How to Get a Good Deal on a Used Car Loan with a Small Down Payment

Small down payment loans typically have higher interest rates. This happens because the loan limits must be higher, forcing a longer loan. The longer a car loan lasts, the higher the interest rates climb. Sticking with a short loan of under 5 years is always preferable for any car loan, but it is particularly advantageous in a used car loan.

Opting for a Short Loan

There are two main reasons to opt for a shorter loan. The first is to reduce the interest rate as previously discussed. The second is to protect against a large financial loss that comes as a car's value depreciates. Automobiles are a unique asset because their value drops so swiftly. Financing an auto means you will ultimately pay far more for the asset than it is worth once you fully own it. This is particularly true with a used car. The value of cars depreciate at a rapidly increasing rate each year. Basically, this means there less of a difference between a 1 and 2 year old car than there is between a 2 and 3 year old car. If you are buying a 5-year-old car with 70,000 miles, you will find it is worth far less than you purchased it for another 5 years down the line. Sticking to a short loan minimizes the total cost of financing and the total net loss on the car.

Higher Monthly Payments

The main disadvantage to a short automobile loan is the high monthly payments. This is particularly true if you have a low down payment because your loan principal will be very high. Paying off a high principal in just a few years can mean payments over $300-$500 a month depending on the expense of the car. In order to make this situation work in your favor, you should budget for the higher cost each month prior to selecting the exact car you will purchase. Start by cutting your monthly salary in half. Next, subtract all fixed payments you currently have including mortgage, rent and other debts. The remaining sum is what you can reasonably afford on your auto loan each month. Any higher, and you will be running the risk of default.

Less Favorable Loan Terms

If you are willing to lock in your loan terms at the beginning, the lender will give you a much better deal. This means agreeing to high fees if you prepay or otherwise alter the loan contract. Since the loan is going to be short-term, you are risking much less locking in terms than you would be if you were opting for a long-term loan. The lender may additionally ask for a recourse loan, which is problematic with a used car. This essentially means, if the car is repossessed and comes in under the value remaining on the loan, you will be responsible for the difference. Since used cars do depreciate in value, you will be assuming far more risk with a recourse loan. However, it may be worth the risk to secure a low interest rate despite a small down payment.

Read More

What Happens to Your Car Loan if the Lending Bank Fails

If you received your car loan from a bank, you have a legitimate reason to wonder what would occur if that bank fails. Many borrowers wonder if they would have to repay the debt immediately, get to walk away without repaying or even lose the car all together. None of these scenarios is the case. In fact, if the bank that lent you the money fails, you will not likely notice the difference on your end.

Loans are Assets

The first point to understand is your loan is an asset to the bank. Even thought the money is currently in your hands, the fact you owe the funds in return means the loan counts in the positive asset column of the bank's financial statements. The only exception is a loan in default, which then becomes a loss. If your loan is still in good standing, it will be handled during the process of liquidating all the bank’s assets.

When the FDIC steps in to sell off the bank's assets in the liquidation proceedings, you loan will be one of the assets up for sale. Another bank may purchase the entirety of the financial holdings from your bank. Or, a private investor may purchase specific loans only. In either case, your loan will pass to a new owner. 

New Owners Contacts You

The new owner will have the opportunity to review your loan and its terms before purchasing the contract. The lender will not be permitted to change the contract upon purchasing the loan. This means the purchaser simply takes your previous lender's spot on the existing loan contract. You will be contacted by this new lender to be informed of the change. The lender will give you instructions for how to continue making your loan payments in the future.

Grace Period on Payments

Since there may be a delay in the time it takes for a new lender to buy your mortgage, you will have a grace period where you are not responsible for making any car loan payments. Typically, this period is 60 days. After that point, you will begin making payments again at the given installment amount. You will not be excused for the payments that came due during the grace period. Instead, you will have to make them at the same time you make your current payments. As such, you should be setting the money aside to make the payments immediately upon hearing from your new lender.

New Payments Begin

Once you know when and where to make the payments, you simply resume paying your loan to the new lending institution just as you used to pay your loan to the old lender. You may receive the opportunity to modify your loan with the new lender if the lender does not think the loan contract is a good deal. The lender may allow you to prepay your entire loan with no penalty, for example. Be wary of any offer to modify the loan to make sure any renegotiation is not entirely in the lender's favor. 

Read More

What is the Payoff Amount?

he payoff amount of a loan refers to the amount of money, including any prepayment penalty, that it will take to pay a loan off in full. When you pay off a loan early, you need to request the payoff amount from the lender, because the payoff amount may change on a daily basis, depending on how the interest is compounded. For instance, a student loan may give you a 10-day payoff amount, which gives you 10 days to pay the amount before it continues to gain interest. Generally speaking, though, when a home is sold, during closing, the buyer's lender will call the seller's lender and ask for the payoff amount so the money can be sent and the lien can be removed from the title. When the lien is removed from the title, it can be transferred to the new owner, and the new owner's lender can place a lien for their amount until it is either paid off or sold.

Read More

5 Tips to Get a New Car Loan after a Reposession

A car loan repossession is one of the most negative reports that can appear on your credit score. The repossession is recorded and a default is also recorded. In order to get to the point of default, several late notices must also have been recorded as well. The result is a very low credit score and a hard time getting a new loan. Try these tips to help secure vehicle financing in the future:

#1 Avoid or Volunteer Repossession

The first step to recover from repossession is to completely avoid it. Refinancing your auto loan before it goes into default may be the best option. If you cannot continue to make payments even after this option, consider voluntarily submitting your vehicle. Although this is still technically repossession, default will not occur and your credit score will be partially saved.

#2 File an Explanation of Hardship

You can explain a default to creditors before you even speak with them by filing an explanation with the credit bureaus. This only works if you have a good reason for your default, such as an illness or joblessness. You will also have to show this circumstance is no longer a factor in order to convince lenders you are once again creditworthy.

#3 Take a High Risk Loan

The fastest way to rebuild credit right after repossession is to take a high risk loan and pay the loan off quickly. Some borrowers may consider a high risk personal loan even if they do not specifically need the funds. The funds can simply be saved in an account to be repaid in full. Interest will be charged, but the interest may be worth the advantages of paying off the loan and getting the credit boost. 

#4 Save for a Down Payment

A down payment goes a long way to getting an affordable auto loan. The down payment will reduce the overall limits of the loan you are seeking, immediately making it lower risk and more affordable to you. Providing a large down payment also goes a long way to assure lenders you are financially capable of paying for the automobile. You should try to supply at least 20% down if you have a low credit score. Where possible, aim for a higher down payment by reducing the cost of the cars you are looking for. Opting for a less expensive car can ultimately give you the best options.

#5 Budget Well

The biggest consideration of whether you will recover from a repossession is how you handle the next loan you achieve. Having two repossessions or default on record can permanently damage your ability to achieve a good loan in the future for any purpose. You should budget for high monthly payments that will likely come with your high risk loan. This can mean saving money for several months in order to allocate more funds toward your car payments. You will also find budgeting after you have received the loan will help you continually make payments toward the principal, reducing the size of your loan and getting you back on track for good credit. 

Read More

What Happens to Your Car Loan when the Lender Changes Ownership?

Your car loan terms should not change when your car lender changes ownership. In fact, you may not even notice the difference on your end. The debt simply transfers into new ownership, and the new owner then receives your payment. All you need to do is wait for instructions on repaying the loan under its new ownership. This can be a little confusing, but there should not ultimately be any issues.

Loans are Assets

It may be hard to think of things in these terms, but your loan is actually an asset to the lender. It is a source of income that will continue to be received for the life of the loan. As such, your lender can sell this asset for immediate liquidity. This usually happens when a lender itself is experiencing problems with debt. This can also occur if your lending bank fails, meaning it needs to sell its assets before closing its doors. In both cases, a new lender can purchase the asset and begin profiting.

Assets are Sold

There are a number of different lenders who may consider purchasing a loan. These include traditional banks, which is typically the case when a bank fails, or independent investors looking for a new revenue stream. In any case, the lender makes a bid on the loan. This sum is typically more than the initial lender paid you, but it is less than the lender would make if it kept the loan in its portfolio. When a bank sales, it may even sell a loan for a loss. The new lender just got a great deal. The lender can begin collecting your monthly payments each month and soon collect more than it spent in purchasing the loan.

Loans enter Grace Period

While the two lenders work out this deal, you may be stuck without an official lender of record. This only truly occurs when your lending bank fails. In that case, a sale can take longer. The FDIC will step in to handle the sale of all loans, and you may go a few months without an official lender. During this period of time, you do not have to make loan payments; this is called a grace period. You should be aware the payments will be due at the end of the grace period. You should save the funds you would typically send in to pay the loan.

New Lender Takes Over

Once the new lender takes over the loan, the lender has a short period of time in which to notify you of the procedure to continue with loan payment. At this point, you will send in the payments that have come due during the grace period. The loan terms will be constant since the new lender purchased the loan as is. The lender may offer you the chance to renegotiate the terms of the loan at this time. You do not have to renegotiate; if you do, be aware the lender may try to get you to agree to more expensive terms. 

Read More

3 Tips to Payoff an Auto Loan Quickly

If you want to payoff auto loan debt quickly, you are not alone. Many people list "paying off their car" as one of their top priorities. The flexibility that comes with not having a car payment is desirable because you can do so many things with the money that you devote to a car every month. However, paying off your car requires dedication and many are not dedicated enough to put a plan into action that will help them pay off their auto loan quickly. If you would like to pay off your loan quicker than you originally planned, here are a few tips to keep in mind. 

Add to Monthly Payment

One strategy that you could use to pay off your auto loan early is to pay a little more than required each month. Putting an extra $50 or $100 will help make a big dent to the principal balance of the loan. This will not require a huge change in your monthly spending habits as it is only a few extra dollars per month. However, it can considerably cut down on the amount of time that it takes to pay off the loan. Making a small commitment every month can make a big difference in your results. 

Make an Extra Payment

Every now and then, make an extra payment when you have the money. For example, when you get your income tax refund, just write another check for the same amount as your monthly payment and send it in. You will be surprised how fast this makes a difference. If you do it twice a year, you will have your car paid off in much less time than it normally takes. This might be much harder for you to do because it requires a bigger financial commitment from you. However, it will make a huge difference in the amount of time that it takes to pay off the loan. 

Bi-Weekly Payment                                                                              

Another strategy that you could use to pay off the loan early is to use a bi-weekly payment system. This amounts to making half of your normal monthly payment every two weeks. At first glance, it might not seem like this strategy will make a difference. However, with this strategy, it is the equivalent of making an extra payment every year. It is a lot easier to budget for this type of a plan as compared to making a single lump sum payment.

Therefore, many will find this strategy easier to implement. Your auto loan company might offer this program for you or you could set it up with your bank. If you do implement this strategy, you will want to time everything right so you are not late on your monthly payments. For example, if the payment is due on the 15th, you will want the second part of the payment to be made on the 15th. This will help you avoid late fees and any other potential problems. 

Read More

How to Avoid Auto Loan Delinquency

Allowing an auto loan to go delinquent places you at risk of compromised credit and repossession of your vehicle. It is much easier to stay current on your debt than to recover once your loan has gone delinquent. Staying current means budgeting well, and it also means knowing when there is a risk you may not be able to pay. Anytime you face this risk, it is important to be proactive to avoid negative consequences.

Budgeting Effectively

The first step to avoiding delinquency on an auto loan is budgeting for the loan. This starts before you even go car shopping. You will need to know how much you can afford to pay toward a loan each month. To find this number, keep in mind that your total debts should never exceed one half of your monthly income. So, you can add together your other debts, such as student debts, mortgage, rent or credit card bills, and determine how much wiggle room you have for a new debt. When you shop for a car, look for one that allows you to stay comfortably within this range. Picking a car first and budgeting second can lead to loan disaster.

Setting up Automatic Payments

Most banks and auto lenders offer simple solutions to pay your car loan automatically each month. Your bank may have a bill pay system. If it does, you will need to know the account number for your car loan. Then, you can use the online banking system's bill pay function to transfer funds directly to your car loan account on a certain day each month. You can alternatively put a credit card or bank account number on file with the lender. Once a month, the lender will deduct your payment automatically. Make sure you have overdraft protection so your account is not overdrawn by your car payment.

Asking for Grace Periods

If you anticipate a time period when you will not be able to pay, you should contact your lender immediately to ask for a grace period. Lenders will usually be willing to work with you if you are in a financial crisis, such as a job loss or emergency illness. In any case, you will submit a letter describing your financial hardship and asking for a grace period. If the lender approves this period, make sure you are ready to continue payments upon conclusion of the grace period. Missing a subsequent payment may be grounds for default on the loan.

Refinancing an Auto Loan

Your financial crisis may be extended beyond your grace period, and this can be a reason to refinance your loan. If your ability to pay the loan is permanently affected, your lender may even refinance with you directly. This can save you the hassle of seeking a new loan from a third party. Deciding to go to a third party can temporarily drop your credit score and result in penalties to the initial lender. However, if this is the only way to avoid delinquency on the loan in the future, it is a better option than continuing with a loan you cannot afford.

Read More