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As New Car Prices Rise Financing Decisions Get Tough

As per personal finance analysts for several renowned firms, the new truth is that automobiles are becoming more expensive by the day and people have to make difficult decisions about financing their purchase. People are now shelling out thousands of bucks more than earlier for the average cost of a brand new car or light truck in 2016.

How your financing decisions get tough

As a result many people are having to borrow more and that too for longer periods of time in order to finance a new car purchase. In the first quarter of this year, the ratio of brand new cars that were bought with the aid of financing grew to more than 86 percent. The average term for a new car loan scheme is now about 68 months that is around five and half years; and some car loans continue as long as seven years. Auto leases are also growing more popular because they often provide lower payments than a usual car loan would involve. Leases make up for more than 30 percent of new car transactions in the first quarter of the year. With a lease, the consumer makes payments for a fixed span of time and then typically can choose either to return the vehicle to the car dealer or to purchase it from them.

Financing Decisions Get Tough

Loans with a longer term involve risks too. There have been incidents reported where money borrowers who take out long term loans end up shelling more money for the car overall, and also face a greater risk of getting “upside down” on the loans, that is owing more than what the car is actually worth.

Market experts have noted that the traditional rule of thumb is the “20/4/10” rule: Car purchasers should focus to pay down at least 20 per cent in cash, apply for a car loan for no more than four years term and keep the cost of principal, interest and insurance to no more than 10 percent of overall household income. If you have to let go of these guidelines, the car you want may just turn out to be too pricey. It is generally observed by experts that if we need to loan out to five, six or seven years for a new car, then we cannot actually afford it.

Also Check : No Need to Worry When You Going for Second Hand Car

There are resources online like the online calculator which can be used to estimate how much we can afford to pay for a new car. It is also recommended to know the price of insuring a specific car model before we buy it, so that we are not shocked when we get the insurance bill after making the purchase.

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