthly payment was $520 with an average term of 67 months. In either situation, that’s a significant amount of funds to dedicate to vehicle financing each month.
Of course, some borrowers pay less than the average. But many drivers pay much more than the average. For example, Alejandra Gaxiola told WTAJ she bought her EV for $60,000 two years ago and faces a payment of almost $1,000 per month.
“Almost a thousand dollars for our car is just, you know, it’s a little crazy,” Gaxiola said to WTAJ.
In addition to the purchase costs, other vehicle-related costs are putting pressure on household budgets. Notably, car insurance costs have climbed in recent years.
Beyond car-related costs, rising housing prices and grocery bills put pressure on household budgets from multiple angles. When forced to choose between housing, groceries, and a vehicle payment, drivers may opt to let their vehicle loan slide into default in order to stay afloat in other areas.
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Explore better ratesHow to manage auto loans responsibly
Typically, the best time to start responsibly managing your auto loan is before you sign on the dotted line. Instead of dealing with the budgetary fallout after you buy a vehicle, making the effort to set a realistic budget and keep your vehicle costs as low as possible upfront can save you significant trouble down the road.
One way to stay on budget is to opt for a vehicle without all of the bells and whistles. According to Kelley Blue Book, sales of vehicles priced above $80,000 have recently soared to 5.6% of car purchases. When financing a vehicle, consider making it a point to spend no more than what you need on a vehicle to suit your needs. For example, your family might only need a sedan to get around instead of a full-sized, luxury SUV. Making trade-offs upfront can protect you from financial stress later.
Although auto loan defaults are on the rise, that doesn’t necessarily mean you are in danger of default. But if you’re struggling to make ends meet while juggling a car payment, consider refinancing.
A refinance offering a combination of lower interest rates and a longer loan term could slash your monthly payment, which allows you to keep the car with less financial stress each month. However, keep in mind that means you’ll likely end up paying more for longer. Ideally, you can find some room in your budget elsewhere to afford your payments.
And if possible, consider making extra payments when you can afford it. Paying off your loan ahead of schedule can free up space in your monthly budget and potentially save you thousands in interest charges. If possible, put extra money toward your remaining balance to eliminate your car loan as soon as possible. (Just make sure you’re not incurring a prepayment penalty. You’ll want to check the terms of your loan.)
Throughout your loan, commit to making on-time payments. If you might forget about a monthly bill, consider setting up automatic payments to simplify your life. In some cases, lenders offer a rate discount when you set up autopay.
Finally, communicate with your lender when you need to. If you run into a rough patch financially, communicate that issue to your lender as soon as possible. Depending on the situation, the lender might offer you a reprieve while you get back on your feet.
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