Why You Should Consider Refinancing Your Car Loan
While many people have heard of refinancing their homes, most have never considering refinancing their auto loan. There are many reasons why you may want to consider changing your auto financing situation. If one or more of these fits you, then it may be worth considering.
Interest Rates Have Improved
As we all know interest rates fluctuate, if they have dropped two points or more since you got your auto financing, then it may be worth looking at refinancing to save a little month each month regardless of your ability to pay.
Your Credit Score Has Risen
If you make your auto finance payments on time as well as your other bills, your credit score will go up over time. When it does, you may be able to negotiate a better auto financing rate with your lender because you no longer represent as great a risk as you did before.
You Want to Lower Your Rate
Is your rate simply too high making your auto finance loan too much for you to afford? If you refinance, you can lower that rate, assuming you have been paying your bills on time. Check with your auto financing lender to see what your options are and you could start saving money on those monthly payments.
Your Financial Situation Has Changed
Sometimes unexpected expenses or a loss of income hit and cause you to take a closer look at your financial situation. By refinancing, you may be able to get a better rate on your auto financing loan, making it easier for you to make those monthly payments.
If your situation changes, you may be able to contact your auto financing companies and refinance that auto loan so your vehicle is more affordable each month. In the long run, you could save a lot of money on your auto financing loan. That will put more money in your pocket and put you in a much stronger financial situation.
What interest rate should I pay?
When shopping for loans from different auto financing companies, your interest rate is mostly determined by your credit score, which auto financing lenders will request along with other documentation. Your credit score is a point of reference to auto financing companies that paints a financial picture of you. It's a measure of how risky it is for an auto loan company to give you a loan--the higher the credit score, the lower the risk.
Typically, these are the average auto financing interest rates for a range of different credit scores:
- 850 - 740: 3.2% interest rate for auto financing loan
- 739 - 680: 4.5% interest rate for auto financing loan
- 680 and below: 6.5 - 12.9% interest rate for auto financing loan
To be approved for an auto financing loan with an optimal interest rate, your credit score should be in the 740 range. If your score is in the high 600's, you will most likely be able to find auto financing, but at a higher interest rate. Anything lower than 620 is considered "subprime" by auto financing companies, which can qualify you for a subprime auto loan with a higher interest rate. By signing up for subprime auto financing, you can work to improve your credit while being able to purchase the car you need.
To ensure that you are getting the interest rate you deserve, one of the best things you can do is check your credit score online before approaching an institution for auto financing. This will save you time and energy you may spend approaching an auto financing company. It's also possible to research and find ways to improve your credit score, such as using credit cards sparingly and pay all scheduled payments on time.
Average Auto Loan Lengths
Currently, the term of the average consumer’s auto financing loan for a new vehicle exceeds five years. In fact, the majority of auto financing loans last about five and a half years. Six -to- seven-year terms make up about 20 percent of all auto finance loans. The average auto loan length is increasing even though auto financing rates are still relatively low, as they have been for much of the 21st century. With the Federal Reserve's recent slight raising of interest rates, auto financing rates may increase. If there is a small increase, it’s unlikely to affect many car buyers, as payments would rise by only a few dollars per month for most borrowers.
Used Car Loans
Current auto financing periods for used cars average four to five years. Auto financing loans for used vehicles generally carry higher interest rates than for new cars, and auto financing companies are unlikely to offer seven-year loans on older models. That's because the value of most used cars plummets by the time the vehicle is 10 years old or more. There's little trade-in value on older cars.
What’s Right for You
No matter the average loan length, when it comes to auto financing, you must make the decision that’s right for your situation. If you can make the payments, it’s wise to choose the shortest auto loan you can afford. With a four-year auto financing loan, you’ll make higher monthly payments but save a great deal in interest. Your car is paid off three years earlier than with a seven-year loan. However, if it’s not easy making that monthly payment, and there’s little money for a down payment, a seven-year auto financing loan makes sense for you.
Dealership vs. Bank Financing vs. Credit Union?
For most people, purchasing a car is relatively simple. We want the car to be safe. We want it to be attractive. We want it to handle our daily needs. It is when we get to the auto financing part of the purchase that things get a little tricky. The ads show a basic auto financing rate with a small writing disclaimer that it is good for qualifying customers. Most people think that auto financing is a cookie cutter process and are surprised when the advertised rates do not apply to them. Auto financing is not one size fits all and will depend on your credit, the type of automobile, and your financing network which may include banks, credit unions, and the dealership.
Your credit score is determined using three different databases and will affect the terms of your financing. Typically auto financing companies will use an average of your Equifax, Transunion, and Experian scores to come up with your credit rating. This score, called a FICO score, ranges from 300 to 850 with a 720 being excellent, 690 being good, 630 being average, and anything lower being bad. The prices quoted in most advertisements are usually for bank auto financing for "good" credit score. There are basically only two parts to auto financing - the amount being financed and the interest rate. The amount down and the length of the loan are also factors in the monthly payment but these are usually easily negotiated. According to the FDIC, there are nearly 7,000 banks in the United States. Most of these offer auto financing and each has its own auto financing rates and terms. Some dealerships already have relationships with banks while some do not. Banks are more likely to deny those with bad credit for an auto loan. At the very least, approach your bank for their auto financing rates.
There are around 6,500 credit unions that provide loan across the country. Credit unions are membership based and tend to have better rates but not all of the rewards and flexibility of banks. Compared to a bank, credit unions may only have limited options or a single auto loan package with the length and terms predefined. Because credit unions are often specific to an industry, the dealership may have incentives that are also part of the industry. For example, teachers may get a dealership incentive for purchasing a new car and get discounts for using the teacher’s credit union.
Some dealerships offer incentives for financing through them. Find out what the financing incentive is before deciding on a car or an auto financing company. One benefit of using dealership financing is that it is a one-stop shopping experience. In general, you walk out with a car. For some, the money is worth the decrease in stress. Others like to know everything about the car and its financing before making any decisions. Of course, everyone wants to save money and get the best deal but an honest analysis of your buying behavior will help you get the best deal while save you from a nightmare experience that taints the joys of purchasing a new car.
When it comes to auto financing, the internet is your friend. Spend some time educating yourself on the specifics of auto financing and shop around for the interest rates and terms that best suit your needs.
How to Get Pre-Approved for an Auto Loan
Getting pre-approved for auto financing is one of the best ways to avoid the high auto financing rates that can come from dealer financing. It also simplifies your car buying process because the negotiations are simpler and you know your budget for a car before you even walk onto the lot. Because you can compare auto financing rates more easily and avoid potential fees, you may also save money. To get pre-approved for auto financing, follow these steps:
1. Check your credit report.
Know your credit score in order to get a good idea of the the auto financing rates you'll be able to qualify for. It's also important to check your credit report for any mistakes or errors, which can lead to denied credit or higher interest rates from an auto financing company.
2. Shop for the best auto financing rate.
Visit your local banks and credit unions to get a variety of options and different loan terms. The best place to start for auto financing is usually a financial institution you already have a relationship with. After that, you can visit more places and compare their rates against that. Credit scores 680 and lower will usually have the best luck with subprime lenders that offer auto financing.
3. Visit a dealership.
Once you are pre-approved for auto financing, a lender will give you a "blank check"--something that approves you for a specific loan amount. Giving this to the dealer means they can finalize everything with your bank/credit union. You can also compare your pre-approved auto financing rate to what the dealership offers you through its own lender network.