Guide to Refinancing Your Auto Loan
If you are like most, buying a vehicle is a significant investment you'll make. As such, it's ideal to think ahead before purchasing to account for everything from the length of ownership to primary use. By doing so, it can help you identify the best vehicle for you as well as help you decide whether to finance or lease it.
Financing your car is not a convoluted process, but it requires commitment, preparation, and effective research on your part. This guide will explain the car loan process and inform you on how you can save money before you secure your first car loan.
Assess Your Financial Condition
Evaluate your economic condition before even thinking about purchasing an automobile – let alone getting a loan to pay for it. A good friend of mine, who has bought and sold many cars in his 25-year career as an independent car dealer, says you should pay attention to three things when assessing your financial condition:
These relate to things like cash in your checking and savings accounts along with certificates of deposit and money market accounts.
Other assets – same thing as resources – include investments in corporate stocks, bonds, and property. Include also in your resources your mortgage-free house and lien-free equipment and other items, such as cars and lawnmower.
A prospective creditor would want to know how much you currently owe before the lender advances you new funds. From the creditor's perspective, a new loan means higher risk, especially if your current debt load seems unbearable when compared with your income.
Questions of income and debt are important in the auto financing process, which is why most lenders use your debt-to-income ratio to evaluate your application and eventually approve or decline it. (To calculate your debt-to-income ratio, divide your debt payments divided by your net income. The lower the ratio, the better.)
3. Car Ownership Costs
Your liabilities – another name for debts – certainly would go up when you buy a car, be it a new automobile or a second-hand vehicle.
As a car owner, you would spend more on maintenance and repairs as well as a collection of other costs that industry insiders call TOC – shorthand for "true cost to own" or "total cost of ownership." TOC includes things like insurance, state fees and depreciation along with finance charges and fuel.
What Do I Need to Get a Car Loan?
The criteria you must meet to get a car loan are not different from requirements under other types of loans, such as personal loans, equipment loans, and special-purpose loans like wedding debts.
- First, you need to buy the car and sign all the paperwork at the dealership, making sure you have read all the fine prints and paid attention to things like warranty terms and conditions.
- Second, your economic situation must fit within the credit requirements of the bank or other financial institution that is granting you the loan. Things to consider here include current employment and job history, say, for the previous three or four years; credit history; credit score; and debt-to-income ratio, which equals your total debt payments divided by your monthly take-home pay.
- Third, the bank would check that the primary driver of the vehicle, you, in this case, has a license – and how long you have had it, just to verify that you are responsible and trustworthy.
Where Do I Get a Car Loan?
Contact your bank or financial institution to learn more about available auto loans along with terms and conditions. If your bank does not provide auto loans or if its loans do not mesh with what you are looking for, shop around.
Just contact your local chamber of commerce or your state's Department of Financial Services to get more information about auto refinance companies in your area. Besides a bank, you can apply for a car loan:
- At a credit union if you belong to one or if the institution grants such loans to nonmembers – check this resource to see credit unions operating in your area.
- From your family or friends if some loved ones have the cash to fork over. This alternative might be preferable to save you money on interest, especially if you have no credit, have filed for bankruptcy recently, or possess poor credit.
- Via the car dealership if the institution grants such loans. Most dealerships work with banks, so the loan you are receiving from the dealership ultimately is granted by a partner bank. At the time of purchase, ask the dealer about financing options as well as the applicable terms and conditions.
- Through peer-to-peer financing, a new alternative to traditional lending that enables a group of willing individuals to advance funds to another person, subject to specific conditions. For more about peer-to-peer lending, or P2P lending, visit Prosper.com and Lendingclub.com.
Pros & Cons of Getting a Car Loan
- Your car insurance coverage will cost you less
- You own the car, so you can change things inside and outside the vehicle as you wish
- You don't pay penalties if something happens to the car, be inside the vehicle or on its body
- You are free to drive as long as you wish-there is no mileage limit
- You will take full possession of the car, legally speaking, after paying off the loan
- You will pay more in loan installments than lease payments
- You must pay for repairs yourself
- You may have to make a hefty down payment before the dealer or bank approves the loan
- Your car loses value as soon you drive it off the dealer's premises, and depreciation eventually will reduce the vehicle's resale price
Five Ways to Save on a Car Loan
Auto loans can be useful in that they can help you receive a reliable vehicle without the huge out of pocket expense. However, the amount you have to pay to repay the car loan may make it an expensive option. By adopting these strategies before and after you receive your auto loan, you'll be able to save significantly.
1. Check Your Credit Histories Before Applying
It's imperative that you understand what is in each of your three credit reports because this is the information lenders will use to determine whether you are an acceptable risk. In addition, if you fail to check your reports and they contain inaccurate information it may lead to you paying more than you expected for the loan.
2. Shop Around for Rates
When finding the best place to finance your new set of wheels, it might be tempting to go to the dealership, since they can cast a huge net by asking multiple lenders quickly. While this is enticing, it shouldn't be your only option. If you have a great relationship with your local bank or credit union, always consider them first, as they might be able to offer you better rates. The goal here is to go to the dealership with another offer already in place, that way you can use it to negotiate the best rate for you.
3. Make a Large Down Payment
The goal in paying less in auto loans is to borrow the least amount you possibly can. This means you should set a savings goal of at least 20% of the vehicle's purchase price. While this is an ambitious goal it accomplishes two things: One, you won't have to pay as much in interest over the life of the loan and two, if you buy new, you can offset the depreciation value of your new vehicle.
4. Consider a Co-signer
If you don't have an established credit history or if you have had credit problems in the past, you may still qualify for an auto loan. The problem is you may receive a higher interest rate due to your credit. To offset this, you should consider a co-signer. By asking a trusted friend or relative with excellent credit to co-sign for you, you can receive the loan you want with a lower interest rate. In turn, you'll save money over the life of the loan in interest charges and it gives you the ability to pay off the loan quicker.
5. Pay Off the Loan Quickly
Once you receive your loan approval, it's important for you to devise a plan to pay it off as quickly as you can. Instead of opting to make just the minimum payment every month, set aside extra cash you can use to pay down the loan quickly. Even something small such as an extra $25 to $50 monthly will help you pay down the loan quicker. Over time, this can reduce the amount of payments you'll make on the loan and help you save money in interest charges.
Car Loans: What to Consider
Car loans involve credit risk, which means that it's important to be throughly prepared before signing any important documents or making a payment. Here are a few things you should reflect on before securing a car loan.
Car Loan or Lease?
Leasing is not a bad thing, but my only beef with leasing is that you make payments that don't add up to anything – unlike an auto loan that you gradually pay down, and once the principal balance is zero, the vehicle is yours. I guess it is a matter of personal preference when it comes to car lease vs. car purchase.
In essence, an automobile lease is an extended vehicle rental, and the lease-vs.-purchase dilemma is the same you would face when you think about buying a house or renting an apartment – in other words, and roughly speaking, to whom you want to send your monthly payments: a mortgage lender or a landlord.
You can use AOL's auto loan comparison tool to determine which car loan is better.
Would I Be Approved for a Car Loan if I Have Bad Credit?
You would not necessarily be turned down if you have poor credit, that is, a credit score in sub-prime territory – I mean anything below 640. Check with the financial institution to learn more about approval conditions. The loan underwriter would determine the cause of the low credit score before approving or denying your application.
For example, if your score is low because you are young and just embarked on the credit bandwagon, the underwriter might consider other factors, such as income and employment history, when making his or her loan decision.
How Can I Refinance My Car Loan?
The vagaries of the economy, especially the ups and downs that interest rates experience every now and then, may prompt you to consider refinancing your first car loan immediately after receiving the funds. For example, if you get approved for an automobile loan with an annual percentage rate of 10%, and three months later you get a better deal from another institution, say, this one charging 7%, you should consider the latter offer and refinance the existing loan. To get more information about interest rate movements, check out Bankrate Auto. You can find a car loan rate by:
- Indicating whether the inquiry is a purchase or refinance arrangement
- Selecting a product, say, a 48-month used car loan or 60-month new automobile loan
- Entering your ZIP code
Use A Car Loan Calculator
You use a car loan calculator when you are shopping around for the best deal, and also after you get approved because you would want to double-check that the monthly payments and loan amortization schedule sent by the bank is correct. "Amortization schedule" is a numerical table that tells you how must pay each month until the loan principal shows a zero balance.
There are myriad auto loan calculators available online, and all provide a step-by-step guide to using their tools. For more information about how to use a car loan calculator, take a look at our auto loan calculator.
Can I Get a Car Loan as a Student?
Yes, but it could be difficult. Put yourself in the lender's shoes, and maybe you could understand why it might difficult to approve a student's car loan application. For example, the potential creditor would see that you have no job, no credit history, and a driver's license that was issued as recently as two or three months ago.
All these factors may cause the loan underwriter to take a pause on your application, determine whether the risk is worth taking, and figure out what other litigants must be obtained from you before the loan is approved. "Mitigant" is something – such as collateral or a co-signature – that a lending institution requires lowering the risk it takes on a specific financial product. For example, in your case, the bank might ask that your dad co-signs the automobile loan application.
Can I Be Approved for a Vehicle Loan After Bankruptcy?
Yes, under certain conditions, most of which vary by lender and state. Some providers specialize in this type of loan, so you can contact them to see if the interest rate they would charge is exorbitant or lower than what other institutions are willing to give you.
The key thing with bankruptcy is that it stays on your credit file up to 10 years, so during that decade, you might not receive the best credit deals available out there.
Car Loans Guide Recap
Applying for a first car loan should not be a complicated process if you do your homework in advance and use online resources that cover everything from financing options to eligibility criteria. By doing the initial legwork, you plant the seeds of quicker loan approval, a lower interest rate, and a loan term and monthly payments that both fit within your budget.