How to Determine the Right Length of an Auto Loan Term

The length of auto loan term you choose for your financing will affect all other facets of your loan. This includes rate, monthly payments and flexibility of terms. The length of the loan you choose will also determine how quickly you can build equity in the car, which is a large consideration with used car purchases. Know your desired length before going into negotiations based on these factors.

Length and Interest Rate

Interest rates tend to be lower on shorter loans. When you pay a loan back quickly, there is a lower chance your financial situation will change in a way that prevents you from repaying the debt. There is also a lower chance inflation will be a large factor in the profitability of the loan for the lender. Ultimately, if you would like the cheapest loan possible, it is best to elect a short-term loan like a 3-year or 5-year auto loan.

Length and Monthly Payment

Choosing the length of your loan is not as simple as just opting for the shortest term, however. You must also consider if you can afford the short loan. When you are paying down a large sum of money, you will have to pay very high rates monthly in order to meet a short-term loan contract. This can be very burdensome for borrowers with lower incomes. One way to counter this problem is saving for a high down payment. This will lower the limits of the loan you need to take, meaning you can pay the loan off faster without having very high monthly payments.

Length and Flexibility

Auto loans from dealers tend to be very rigid. This means you will not be able to prepay or refinance without large penalties. Auto loans from banks may be more flexible, but they can still be difficult to rearrange if need be. The longer the loan you take, the more likely you will need to rearrange the debt in the future. This can occur if your job or income changes. Lenders know this, so they will build in less favorable terms on long loans to prevent you from changing the loan down the line. You will generally find more options to prepay or negotiate a shorter loan.

Length and Equity

When you make high monthly payments, you build up equity in the car much faster. This prevents the possibility you will have an upside-down loan. In an upside-down loan, you owe more on a car than it is currently worth on the market. This is particularly concerning with a used-car loan. Used cars depreciate in value faster than new cars. You should aim for the shortest loan term possible on a used car to prevent having negative equity in the vehicle. Even new cars can slip into a negative equity situation in a loan term of 7 or more years. If you elect a very long loan, make sure your down payment is high enough to protect you against a negative equity loan so you do not risk exposure to increased liability if you default on the loan.

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New-Car Auto Loan Tips for Recent College Graduates

New-car auto loans can require a good credit score and high down payment. Recent college graduates often have neither of these things, so it can be hard to get a good auto loan for a young professional. Try these tips to get the best possible loan.

Protect Credit Early

Start early when it comes to protecting your credit. Many college students do not realize failing to pay utility bills or campus medical bills while attending school can drop a credit score. Even failing to return a video to the rental store can result in a dip. Start thinking about credit early, and work to avoid any negative reports while attending school. Even if you have high student loans or other debt problems, simply avoiding any missed payments can protect you from having negative information on your report.

Budgeting for a New-Car Auto Loan

Think about what you can afford when you purchase your car. You may have a salary for the first time, and to can be enticing to go buy a pricey car. However, you need to think about the other payment obligations you will have in the near future. To determine your budget, start by cutting your monthly salary in half. From this amount, subtract any debt payments you have, including your rent. Determine how much you will save each month, such as 5 percent or 10 percent of your paycheck, and subtract this amount. The resulting figure is the price you can pay monthly for your auto loan.

Selecting the Right Loan Terms

Once you know how much you can afford, you should think about the length of your loan. It is best to pay off a post-graduate college auto loan within 5 years. This will help you if you intend on buying a home in the future by reducing the possibility these two loans will overlap. Given the monthly payment you can afford and the length of your loan, you will know your ideal loan limit. This is the budget you need to use when you select a car. 

Looking for Incentives

Many lenders will offer you a discount as a recent graduate. However, the lender does not have an incentive to give you this discount unless you explicitly ask for it. Instead of approaching the lender as if you are a wealthy young person, it may be better to approach the lender as a recent graduate in search of a good deal. Ask the lender, especially if you are using a dealership loan, how they intend to help you get into the car you are looking to purchase. 

Avoiding a Cosigner

It is common for lenders extending financing to recent graduates to seek a cosigner on the loan. Lenders know college graduates are often connected with older individuals who have higher credit scores and incomes. A lender would much rather get one of these established borrowers on the hook for the debt than a young person who is less likely to be concerned with making payments. Do not agree to a cosigner unless you would otherwise be turned down for the debts.

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Interest Rate Ranges for Student Car Loans

Student car loans will usually have higher interest rates than loans to more experienced borrowers. This occurs for a number of reasons. First, students are less likely to have a verified and stable income which can be a sign of risk to a lender. Second, student borrowers likely have a lack of assets due to their age. Finally, student borrowers tend to have short credit histories, giving a lender little reason to believe they can make payments on the loan. Based on these factors, you can expect elevated interest rates.

Subprime Car Loans

Students may receive offers for a subprime car loan. This is not the best choice for several reasons. A subprime loan is offered at an initial rate much lower than the rate banks pay to borrow funds, called the national prime rate. For the first few years of the loan, the bank will be losing money on the deal. To make up for this loss, the bank will raise the interest rate to a very high level after the introductory period. Students may be attracted to this option because the rate increase could happen after they graduate and earn an income. However, it is best to cap how high the rate can climb in this scenario.

Percentage above Prime

If you can cap how high a loan will climb above the prime rate, a variable rate loan may be a reasonable idea for a student. Assure your loan is never more than a few percentage points above prime. This will guarantee your loan rate is not out of line with national averages. However, only you can judge whether or not your credit score means you will have to settle for a worse rate. You may know you are a high risk borrower, and you may have to decide an interest rate three percent or higher above prime is reasonable.

Fixed Rate Loans to Students

Loans to students at a fixed rate may be harder to find, but they will generally be more desirable. You can still use the national prime interest rate as a baseline for your estimate of the rates you should be able to receive. You can score a lower rate by electing for a short-term loan, such as a three or five year loan instead of a seven year loan. You can also lower the rate on a fixed loan by providing a larger down payment to reduce the sum you will owe.

Student Loans with a Cosigner

A cosigner is one option to keep your rate low. There are some downsides to using a cosigner. The loan will not help your credit score improve as drastically when you pay it off if you have a cosigner on the loan. However, in terms of interest rate, a cosigner will help make your loan much cheaper. Consider using a parent or family member as a cosigner on your student car loan. This should qualify you for a standard interest rate if your cosigner has very good credit.

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Why Are Subprime Car Loan Interest Rates So High?

Getting a subprime car loan could be an option for you if you have been turned down by a traditional car lender. Subprime car loans provide loans to those that have less-than-perfect credit at a higher interest rate. Here are the basics of why subprime car loans have a higher interest rate than other loans. 

Subprime Car Loans

In order to fully understand why subprime car loans have such high interest rates, you first need to understand what these types of loans are. A subprime loan means that the lender is dealing in the riskiest part of the market and makes the loans separate from traditional loans. Those with a 640 FICO score or lower will be potential clients for this market. 

Increased Risk

The lenders are going to charge more for the interest rate on these types of loans because of the increased risk. When you are dealing with people that have a credit score of less than 660, this means that you are taking on a great risk. Those with low credit scores got those scores because of their disregard to paying their debts. Regardless of what happened to cause them to not pay their bills on time, the fact remains that they are a bigger credit risk than those with higher credit scores.

Lending money to someone for a car loan is an investment for the lender. They do it so that they can make a return on their investment. One of the first rules of investment is that when you take on higher risk, you should be able to get a higher reward. Therefore, when the lender works with someone that falls into a high risk category, they are going to be asking for a higher return on their investment. 

Lack of Options

Another reason that these lenders charge so much is because they know that they can and still have plenty of business. There are quite a few people that fall into the category of not having a good credit history. These people can not get a normal car loan and therefore, they have to deal in the subprime market. When the lenders know this, they can charge a higher rate of interest and still have a steady stream of applicants that have been turned down elsewhere. Almost everyone needs a car these days and therefore, they will be willing to take any interest rate that they can get in many cases.

Risk of Default

Another factor that goes into the high interest rate is the risk of default. Many borrowers that fit into the subprime market have a high debt-to-income ratio. This combined with a bad credit score means that they are a high risk of default. As a subprime lender writes loans, they know that there is a certain amount of loans that will go into default. With this information, they have to charge the group as a whole enough money in interest so that they can still make money even with the defaults.

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3 Basic Auto Loan Approval Requirements

In order to get an auto loan approval there are certain requirements that you are going to have to meet. The lender has to be satisfied that you are a good credit risk in order to give you a loan. Here are a few basic auto loan approval requirements.

1. Good Credit History

The first thing that a lender is going to look at is your past credit history. Your credit history tells lenders the majority of what they need to know in order to make a lending decision. With your credit file, they can pull up payment information on all of your past accounts. When you open a new credit account, the creditor will provide information about that account to the major credit bureaus. Credit bureaus keep track of all of this information on your permanent credit file. They will then provide this file to lenders when they want to decide whether or not they should give you a loan. The credit bureaus also use this information to provide you with a credit score. 

Your credit score is a compilation of your entire credit history in one number. The higher the number, the better your credit history has been. Most lenders will quickly glance at your credit score before they get too involved in your credit history. The formula used to complete your credit score is based on payment history, amount of debt on credit accounts, credit mix, and several other factors. If you have always paid your bills on time, never defaulted on a loan, and do not have a lot of debt, there is a good chance that you will have a decent credit score. This tells auto lenders that you would potentially be a good person to lend money to for a new car. 

2. Income Amount

When trying to get approved for a new car loan, the next thing that they will look at is your income amount. The auto lender it going to want to know that you make enough money to make your monthly car payment. They will require you to provide them with some kind of documentation that you make the amount of money that you claim. You may have to provide them with pay stubs from your job, W-2's, and even financial statements. They might like to see that you have a certain amount of money in the bank before they will consider giving you the loan that you need. 

3. Debt Situation

The auto lender is also going to take a detailed look at your debt situation. They will look at all of your debt accounts and see the status of all of them. They want to know that you do not have too much debt to satisfy your obligation with them. They use debt-to-income ratios to decide if your debt situation is in line with your income amount. If you have too much debt, you may not be able to qualify for a loan. 

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High Car Payments? 3 Options to Consider

Dealing with high car payments is something that many people are faced with every single month. While buying the more expensive car might have seemed like a good idea at the time, later, you may wish that you had not. If you are saddled with high car payments that you can not afford, here are a few options to consider.

1. Refinancing

One option that you have is to refinance your auto loan. This will only work if you have been paying on your car for a few years or if you can find a loan with lower interest. Most car loans are set up to be around 5 to 6 years. For example, let's say that you bought a new car for $15,000 and financed it for 5 years. After 3 years of payments, your balance would be down to $7000. Your original payment was amortized based on taking the $15,000 balance, adding interest and dividing it by 60 months. Therefore, you are still making that payment, even though your balance is only $7000. By refinancing, you can take that $7000 and spread it out over a new auto loan for 5 years. Now you are taking $7000, adding interest, and then dividing it by 60 months. This will significantly lower your payment, but you need to realize that you are going to be paying on the car for another 5 years. 

If you find a car loan with a lower interest rate than what you are paying, it could also have the effect of lowering your monthly payment. However, this will usually not be as drastic of a payment reduction unless you have already paid down some of the balance of the loan.

2. Trade In

Another option that you have is to trade in your existing car to a car dealership. In order to lower the monthly payment, you will most likely have to choose a car that is not as nice as your existing car. By choosing a car that is valued much lower than what you are currently driving, the new car payment could be lowered a bit. When you choose this option, you need to investigate the process very carefully. If you are not cautious, you could be taken advantage of by the dealership. They are notorious for not giving you fair value on your trade in and adding in unnecessary fees along the way.

3. Sell Your Car

Instead of trading your car in to the dealership, you could also try selling it to a private party. With this option, you will most likely have to advertise that your car is for sale and then find your own buyer for the car. You can then take the money that you net from the sale and try to buy an inexpensive car with it. With this method, it could take longer as you have to locate a buyer before anything can be done. 

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The Truth behind Car Loan Elimination Scams

There are a number of car loan elimination companies out there that claim that they can get you out of your car loan. While this would be great for you, many times, it is a scam. Here are a few things to consider about car loan elimination scams.

How They Work

Car loan elimination scams are very common. The companies that offer this service usually mass market in order to find people to work with. They will send out mass emails or send flyers out in the mail. They will use a lot of hype and slick advertising to get people to contact them about eliminating their car loan. 

When you are very deep in debt, you want to believe that there are some options out there that can help you eliminate your debt. Therefore, this sounds like a pretty great proposal. You hire someone to help you get out of your car loan debt. It is cheaper than paying off the loan, so to you, it makes sense. The only problem is, the process is completely bogus.

You call the company or visit their website and they start to tell you about the process. For a fee that usually amounts to $1000 to $3000, they will show you how to get your car loan eliminated. Most of the time, they will not be handling this process for you. They will only show you how to do it and then let you handle everything. They may provide you with a generic letter that you can show to your creditors. It may say something like "Declaration of Voidance" or "Bond for Discharge of Debt." You are supposed to be able to show your car loan company this document and then they are supposed to just forgive the debt. However, the bad thing is that these documents do not actually work. You pay them the fee, take the documents, and then do what they suggest. As it turns out, the creditor will usually have no idea what you are talking about and ask you to leave.

Principles Behind Argument

When you start to learn about the methods that they tell you to employ, it sounds great. They tell you things like all debt is technically illegal. They tell you that there are court cases that are starting to rule in favor of the debtors as a result of this glitch in the system. They want you to believe that once you sign the loan document, the lender is paid in full. Therefore, they are not out any money when you use this process.

Caution

When approached with an offer like this, you should exercise extreme caution in moving forward. There are a few ways that you can legitimately get rid of debt. You can make your payments and pay it off, you can do a debt settlement, or you can file for bankruptcy. If someone is promising otherwise, you might want to ask for proof before you part with a few thousand dollars.  

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