Getting a car loan is currently very difficult.

Getting a car loan is currently very difficult.

Car Loans: What Buyers Need to Know

Source: Insider

Car buyers are facing some of the highest interest rates and monthly car payments in history — at a time when the rate of auto loan rejections is soaring. With low inventory and sky-high prices for new and used vehicles, getting a car loan has become more challenging than ever.

The Challenge of Getting a Car Loan

It’s becoming increasingly difficult for consumers to obtain car loans. According to the Federal Reserve, lenders are denying over 14% of car-buying loan applicants. While this rejection rate is lower than the overall loan rejection rate of nearly 22%, it marks the highest likelihood of auto loan rejection in recent history.

The surge in rejections can be attributed to the current macroeconomic climate, coupled with the fact that some drivers have more debt on their cars than the cars themselves are worth. Lenders may be concerned about escalating balances and rising delinquency rates, which have been increasing steadily.

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Factors Contributing to Loan Rejection

The overall banking environment and rising delinquency rates have led banks to reduce their auto lending activities. As a result, consumers face higher interest rates and significantly higher monthly car payments. In June, average interest rates for new vehicle loans reached 7.2%, while rates for used vehicle loans soared to 11%, according to auto buying firm Edmunds. Additionally, the average monthly car payment surpassed a record high of $733 in the second quarter of this year, with more than 17% of consumers paying over $1,000 per month.

These challenges are particularly pronounced for used car buyers. Factors such as student loan payments have also influenced the lending environment. The availability of consumer credit in the used car market is experiencing tighter conditions compared to the new car market. The reintroduction of student loan payments is likely to increase delinquencies and make lending more stringent.

What Buyers Can Do

To navigate this challenging car loan landscape, buyers should take certain steps to improve their chances of getting approved for a loan. One option is to approach a direct lender like Navy Federal, which saw a record number of loans and applications in May. Gary Guthridge, Assistant Vice President of the consumer lending portfolio at Navy Federal, advises buyers to come prepared to dealerships and obtain pre-approvals whenever possible.

Being pre-approved gives buyers a clear understanding of their loan terms and monthly payments, allowing them to negotiate with confidence. By knowing the specific terms, borrowers can assert their negotiating power and make more informed decisions about their purchase. For instance, knowing the impact of a shorter loan term can help buyers plan their budget accordingly.

Furthermore, it is vital to maintain a healthy payment ratio to gross monthly income and opt for a reasonable loan term. Keeping the monthly payment between 15 to 20% of their total income can ensure that buyers do not overextend themselves financially. Additionally, selecting a loan term that strikes a balance between manageable payments and a reasonable timeframe for repayment is crucial.

Conclusion

Securing a car loan has become more challenging due to the current economic climate and rising delinquency rates. Higher interest rates and monthly car payments have put additional pressure on buyers. However, by taking proactive steps such as obtaining pre-approvals and negotiating loan terms, buyers can improve their chances of getting a loan and make informed decisions about their purchase. Responsible financial planning and budgeting are key to successfully navigating the car loan landscape.

• car buying
• loans
• Transportation