We publish an auto lender review guide to help buyers see current rates from top nationwide lenders.
For your convenience, here is data on what rates looked like across Q1 of 2020 as the COVID-19 crisis spread across the United States.
|Super Prime||720 or higher||3.65%||4.29%|
|Prime||660 - 719||4.68%||6.04%|
|Nonprime||620 - 659||7.65%||11.26%|
|Subprime||580 - 619||11.92%||17.74%|
|Deep Subprime||579 or lower||14.39%||20.45%|
Source: Experian 2020 Q1 data, published on August 16, 2020
Across the industry, on average automotive dealers make more money selling loans at inflated rates than they make from selling cars. Before you sign a loan agreement with a dealership you should contact a community credit union or bank and see how they compare. You can often save thousands of dollars by getting a quote from a trusted financial institution instead of going with the hard sell financing you will get at an auto dealership.
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When a new car buyer starts researching and comparing features on the latest models, it can be tempting to purchase the most luxurious or powerful vehicle available. Unfortunately, too many people fail to factor in the real cost of a particular car and suffer as a result. There is far more to car ownership than just signing some paperwork and handing over a down payment. Even when paid for fully in cash, a car continues to generate multiple monthly costs that quickly spiral into massive bills if neglected. How much those expenses total varies from vehicle to vehicle, but they can be estimated with some basic information. These are the seven most important factors that contribute to a car's real value and decide whether or not a buyer can actually afford to own it.
The initial fee of a vehicle is its sticker price: the amount that the dealership receives in exchange for transferring ownership. This is the first cost consumers see and, sometimes, the last they consider. There are also the various transaction fees for license plates, registration and title transfers, plus taxes. The amount paid up front is largely determined by the car in question; its condition as a new or used vehicle; and the down payment made.
New cars today sell for anywhere $10,000 to millions. They range from tiny, eco-friendly urban hatchbacks to behemoth SUVs, with a vehicle designed for every need in between. As a general rule, the bigger the car the more expensive it will be. Trucks designed to haul several tons of goods and equipment cost more than standard commuter sedans simply because of the greater resources going into building them. This is not always true, however. A sporty coupe with a sleek design and a roaring engine may cost more than any SUV on the market. The vehicles at the high end of the price scale are usually the most coveted but, when confronted with costs of ownership, most families opt for something more practical.
Used cars are an economical choice when a new car is not in the budget. Unfortunately, with so many individuals looking to buy used, there's a shortage of reasonably priced, quality vehicles available in many areas. Anyone looking for a deal will need to hunt and haggle with dealers and private owners alike.
Once a deal is struck on a car, the process of legally changing hands begins. For private sales, that usually means visiting a notary for plates, the title, registration and taxes. Dealerships should take care of all of this during the sales process. Either way, the buyer is expected to cover the attached fees, which can reach several hundred dollars by the time everything is accounted for.
The final, and biggest, deciding influence in initial cost is how much of the car's price is provided at time of sale. Saving up most or all of the sticker price is a wise move for anyone who can afford it. Financing saves money in the short-term and is a tempting prospect, but it also ends up tacking on at least a few hundred dollars over the life of the loan and saddles the car's owner with a monthly payment for years down afterward.
Financing is not always straight-forward, especially for those with poor or limited credit. First-time buyers often run into obstacles here. Young men and women with no credit history and an entry-level income are either declined or offered loans at high interest rates to compensate for the risk. The situation is further worsened when the car:
When any of these occur, the buyer may be required to make a substantial down payment to earn the bank's backing or forced to pay for everything in cash.
Relying on a cheap and easy loan is a bad strategy, especially in a sluggish economy where banks are hesitant to trust anyone. Credit unions provide more reasonable rates to members, but even when financial backing is secured there is still the issue of paying off the loan. That means monthly payments, which may not seem like much in theory but begin to pinch when finances are tight. Failure to meet payment obligations results in damaged credit, making it even harder to get loans in the future. Even if a car is totaled, sold or rendered inoperable by a mechanical malfunction, the payments will continue.
The only reason loans are offered, of course, is because they are profitable to the lender. The interest rate determines how much more is paid over the life of the loan than the amount borrowed. What that translates to is a thousand dollars or more added to the sticker price of a mid-ranged vehicle. Some loans have interests rates as high as 16 to 20 percent. Financing is a convenient option when there are no other ways to afford a car, but it should only be used as a last resort.
After the bills associated with paying for a vehicle, there are also the day-to-day costs needed to keep it running. Fuel is perhaps the most obvious and common of these. Every car needs some sort of energy to run. Advanced new models may be powered by electricity, but most still rely on gasoline to get back and forth. Every car has a certain gas consumption rate that varies both by model and by each unique vehicle. This is determined by the engine and aerodynamics of the car but is also lowered by driving style and the natural wearing down of various components. Most new cars begin at the factory-specified gas mileage and slowly become less and less fuel efficient as time goes on.
With gas prices fluctuating but always rising in the long run, the trend within the automobile industry has been to release cars with better gas mileage. This usually entails making them smaller, both in cargo space and engine size. Not every family wants or can use a tiny fuel sipper, however. Even the gas-guzzling SUVs can reduce their impact at the pump through careful management, including:
Gas is the greatest limiting factor on a car. Without it, a driver will not be going anywhere. Because of this, those with long commutes should seriously consider choosing a practical car over an exciting one.
Some cars lose half their value the minute they roll off the lot. Others remain highly sought-after years later. This may not seem important immediately after a purchase, but it is something that will come up when it is time to trade it in for a new vehicle. Flashy sport cars are especially vulnerable to this because much of their price comes from the thrill of buying a luxurious new vehicle. The dependable, rugged commuters retain their value longest, since they are the kinds of cars that people buy used.
Accidents and major repairs accelerate depreciation considerably. For expensive or stylized cars, changing market tastes also play a heavy role. When weighed altogether, the less expensive but indestructible wagon may therefore end up with a higher value than the speedy coupe. For some, this doesn't matter compared to buying a desired vehicle, but it is nevertheless another critical part of its real value.
Besides gasoline, cars must also be tuned up periodically to continue running at peak performance. This includes changing oil, tires, belts and brakes. Oil changes are done every few months to prevent the build-up of gunk and contaminants in the engine. Oil filters are changed less often, once the residual debris becomes too thick. This type of maintenance is essential for keeping an engine in good working order, lowering the chances of malfunction and improving gas mileage. If done at home, changing oil is cheap and easy, but if left to professionals it can cost $100 or more per year.
Tire rotations are performed with oil changes. This is not a full tire change but a switching of positions to create even wear along the treads and extend their useful life. Tires may also be aligned to help the car drive straight and topped off with air when they begin to run low. Depending on the style and quality of the tire, they must also be replaced every so often for safety's sake. The size and exclusivity of a model will affect the price of a new set of tires.
Brakes are probably the most important maintenance performed on a car. When the pads begin to wear low, safety becomes compromised, and the braking system may fail altogether. Then there are spark plugs and air filters to replace as well as general cleanings every two or three years to scrub the engine free of waste material. Learning how to do the simpler forms of maintenance saves car owners hundreds or even thousands of dollars per year but must be budgeted for otherwise.
Even with a regular maintenance schedule, things sometimes go wrong. Certain models are famous for their ability to travel hundreds of thousands of miles without so much as a stray squeak, while others are infamous for short-circuiting 10 miles from the dealership. When a car breaks, the severity of the problem as well as the availability of replacement parts will determine the repair bill. An expensive import, for example, doesn't have new oil pans sitting in the back of every mechanic's shop and requires specialized knowledge.
Used cars are more likely to develop issues, but they also have precedent on their side. There's generally more information about the known problem areas and when they develop once a car has been around for a while. New cars start off with a clean slate but are an unknown quantity.
One of the biggest costs associated with car ownership is insurance. Proof of auto insurance is legally required to register a vehicle and drive it. Rates are assessed on an individual basis and determined by many different factors, the most important of which are:
Insurance companies offer liability, collision and comprehensive damage. Liability is the base form of insurance required for every driver. It covers any damage or injury caused by the insured driver. Collision insures damages incurred to the insured driver's car. Finally, comprehensive insurance covers every other damage not caused by an accident.
Liability is the least expensive type of insurance, and every new aspect of the policy adds hundreds of dollars to the yearly fees. Whether or not the extra cost is worth it depends on the quote and the driver's sense of caution. Even the minimum mandatory policy, however, costs hundreds or even thousands of dollars to maintain per year.
Cars are now a necessity for anyone living outside a major city, but owning one requires careful commitment and budgeting. With the right financing and realistic expectations, however, it is possible for any person to buy and care for a vehicle without going bankrupt in the process.