COVID-19 is having a massive impact on the global economy and very few industries have been untouched by it. If your business relies on employees working in a physical space and profits only when people are willing to shop and spend, thereâs no escaping it.Â
Itâs no surprise, therefore, that the auto industry has been so negatively affected. In a recent guide, we looked at the many auto loan relief options that manufacturers offering in light of the coronavirus. In this guide, weâll highlight the ways this industry has been stung by the pandemic and look at what it means for the future of the US automobile and car financing sectors.
How is the Coronavirus Affecting Car Sales?
The automobile manufacturing industry experienced a minor surge at the beginning of 2020 but COVID-19 began to impact sales heavily in March. Many companies, Fiat Chrysler and General Motors included, began the year with strong momentum behind them, but March hit them hard and negated all the gains made during the first two months.
Both of these companies recorded losses for the first quarter of 2020, with Fiat Chrysler losing 10% in total.
Toyota, one of Americaâs biggest manufacturers, also recorded massive losses for March, with daily sales dropping by nearly a third during this month.
All of this is to be expected. The US has yet to announce the sort of national lockdowns we have seen in countries like the United Kingdom, Italy, Spain, and Greece, but many citizens are in self-isolation, countless businesses have shut their doors, and there are fewer cars on the road as a result.
Combine this with the fact that people are losing their jobs and worrying about their futures, and itâs easy to see why car sales have been affected so severely.Â
What are Manufacturers Doing About It?
Automobile manufacturers have moved quickly to stem the rising tide of financial devastation caused by COVID-19. Fiat Chrysler, for instance, is offering improved auto loan conditions to convince consumers to make sizeable purchases and keep the wheels turning. It has also made it easier to purchase a car for those in self-isolation or lockdown.
You can now buy a Fiat Chrysler online, with options for trade-ins, auto loans, and pretty much everything else you would get when buying in person.
Theyâre making it easier for you to buy because they need you to make that commitment. At the same time, the production of many new vehicles has been halted.
While some plants and showrooms are still open in the United States, Europe has experienced an almost continent-wide shutdown, leading to a decreased demand.Â
Manufacturers are also anticipating that things will get worse, as many experts predict that the USA will experience a spread similar to that of Spain and Italy.
How Has COVID-19 Hurt the Automobile Industry?
We have already touched upon some of the ways that COVID-19 has impacted the automobile industry, but the problem goes far beyond people not being able to make it to their local showrooms. Furthermore, if events in Europe are anything to go by, the problems will only get worse and it could be several years before the automobile sector recovers.
Here are a few reasons the industry has been hit hard:
There is a genuine fear that the COVID-19 pandemic will remain for all of 2020 and even beyond that. It seems unlikely that it will last for that long, but if the country doesnât go into lockdown and a vaccine isnât produced, itâs possible.Â
With this in mind, many consumers are putting off buying new cars out of fear that they simply wonât need them. New cars depreciate rapidly and can lose 20% in the first year. Whatâs the point of spending $30,000 on a new car if it will be worth $24,000 by the time you actually get behind the wheel?
Struggling Stock Markets
The stock market doesnât just impact big companies and investors. It also affects average American families who have their money tied into savings accounts, stocks, and pensions. Savers have lost a lot of money and are worried that theyâll lose even more in the near future, making buying a $30,000+ vehicle incredibly reckless.Â
Price of Gas
One of the few things that the automobile industry has on its side is the price of fuel, which has plummeted in the past few weeks. The problem is, no one cares about the price of fuel when theyâre stuck inside the house worrying about their health and their jobs.
Automotive plants canât simply shut down for a few weeks and then start up again when everything has cleared up. Many plants were already struggling to keep things together and once production stops and their profits disappear, they may close down entirely, taking hundreds, if not thousands of jobs with them.Â
Bottom Line: Car Sales After COVID-19
Itâs highly likely that the hard times will continue for the manufacturing industry. As the coronavirus continues to spread across the country, manufacturing plants will struggle to retain employees, showrooms will shut, and fewer Americans will be willing to pay the $30,000+ required for a new vehicle.
Whether this impacts the future price and availability of automobiles remains to be seen, but itâs highly likely that weâll see some massive changes in this industry. Americaâs best-loved manufacturers will lose millions and could be sent to the brink of financial destruction, while many salespersons and mechanics will likely lose their jobs as demand drops and garages/showrooms close down.Â
How COVID-19 is Affecting Auto Loans is a post from Pocket Your Dollars.
If you buy or lease a car, youâll need to arrange for insurance coverage. Not only is it the law in most states, it will also protect your bank account in the event of an accident. However, if youâre involved in an accident and the other driver doesnât have car insurance, you could run into problems. Thatâs the thinking behind uninsured motorist insurance.
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Uninsured Motorist Insurance Basics
If two people who both have car insurance get in a car crash, they exchange insurance information. The other driverâs insurance company generally pays your expenses if youâre in a crash. So what happens if the other driver doesnât have insurance? Thereâs no one to pay you, cover your car repair or replacement or foot your medical bills if youâre injured. Your own car insurance may cover those costs, but it depends on the plan.
Thatâs where uninsured motorist insurance comes in. Uninsured motorist insurance policies offer protection against property damage or personal injury resulting from a run-in with an uninsured driver. There are a lot of bad drivers out there, and plenty of people who drive regularly but canât afford car insurance. Have a run-in with one of them and you could end up covering your own medical and car repair bills.
In 22 states and the District of Columbia, drivers are required to have uninsured motorist insurance, so if you have vehicle insurance youâre covered in the event of a crash with an uninsured driver. But if you live in a state that doesnât require uninsured motorist coverage, your regular car insurance policy may not protect you from bills if youâre in a crash with a driver who doesnât have car insurance.
Check out our budget calculator.
Is Uninsured Motorist Insurance Necessary?
If you live in a state that requires uninsured motorist coverage as part of the minimum coverage requirement for all auto insurance policies, you have at least some protection from uninsured drivers. You can always call your insurance company to check on the kind of coverage you have and discuss your coverage options.
If you live in a state that doesnât require uninsured motorist coverage, the question becomes: Should you buy uninsured motorist insurance as an add-on policy to your regular car insurance? Before you decide, itâs worth pricing it out.
First, you can call your car insurance provider and check what level of coverage you already have against uninsured motorists. Your existing plan may provide some level of protection against medical bills and/or car repair bills resulting from a crash with an uninsured motorist.
If you donât have any coverage or if you think your coverage levels are insufficient, you can ask your insurance provider how much it would cost you to add uninsured motorist insurance to your coverage package. You can also get quotes from other car insurance companies and opt for the policy that provides the best coverage for the lowest price.
Uninsured motorist insurance can give you some extra protections, too, such as coverage in the event that a hit-and-run driver crashes into your car or in the event that youâre struck by a vehicle as a pedestrian. So even those with built-in protection against uninsured motorists through their regular car insurance may be tempted to add extra coverage.
Related Article: All About Car Loan Amortization
Just because you have car insurance that youâre paying for every month doesnât mean youâre protected in all eventualities. If reading this article has made you nervous that you might not have enough â or any â protection against uninsured motorists, this could be a good time to get your insurance company on the phone, particularly if you live in a state with a high percentage of uninsured drivers.
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The post What Is Uninsured Motorist Insurance? appeared first on SmartAsset Blog.
Deciding to move is a major decision and location is one of the most important aspects you should consider when planning a move. Whether it’s a new neighborhood, a new city, or a new state–once you get there, you want to make sure your new community truly makes you feel welcome.
The post Four Things to Consider When Choosing Your Next Community appeared first on Homes.com.
You’re involved in an accident, your car is wrecked, and your insurer has stepped in to cover the damages. All is well, and you only have the deductible to worry about, but what happens before the car is fixed? How do you continue to get to work every day and take the kids to school when your car is in theÂ repair shopÂ for the next few days or weeks?
That’s whereÂ rental carÂ reimbursementÂ coverageÂ steps in. If you have thisÂ optional coverageÂ on yourÂ carÂ insuranceÂ policy, you won’t need to worry.
Keep reading to learn how this coverage option works.
Rental CarÂ ReimbursementÂ vsÂ RentalÂ CarÂ Insurance
Before we go any further, it’s worth clarifying the potential confusion surroundingÂ rental carÂ coverageÂ andÂ rental carÂ reimbursementÂ coverage. The former includes damage waivers, property insurance, and liability coverage and protects you when you are driving aÂ rental car.
You will be offered this type of insurance when you rent a car and can also get it through your currentÂ insurance policyÂ or through yourÂ credit card, bank account or travel insurance.
As forÂ rental carÂ reimbursement, it is designed to cover the costs of renting a vehicle when your car is in the shop or has been stolen.
Rental carÂ reimbursementÂ only applies if yourÂ insurance companyÂ is paying for the repairs and those repairs are covered by yourÂ insurance policy. It is a coverage option that is typically only available to policyholders who haveÂ collision coverageÂ or comprehensive coverage insurance.
What DoesÂ Rental CarÂ ReimbursementÂ Cover?
Rental carÂ reimbursementÂ is designed to cover theÂ cost of aÂ rental car, but there are limits. MostÂ insurance companiesÂ will only cover you for 30 days and many also set aÂ daily limit, often between $50 and $100. This means that you can’t claim for costs above this or for a rental period that extends beyond it.
In some states and in some situations, you may not even need toÂ addÂ rental reimbursement coverageÂ to your policy as theÂ at-fault driverÂ could be responsible for yourÂ rental costs. In the event of aÂ car accidentÂ caused by a fully-insured driver, their liability insurance may cover you for transportation costs, while also paying for the damage done to you and your vehicle.
However, there is aÂ coverage limitÂ that means they may not be liable for all the costs you pay to theÂ rental carÂ company. In such cases, havingÂ rental carÂ reimbursementÂ coverageÂ on your policy will cover the difference and ensure you’re not out of pocket.
How Much Does it Cost?
The cost ofÂ rental reimbursement insuranceÂ differs from state to state and provider to provider. Your costs will also be higher if you are deemed to be a high-risk driver and have a history of at-fault accidents andÂ insurance claims. Generally, however, you can expect to pay anywhere from $3 or $4 a month extra to $15 or $20 a month extra.
It’s not a huge amount because the cover provided is very limited. For instance, at $50 a day over 30 days, the insurer’s liability is just $1,500, which is a fraction of the amount they can expect to lose with other coverage options.
How Does the Process Work?
You’re involved in a minor accident and your car is taken to theÂ body shop, now what? If you haveÂ rental coverage, you can do one of the following:
1. Pay for it Yourself
When you pay for the vehicle yourself, you have more choice about what car you rent and from where you rent it, and you can also get it as soon as you need it. If you choose this option, just make sure you keep a record of all the costs so you can report these to the insurer and get your money back.
By choosing this method, you have more control and providing you have cover, you shouldn’t encounter any issues when seeking reimbursement. Get theÂ rental vehicleÂ you want, drive it off the lot, and wait for your car to be fixed and your expenses to be covered.
2. Let YourÂ Insurance CompanyÂ Do It
The second option, and the best option, is to go through yourÂ insurance company. They will contact theÂ rental companyÂ on your behalf and deal with all of the red tape, ensuring you only get a car that you are fully covered for and providing you with all the necessary details at the same time.
By going through your insurer, you can avoid the hassle and they may even help you to get a better deal.Â
It’s worth noting, however, that your insurer will not pay for additionalÂ rental carÂ coverageÂ like damage waivers. But as noted already, yourÂ auto policyÂ may already provide you with the cover that you need.
Should You Get AdditionalÂ CarÂ RentalÂ Reimbursement Coverage?
On average, you will useÂ rental carÂ coverageÂ just once in a 10-year period, and you may only need it for a few days at a time. To determine whether thisÂ additional coverageÂ option is right for you, simply calculate how much it will cost you on a monthly basis and then compare this to how much it is likely to offer you.
For instance, let’s assume that you are charged $10 a month for this additional option. This means you will pay $120 a year or $1,200 over ten years. Assuming you’re being offered a maximum of $50 per day for 30 days, this means the benefits are capped at $1,500.
If you’re paying $15 a month instead, that’s $180 a year, $1,800 a decade, and more than you will get back. And, in both cases, we’re assuming that you rent a car for the full 30 days at the maximum allowed price, which is somewhat rare. As a result, you can probably overlook thisÂ additional coverageÂ option when those are the prices quoted.
Bottom Line: ChoosingÂ Insurance Coverage
FromÂ carÂ rentalÂ coverageÂ andÂ rental carÂ reimbursementÂ toÂ roadside assistance, new car replacement and more, there is no shortage of options for the average driver.Â
But as tempting as it is to add all of these options to yourÂ autoÂ insuranceÂ policyÂ in the knowledge that you’ll be fully covered, the costs can spiral out of control very quickly. You could find yourself spending an excessive amount of money unnecessarily, and at a time when everyone is watching their budgets, that’s never a good thing.
Think aboutÂ rental carÂ reimbursementÂ carefully and reject it if you don’t need it, even if it is only $10 or $20 extra a month.Â
A Guide to Rental Reimbursement Coverage is a post from Pocket Your Dollars.
It is common occurrence on American highways for near-accidents to occur. It is also a common occurrence on American highways for people in near-accidents, to look at the license plate of the near-accident-causer and think to themselves, âOh, well of course theyâre from Massachusetts.â Or some other state. It seems like almost every state has a reputation for having terrible drivers. Thanks to data from the National Highway Traffic Safety Administration we can confirm some of those myths and dispel others.
Looking to move? Check out mortgage rates in your new area here.
According to the National Highway Traffic Safety Administration around 32,000 people were killed in vehicle-related incidents in 2014. Of course some incidents are genuinely accidents, while some are clearly the fault of one driver, like in the event of drunk driving. But deaths and DUIs are not the only metrics to measure bad driving, people who receive speeding tickets or do not have automobile insurance can also be considered negligent drivers.
To find the states with the worst drivers SmartAsset looked at number of drivers, DUI arrests, people killed, google trends in speeding tickets and percentage of people who have auto insurance. To find out how we put all these numbers together to create our index please read the full methodology below.
No Massachusetts. Boston drivers usually have a reputation as bad drivers but the numbers we analyzed donât bear that out. Massachusetts ranks 48 on our list. While we have no data on non-fatal accidents, the fact that they lead the nation in insured rate is a positive sign.
Be careful when driving in the southeast. Maybe itâs the heat causing road rage, but four out of the top ten states in our study are located in the southeast.
Florida is often plagued with a reputation for bad drivers. The numbers seem to show that this might, in fact, be true. Floridians google âspeeding ticketsâ and âtraffic ticketsâ more than any other state. They also have the second lowest number of insured drivers in the nation.
Another southern state and another state in which one ought to be extra careful when driving through. Mississippi had the 5th highest deaths resulting from vehicular incidents. One area where Mississippi can improve is in DUIs. Mississippi had the 12th highest rate of DUI arrests per driver in the country. Like Florida relatively few people are insured. They rank 3rd worst in that category with only 77% insured.
Buying car insurance? Avoid these 6 mistakes.
Continuing on the theme of states with low insured driver rates, Oklahoma has the least. Only 74% of drivers in Oklahoma are insured. It does not get much better for the state in the other categories we looked at. They have one of the 15 worst scores in DUIs per thousand drivers (7.74), number of people killed per thousand drivers in vehicular incidents (.21) and rate of googling parking and traffic tickets (52.13).
4. New Jersey
The Garden State has the infamy of being the state with the second most deaths per driver at 0.62. New Jersey drivers are more likely to be insured than some of the other states on our list. New Jersey drivers are insured at a rate of almost 90%, coming in 22nd on our list.
New Jerseys neighbor and rival for worst drivers in the northeast, Delaware is unfortunately the only state with more deaths per driver than New Jersey. One curious statistic is that while Delaware has the lowest DUI rate per driver, 40% of deaths occurred when the driver was above the legal limit for drinking, which is the 4th highest rate in the country.
Another southern state and a similar story to the others with pretty bad scores all around. One bright spot â Alabama has the 4th best score with only 1.42 DUI arrests per thousand drivers. Like Delaware, though, that statistic does not tell the whole story, 33% of deaths in Alabama resulted from a driver being over the legal alcohol limit.
Vermont leads the nation in DUIs per driver with 50 per thousand drivers. However, they also have the lowest percentage of deaths resulting from drunk driving, at 20%.
Tennessee is one of the least insured states in the country, with 20% of people not having car insurance. Tennessee also has the 18th highest number of deaths per thousand drivers. One positive is that they are in the better half of the country for DUI per thousand drivers at 5.7.
Tragically for Texas it has the highest percentage of deaths coming from drunk drivers at 40% and yet it is in the better half of states for DUI arrests. Recent news that Uber and Lyft will both be leaving Austin may have an impact. According to MyStatesman, Austin only has permits for 756 legal taxis and is hoping to increase that to 1,161. But for a tech hot-spot with a population of 850,000 even this may not be enough.
Nevada is the 3rd worst state for traffic and speeding tickets (when comparing googling trends) as well as being the 17th worst state for DUIs. The good news is that 88% of Nevada drivers are insured.
Data and Methodology
In order to find out which state had the worst drivers SmartAsset collected data across 4 metrics.
Percentage insured. Data is taken from the Insurance Research Council.
DUI per thousand drivers. Number of drivers is taken from the Federal Highway Administration. Number of DUIs is taken from the State Justice Department.
Deaths per thousand drivers. Data is taken from the Fatality Analysis Reporting System, which is part of the National Highway Traffic Safety Administration.
Google trends on driving tickets. This data is the average of the scores each state got in google trends for the 8 phrases: speeding ticket, âspeeding ticket,â speeding tickets, âspeeding tickets,â traffic ticket, âtraffic ticket,â traffic tickets and âtraffic tickets.â
We then indexed each factor for every state giving equal weighting and then finding the average score per state to create the final index.
Questions about our study? Contact us at firstname.lastname@example.org.
Photo credit: Â©iStock.com/Ben Harding
The post States With the Worst Drivers â 2016 Edition appeared first on SmartAsset Blog.
Food delivery and ridesharing are great ways to earn extra income. The market for food delivery has increased as restaurants have had to adapt to COVID-19 precautions, and just about everyone could use some extra income as we continue to navigate life during a pandemic.
If you’re considering joining a food delivery or rideshare company as a driver, you need to be sure you have the right insurance coverage. If you’re in an accident, you want to be able to replace your car or fix it so you can keep working.
As you review your car insurance, here’s what you need to know:
You have a coverage gap
Rideshare and delivery companies offer some insurance coverage while you are on your way to pick up passengers or food and while you are transporting passengers or food. However, when you have your app on and are waiting to accept a delivery, neither your personal car insurance or your rideshare company offers coverage.
If you are in an accident while you’re waiting to accept a job, you won’t have any insurance coverage. You’ll be on your own for covering the resulting costs and may have to deal with other issues.
Look for an insurance policy to cover the gaps
To protect yourself and cover this gap, you’ll want to purchase an additional policy or a policy that adds rideshare coverage to your personal policy. These policies and riders are commonly called rideshare insurance. However, they are commercial auto coverage policies that offer insurance coverage when you use your car for business.
Choose a reliable and highly rated insurer for your policy. Check the insurer’s financial strength to gauge the company’s financial stability and ability to make claims payments. Reading customer reviews can give you a sense of the customer experience with the insurer, which can also help you find a good company.
As you shop for policies or riders that can be added to your personal auto coverage, you can use companies like Policygenius toÂ compare policies across multiple insurers. The ability to compare quotes and policies quickly and efficiently makes it easier to find a good deal. This can also be beneficial if you’re also shopping for personal auto insurance coverage.
Before you buy a policy, understand how it works:
- What is the deductible? This is the amount you’ll pay before the insurer starts to pay for covered damage.
- How much is the premium? This is the monthly fee you pay for insurance coverage.
- Does the policy have a benefit maximum? This is the most an insurer will pay. Once this limit is reached, the rest of the expenses are your responsibility.
- What coverage is offeredâcollision, liability, comprehensive, medical payments, income loss, etc.? Car insurance policies are highly customizable because you can choose how much and what kind of coverage to buy.
Car insurance requirements vary by state. Liability coverage for property damage and physical injury is most commonly required. Some states require additional coverage for uninsured or underinsured motorist insurance or Personal Injury Protection (PIP). PIP coverage offers coverage for lost wages according to your policy’s terms.
Making a claim for lost wages will depend on whether your state is an at-fault or no-fault state. You may need to file a claim with the other driver’s insurance, use your uninsured or underinsured motorist insurance, or PIP coverage.
Keep in mind that you typically have to have the same level of coverage on your personal insurance as you do with your rideshare coverage. Knowing the cost and kind of protection offered by your policy will help you find one and choose coverage that will meet your needs.
Communicate with your personal car insurance carrier
If you’re driving for hire and do not communicate that to your car insurance company, you could lose your coverage. Insurers can end your policy and no longer offer you coverage if you don’t communicate clearly about your car usage.
While communicating and getting commercial auto coverage added to your policy can cost more, you’ll be better protected if you have the right coverage and won’t have to worry about your insurer rescinding the policy. Communicating with your car insurance company about how you’re using your car will ensure that you have the coverage you need, which will give you peace of mind and benefit you in the long run.
Set yourself up for success
Before you sign up with a food delivery or rideshare service, understand what coverage your company offers and where the coverage gap is. This will help you know what to look for as you evaluate rideshare or commercial auto insurance policies.
If you’re happy with your current auto insurance provider, start by asking them what they offer. You can also compare what your current insurer provides with what other insurers are offering to check that your company is competitive.
Purchasing insurance to cover the gap will give you peace of mind and financial protection if you’re in an accident. It will also protect your car, which is essential to your ability to work as a rideshare or food delivery driver.
The post 3 Things Rideshare and Delivery Drivers Should Know About Car Insurance appeared first on Credit.com.
Join bloggers Amanda and Corey Hendrix as their family embarks on a new homebuying journey. From previously living in older homes that require plenty of love (and renovations), they’re looking at opening up their option into new build territory.
Insurance companies determine risk when calculating rates and offering coverage. If the company determines that your accident risk is higher than average, you’ll have to purchase high-risk auto insurance. Since companies base rates on risk, you can expect to pay more for coverage if you need high-risk insurance.Â
Find out why you might need high-risk insurance, how you can lower your premiums, and more. Then you’ll be ready to shop for high-risk auto insurance if necessary.Â
Reasons for High-risk Auto Insurance
Insurance companies look at various factors when determining risk. You might need high-risk insurance if you:
- Have lots of at-fault accidents on your recordÂ
- Have a large number of speeding ticketsÂ
- Have reckless driving or racing violations
- Have been convicted of driving under the influence
- Are a young, inexperienced driver, or are over 65 years oldÂ
- Have bad creditÂ
- Use the vehicle for a ridesharing service or another high-risk activityÂ
- Drive a high value or specialized car
- Had your license suspended or revoked
- Let your insurance lapseÂ
Lowering Your Risk
If you’ve been flagged as a high-risk driver, there are some things you can do to reduce your risk in the eyes of the insurance company. Reducing your risk can lead to lower premiums.
First, if you are high risk due to moving violations, take a defensive driving course. Speak with your insurance agent before taking a class to ensure it’s approved, though.Â
Also, practice safer driving behaviors while on the road. Follow the speed limit and obey all laws. After you hit the three-year mark without any tickets, your premium should decrease.
If you’re high-risk because of a DUI conviction, speak to your insurance company about installing an interlock ignition device. While most companies will not reduce the rates, some will, so it’s worth exploring.Â
Improving your credit score can also lower your premiums. Some insurance companies charge more for bad credit scores, so make your payments on time and reduce your credit-to-debt ratio.Â Â
SR-22 Certificate and High-risk Insurance
If you require high-risk auto insurance because your policy lapsed, or your license was suspended or revoked, you might need an SR-22 certificate. This certificate is not insurance. Instead, it is proof that you have the required liability insurance. Your insurance company will issue the certificate and send it to the necessary state office on your behalf.Â
High-risk Insurance Restrictions
Some high-risk policies include restrictions. For example, you might be the only person protected when driving your vehicle. If someone else drives your car, he or she won’t be covered. Also, if you are in an accident and the court assesses punitive damages, your policy might not cover it. Finally, the company might review your driving history annually and increase your rates if you have any infractions.Â
Because of these restrictions and the high cost of coverage, work hard to reduce your risk, so you can get a standard policy soon.Â
Getting High-risk Insurance
Finding high-risk auto insurance is a bit harder than purchasing a standard policy. Some major insurance providers offer high-risk coverage, so you can begin shopping there. However, you might have to use a company that specializes in these policies. When you choose such a company, you’re less likely to get turned down for insurance.Â
As with any insurance policy, you should compare quotes before purchasing high-risk coverage. Companies use different formulas for assessing risk. One company might see you as extremely high risk, while another might view your risk at a moderate level, meaning you’ll pay less. After you compare quotes, you can purchase your policy and hit the road once again.
What Is High-risk Auto Insurance?Â Â is a post from Pocket Your Dollars.
These days, it can take a long time to pay off a car loan. On average, car loans come with terms lasting for more than five years. Paying down a car loan isnât that different from paying down a mortgage. In both cases, a large percentage of your initial payments go toward paying interest. If you donât understand why, you might need a crash course on a concept called amortization.
Find out now: How much house can I afford?
Car Loan Amortization: The Basics
Amortization is just a fancy way of saying that youâre in the process of paying back the money you borrowed from your lender. In order to do that, youâre required to make a payment every month by a certain due date. With each payment, your money is split between paying off interest and paying off your principal balance (or the amount that your lender agreed to lend you).
What youâll soon discover is that your car payments â at least in the beginning â cover quite a bit of interest. Thatâs how amortization works. Over time, your lender will use a greater share of your car payments to reduce your principal loan balance (and a smaller percentage to pay for interest) until youâve completely paid off the vehicle you purchased.
Not all loans amortize. For example, applying for a credit card is akin to applying for a loan. While your credit card statement will include a minimum payment amount, thereâs no date set in advance for when that credit card debt has to be paid off.
With amortizing loans â like car loans and home loans â youâre expected to make payments on a regular basis according to something called an amortization schedule. Your lender determines in advance when your loan must be paid off, whether thatâs in five years or 30 years.
The Interest on Your Car Loan
Now letâs talk about interest. Youâre not going to be able to borrow money to finance a car purchase without paying a fee (interest). But thereâs a key difference between simple interest and compound interest.
When it comes to taking out a loan, simple interest is the amount of money thatâs charged on top of your principal. Compound interest, however, accounts for the fee that accrues on top of your principal balance and on any unpaid interest.
Related Article: How to Make Your First Car Purchase Happen
As of April 2016, 60-month new car loans have rates that are just above 3%, on average. Rates for used cars with 36-month terms are closer to 4%.
The majority of car loans have simple interest rates. As a borrower, thatâs good news. If your interest doesnât compound, you wonât have to turn as much money over to your lender. And the sooner you pay off your car loan, the less interest youâll pay overall. You can also speed up the process of eliminating your debt by making extra car payments (if thatâs affordable) and refinancing to a shorter loan term.
Car Loan Amortization Schedules
An amortization schedule is a table that specifies just how much of each loan payment will cover the interest owed and how much will cover the principal balance. If you agreed to pay back the money you borrowed to buy a car in five years, your auto loan amortization schedule will include all 60 payments that youâll need to make. Beside each payment, youâll likely see the total amount of paid interest and whatâs left of your car loanâs principal balance.
While the ratio of whatâs applied towards interest versus the principal will change as your final payment deadline draws nearer, your car payments will probably stay the same from month to month. To view your amortization schedule, you can use an online calculator thatâll do the math for you. But if youâre feeling ambitious, you can easily make an auto loan amortization schedule by creating an Excel spreadsheet.
To determine the percentage of your initial car payment thatâll pay for your interest, just multiply the principal balance by the periodic interest rate (your annual interest rate divided by 12). Then youâll calculate whatâs going toward the principal by subtracting the interest amount from the total payment amount.
For example, if you have a $25,000 five-year car loan with an annual interest rate of 3%, your first payment might be $449. Out of that payment, youâll pay $62.50 in interest and reduce your principal balance by $386.50 ($449 â $62.50). Now you only have a remaining balance of $24,613.50 to pay off, and you can continue your calculations until you get to the point where you donât owe your lender anything.
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Auto loan amortization isnât nearly as complicated as it might sound. It requires car owners to make regular payments until their loans are paid off. Since lenders arenât required to hand out auto amortization schedules, it might be a good idea to ask for one or use a calculator before taking out a loan. That way, youâll know how your lender will break down your payments.
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