Auto loans are major—and growing—components of consumer debt. In 2017, Americans owed over $1 trillion in auto loans, and unfortunately, millions of those car buyers were delinquent on their payments. To help consumers avoid further debt or repossession, Consumer Portfolio Services recommends the following tips for managing auto loan debt.
Tip #1: Keep Auto Expenses Below 20% Of Income
The 20% rule offers a simple way to estimate whether a car loan is affordable. Monthly loan payments along with gas, oil changes, parking fees, and other expenses should not exceed 20% of the car owner’s monthly income. In other words, if a person earns $4000 per month, he or she should spend no more than $800 on transportation. Since gas prices can fluctuate and repair needs are not predictable, it’s a good idea to estimate high.
Tip #2: Set Up Automatic Payments
Car buyers can avoid high fees for late payments by setting up an automatic payment or debit. Some auto lenders may even offer a discount or a lower interest rate to customers who do this. The only thing to beware of is letting the balance drop too low before a payment is due.
Tip #3: Refinance For A Better Rate
Getting a lower interest rate on a loan can lower the overall cost of the loan considerably. One of the main reasons car buyers refinance loans is that their credit scores have improved enough to qualify them for a lower interest rate. Consumers can also benefit if federal interest rates go down. However, bear in mind that adding years to a loan, even at a lower interest rate, can increase the total cost of the loan.
Tip #4: Communicate With The Lender About Problems
Even when consumers budget carefully and take out loans they can afford, their circumstances can change suddenly. If a sudden job loss or other emergency is going to make payments difficult, talk to the lender right away. Most lenders are willing to work with their clients to help them avoid defaulting. Some will accept a delayed payment, for example, or make a new schedule of payments. It is important to get any changes made to the loan in writing.