Rising Car Debt is a Problem
Car prices have surged since the pandemic. As a result, many consumers are paying car payments that are more than $1,000 a month. In addition to higher car prices, the Federal Reserve has been raising interest rates in an attempt to calm inflation, driving up auto loan balances. These rate hikes have made it more expensive for people to borrow money from car loans, to personal loans, and mortgages.
According to Bloomberg, car debt is now so high, borrowers owe more than their car is worth. That’s a real problem. Car dealers worry that record prices are leading to a surge in negative equity and overwhelming car debt. More people could be left without car-financing options.
While it’s not unusual for drivers to have negative equity, some car dealers say more people are coming to them with vehicles that are now worth $10,000 under what they owe on the car. Meanwhile, car buyers are increasing their loan term length to be able to afford monthly payments, increasing loans to seven years.
Why is this concerning?
If you have an auto loan, and your financial situation changes and your budget is tight, you would generally be able to sell your car and walk away without car debt. You can’t do that if your car won’t pay off your auto loan balance.
What to know when financing a car today.
Now more than ever it’s important for car buyers to be careful when considering financing options. If you can put off buying a car, you would benefit from waiting given high car prices and loan rates.
However, car prices have been high for some time, so you might not be able to delay any longer. One thing you can do to secure a better loan rate is to work on your credit score prior to applying for a car loan. The better your credit score, the more likely you are to get competitive terms.
Attempt to get a loan you can pay off within three years. Many people are accepting car loans for seven years, which keeps you in debt longer and costs you more in interest. You might have to choose a cheaper car than you dreamed of or opt for a used car over a new one.
Car prices and interest rates are still high, leaving car owners with negative equity and extending car loan term lengths. If you can put off buying a car, you could benefit financially and reduce car debt. If you can’t wait, you may have to go with a cheaper car to avoid a large loan you can’t pay off for years. Work on your credit score before you apply for an auto loan to help secure a competitive interest rate and lower what you’ll owe overall.
If you need fast funding, Uprova can help. We work with borrowers from a wide range of credit backgrounds. Request up to $5,000 online. If your request is approved, funds are transferred to your account in as soon as one business day. Check your rate today.