Auto Loan And How It Affects Debt To Income Ratios

These days new car prices can easily surpass the $30,000 mark.  Many folks do not have $30,000 saved so the majority of new car buyers get an auto loan when purchasing a new vehicle.  Used car prices are also very expensive and if you want to get any vehicle that is newer and in good running condition that is reliable, you can expect to pay over $10,000 plus for it.  Again, an auto loan will most likely be necessary.

Auto Loans Have Great Impact On Home Loans

Auto loans are not like mortgage loans in a sense that they are shorter term loans.  Mortgage loans are amortized over 30 years but auto loans are normally amortized over 3 to 5 years so the payments are high.  For example, a typical new vehicle is over $30,000.  If you were to put $3,000 down payment on a $30,000 car and finance $27,000, your monthly payment will be $512.62 per month at a rate of 5.25% interest rate.  $512.62 per month is equivalent to a $104,204.11 mortgage loan amount at a 4.25% mortgage rate amortized over 30 years.  So if you were to purchase a $30,000 car and put down $3,000 and finance $27,000 to yield a car payment of $512.62, that would be decrease your mortgage loan qualification amount by $104,204.11.  Many home buyers who recently purchased a new vehicle have trouble for qualifying for a mortgage loan on the home they want because their auto loan payment really affects their debt to income ratios when qualifying for a residential mortgage loan.

Auto Loan Basics

In most states, when you get an auto loan, the auto finance company holds the title until you made your last auto loan payment.  Once you have paid your auto loan in full, then the auto finance company turns over the title to you.  If you default on your auto loan, your auto gets repossessed and sold at a car auction.

Auto Depreciation

If the auto is sold less than the balanced owed, the auto finance company can go after you for the deficiency.  If you do not pay and the auto loan company realizes that you have a job and assets, they can file a lawsuit against you and try to get a judgment from the courts.  Once they have a judgment against you, they can come after you by garnishing your wages or seizing your bank accounts.  All autos financed by an auto finance company requires that you have mandatory full coverage auto insurance so in the event of theft, accident, or vandalism, the auto lender’s assets are covered.

How Difficult Is It To Get An Auto Loan?

It is not too difficult to get an auto loan.  If you have bad credit and want to purchase a new car, the auto loan company will most likely require you to put more money down.  For those with perfect or great credit, they can get an auto loan with very little or no money down.  An auto loan finance company will report your auto loan payment history to all three credit reporting agencies.  Making your payments on time on your auto loan is a great way of re-establishing your credit if you have bad credit and want to re-establish your credit.  If you are late on your auto loan monthly payments, your credit scores will suffer and it will also be reflected on your credit report that you are a late payer and can have negative consequences on you getting future credit.

If You Intend In Buying A Home, Buy Your Car Later

As mentioned earlier, an auto loan will greatly impact your debt to income ratios when it comes to qualifying for a mortgage because auto loans are shorter term loans.  Most auto loans are amortized over 3 to 5 years so an average automobile loan payment is normally $500 per month.  A $500 monthly payment is equivalent to a $100,000 mortgage.  If you have a reliable vehicle and are intending in buying a new car but also are thinking of purchasing a new home, get the new home first and get the car after you have purchased your new home.

By Gustan Cho

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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