Before consumers agree to any type of loan, they should make sure they understand what they’re getting themselves into. However, a new survey from the used car marketplace, Instamotor, shows that in most cases, people don’t really understand what goes into financing a new or used vehicle.
Consumer Survey Results
Instamotor surveyed 800 Americans, all of whom have previously applied for car loans, about their auto financing knowledge. Some of the results they found were surprising.
For instance, while 79 percent of borrowers were approved for the auto loan they applied for, 52 percent were unable to name the three biggest credit bureaus. And 94 percent didn’t know that auto lenders sometimes use a different credit score to access a borrower’s eligibility, called an Auto FICO. And 61 percent believed that lenders consider both their age and marital status when evaluating them for a loan.
The survey also found that most Americans are unprepared to evaluate an auto loan offer; nearly 60 percent of respondents didn’t understand the relationship between the term of the loan and the interest rate. 42 percent didn’t understand what it means to be “upside down” on an auto loan while 62 percent were unfamiliar with the term “gap insurance.”
The survey also revealed that when it comes to auto loans, a clear knowledge gap exists between millennials and Gen Xers. The millennial participants understood less about basic auto loan information than the Gen X participants in every category.
More Information About Auto Loans
Experian, Equifax, and TransUnion are the three biggest credit bureaus in the United States.
When individuals apply for an auto loan, lenders use many different factors to determine their eligibility. However, they don’t evaluate a consumer’s age or marital status; in fact, to do so would be illegal. Lenders do consider the borrower’s FICO (or Auto FICO) score, their debt to income ratio, and the loan to value ratio.
And while many consumers opt for longer loans so they will have a lower monthly payment, this means they will end up paying more money in interest over the life of the loan. Budget allowing, it’s always better to choose a short-term loan and to pay it off as quickly as possible.
Being “upside down” on an auto loan means the borrower owes more money on the vehicle than its worth. This can result from taking out a high-interest loan or paying a very small down payment on the loan. This becomes problematic if something happens to the vehicle, in which case gap insurance can be useful.
In the event of an accident, gap insurance will pay the difference between what the insurance determines the car is worth and what the borrower still owes on the loan.