Average Car Payment Per Month

Factors that Determine Average Payment on a Car Loan

There are numerous factors that determine the average payment on a car loan and they include;

Loan size

Your loan size or loan amount majorly determines how much you have to pay back. Your loan amount is the price of the car, fees, taxes, and interest charges. To get a car loan, a down payment and/or trade-in is required. The total loan amount excludes your down payment and the value of your trade-in.

Loan duration

The repayment terms of your car loan tell you how much time you have to repay the loan. A shorter loan term will mean a higher monthly payment, while a long-term loan means a lower monthly payment. For instance, your monthly repayment will be higher for a 12-month car loan than for a 24-month car loan. Most car loans are long-term, the most common being 84-month loans. With an 84-month car loan, your monthly repayment amount will be lower and more affordable. 

While long-term loans seem attractive, remember that the longer your repayment term, the more the overall interest on the loan.

Interest rate

According to statistics, the average loan interest rate in Canada is 4.44%. An average Canadian pays about 4% to 6% interest on their car loan. The interest rate on your car loan determines the amount of interest you will be required to pay for on loan. Some car loans have fixed interest rates, while some others do not.

Credit score

Your credit score is a picture of your financial status. Lenders usually check the credit scores of loan applicants before approving a loan because it provides information on their ability to pay back the loan. A high credit score qualifies you for a low-interest car loan and a longer repayment term. This is because lenders consider borrowers with high credit as less risky than borrowers with low credit. This is not to say you cannot get a car loan with good repayment terms if you have low credit. A low credit score can however increase your monthly interest rate which in turn results in higher monthly payments.

Income

Another factor that provides lenders information on your ability to pay back a loan is your income. Lenders consider your debt-to-income ratio (DTI), which is the percentage of your monthly income that goes towards repaying debts. Therefore in addition to credit scores, your DTI also determines your interest rate.  A low debt-to-income ratio increases your chance of getting a low-interest rate on your car loan which translates to a lesser monthly payment.

How to Get a Low Monthly Car Payment

Modifying or making changes to the factors that are involved in calculating your car payment can influence how much you pay monthly and in total. Asides from these factors, there are certain things you could do to get a low monthly car payment. They include;

Pick a less expensive car

The more expensive your car is the higher your monthly payment. If you cannot settle your monthly car payments with ease, you could consider opting for a less expensive car. For instance, if you get a car loan for a car worth $30,000 with a loan term of 84 months, your monthly car payment would be more when compared with getting a loan for a car worth $20,000 with the same loan term of 84 months. 

Also, note that a new car is not always the better choice. Most new cars lose about 10% of their value once you purchase them. If getting a new car would be financially strenuous for you, you could get a fairly used car that is in great shape.

Request for a longer repayment term

A longer repayment term automatically means you get to pay less, monthly. In addition, a longer repayment term gives you more time to complete the payment of your car loan and therefore gives you a little relief from the monthly financial burden. As mentioned earlier, you should keep in mind that a longer loan term means higher interest charges which in turn increase your overall loan payment. 

Put more money down

Reducing your overall loan amount will subsequently result in fewer monthly payments. You can reduce or knock down your loan amount by putting down a bigger down payment. Putting down more money also increases your chances of paying off your car loan early. You should however not exhaust your savings in a bid to knock down your loan amount as your savings will be useful for emergency expenses. You should only spend about 10% to 15% of your disposable income on car payments.

Trade another vehicle in

Trading in another vehicle is a great way to knock a substantial amount off the price of your new vehicle. This is a great way to reduce your total car loan amount and subsequent monthly payment.

Build your credit score

If you do not need to get a car urgently, you can take your time to improve your credit score. Good credit increases your chances of getting a car loan with a low-interest rate and monthly payment. 

Pay off debt 

Your debt-to-income ratio (DTI) influences the interest rate and monthly repayment. Lowering your DIO shows your lenders that you can pay back your loan with ease and qualifies you for a loan.  You can lower your DIO by paying off your debts, including credit cards and previous loans on time. 

Final Thought

Taking a car loan is a big step that will have a significant effect on your monthly financial budget. Properly evaluate your options and come with an achievable strategy to ensure that you do not default on your monthly car payment. A late or missed car payment will have a negative effect on your credit scores.