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Auto Loan

How Often Can You Refinance Your Car Loan?

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

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Refinancing your auto loan can be a wise decision, especially if you do the math and realize you have something to gain. You may find more attractive interest rates, have improved credit, or be struggling to afford your payments and want a way to ease your monthly auto bill. The real issue is whether a new loan and its attendant fees will result in savings during the time it takes to own the car outright.

But what happens if you’ve refinanced before and you’re looking to refinance your auto loan yet again?

How long to wait before refinancing your auto loan

Good news: Consumers can refinance their car as many times as they want and as often as they can find a lender willing to approve them for a new loan.

You can even refinance your car loan the moment you get it home from the dealership if you realize you can land a better loan. There are no legal restrictions on financing a car later on, although it may be harder to find a willing lender as the years and miles accrue on the vehicle. Each lender has its own set of requirements. At Bank of America, for example, the car must be less than 10 years old and have fewer than 125,000 miles on it to qualify for refinancing.

Just because you can refinance doesn’t necessarily mean it’ll be easy.

Look at your original loan contract to see if you have to jump through any hoops first. The Federal Trade Commission (FTC) warns that finance companies and banks can impose “prepayment penalties” on their contracts, which are fees they charge if you decide to pay off your loan earlier than planned. And, of course, by refinancing with a new lender, you are doing exactly that.

According to online auto retailer Cars Direct, prepayment penalties are allowed by the government in the District of Columbia and 36 states.

7 Reasons It Makes Sense to Refinance an Auto Loan

There are many cases in which it might be a good idea to refinance your auto loan.

Perhaps you need a lower monthly payment to offset a tight budget, or you need to save the total amount the car financing will ultimately cost. We’ll break down a few factors that can make it profitable to refinance now.

1. You qualify for a loan with a lower interest rate

Many car shoppers never shop around or compare auto loan offers, and that can be a costly mistake. If you’re in that group, then you may walk off the lot with a terrible rate and realize late that you could have gotten a much better deal. That’s a good reason to refinance.

In another scenario, if interest rates have dropped a few percentage points since the car was originally financed, there’s a chance auto rates might be lower as well. You may save money on refinancing the vehicle. Consumers can search for auto refinancing rates at competitive lending sites like LendingTree, the parent company of MagnifyMoney, which may offer interest rates as low as 1.99% APR on terms of two, three, four and five years. Lenders may offer the best rates to consumers with good-to-excellent credit scores (700-800).

2. You want a lower monthly payment

Even consumers with clear credit histories and top scores may not like the cost of their current monthly payments. You might find that you can get a longer term loan (and, thus, a lower payment) by getting pre-approved financing from a bank, credit union or private lender. You should compare a new loan with the terms and rates of your existing financing. LendingTree’s Auto Refinance Calculator crunches monthly payment figures, allowing buyers to type in different interest rates and loan terms to find the sweet spot.

Just beware of choosing a loan with a longer term. It may save you money on your monthly payment, but you will ultimately pay more interest over time.

Here’s an example to show you how much more you’ll pay with a longer-term loan.

For those who can increase their monthly payment without too much stress, shortening the term may be a good strategy. Monthly payments will be higher, but the car will be paid off sooner, lowering the total amount of paid interest. The bottom line: If you’re considering changing the term in refinancing, be sure the interest rate and refinancing charges are low enough to make it worthwhile.

3. You want to remove or add a co-signer

There may be business or personal reasons to add or remove a co-signer from the original auto financing. In a divorce, the primary owner may want to remove the ex-spouse co-signer from the loan and title. Or someone may want to add a co-borrower with better credit to qualify for a lower refinancing rate. Either way, those modifications are going to require refinancing.

Unfortunately, it’s going to be difficult to remove yourself as a co-signer if the person who financed the car stops making payments. So if that’s your case, check out our guide on how to get out of a bad car loan.

4. Your credit score has improved and you can qualify for a lower rate

Congrats on improving your score! According to our parent company, LendingTree, if you raise your credit into the next tier in the FICO Score range you may see appreciable savings. Auto lenders rank consumer credit into Tiers A, B, C, D and F. Financing to applicants with D- and F-tier scores may only be offered as subprime or bad credit loans:

  • Tier A: 781 – 850
  • Tier B: 661 – 780
  • Tier C: 601 – 660
  • Tier D: 501 – 600
  • Tier F: 300 – 500

Borrowers falling into the D and F tiers should review MagnifyMoney’s guide on bad credit loans.

5. You earn a lot less or a lot more than you used to

There may be two key financial reasons supporting car refinancing:

  • You earn more than you did when you bought the vehicle and want to pay it off sooner
  • You earn less than you did and cannot meet the monthly payments

Those who have improved finances may choose to refinance to shorten the loan term, increasing their monthly payments but slashing the amount of total required payments to pay off the car. Owners who have experienced a financial setback (change or loss of income) can refinance their vehicles to a longer term, lowering the amount of their monthly payments. Refinancing your loan to a lower rate with the same or more favorable interest rate will lower the total cost of the car.

6. Your car is worth less than what you owe

If a consumer owes more money on their car than it’s worth, they have an “upside-down” loan. This can happen if you buy a car with a very low down payment and finance the rest. Your car simply loses value over time and you wind up paying on a loan that was determined based on its value months or even years earlier. If your car loan is underwater, you don’t have a good chance of getting refinanced since the lender will take a hit on the collateral if you default. A way to stave off disaster is to make extra payments on the original loan or take out a home equity or personal loan to pay off the vehicle.

7. Your car is getting older

If you want to refinance before your car gets too old to qualify, you should.

Lenders set their own limits on how many miles and years on the road qualify cars for refinancing. For example, Nationwide Bank will not refinance vehicles that are 20 years or older, or 150,000 miles on the odometer. Bank of America will not refinance cars 10 years or older and won’t touch vehicles with 125,000 miles or more.

Risks To Consider Before You Refinance

Impact on credit

When you apply for refinancing, a “hard inquiry” is reported to the credit agencies. Multiple hard inquiries on refinancing (and other loan requests) can drop credit scores by a few points, but the impact can be offset if you make consistent payments on time, which will help boost your score.

Also, you won’t get dinged if you shop for an auto loan over a short period of time — say two weeks or so. In that case, credit bureaus should treat all those hard inquiries as just one inquiry.

Long-term loans can cost more in the long run

Today, you can get auto loans for as long as 84 months. Extending terms through a refinance may look good when the monthly payment comes due. But the added interest over the term can cost you more in the end. Term and APR sit on opposite sides of the seesaw.

Doing the math, compare these costs when the terms are extended:

  • A $30,000 car financed at 6% for five years: $34,799
  • Financing the same car and rate for seven years: $36,813

If you drag out your loan term, you could wind up upside down on the loan

During the first years of ownership, financing on a new car is already upside down. That’s because the monthly payments are largely paid on interest rather than on the principal. Meanwhile, the new car is losing value. If the consumer has a downward turn in finances, the loan can go off the deep end. With an older vehicle, there’s still a risk with a long extension. By the time the refinancing is paid off, the car will have amassed high mileage that can diminish its use as a trade-in.

Fees

Each state charges a titling fee when a new loan is made on the vehicle. Check your state’s Department of Motor Vehicles (DMV) to find out the fees. In New York, for example, the titling fee is $50. It’s unlawful for the dealership to make a profit on the titling. Remember, frequent refinancing customers pay for titling each time.

There are no requirements or charges for an appraisal when refinancing, but the borrower may be assessed lender fees for loan originations and processing. Get all charges — in writing — in your contract. Some lenders may be open to negotiations on some fees. Be wary of upfront fees that may be charged with any loan application at the bank, credit union or finance company.

How To Compare Auto Refi Offers

Always shop around for the best auto loan deal before you head to the dealership. If you walk in the dealership with an offer in hand, they will have to negotiate with you if they want your business — and they will, because they do.

Here’s what to compare when you’re looking at different loans:

  • Price
  • Down payment requirement
  • Amount financed
  • Annual percentage rate
  • Finance charges
  • Term length in months
  • Number of payments
  • Monthly payment amount

Try comparing loans with the same term to find the best APR. Or view the same APR across multiple terms to see the financial impact on monthly payments. Take your comparative checklist when visiting lenders or bank and credit union websites. Our parent company LendingTree serves up free offers on auto refinancing in a comparative format.

Pre-approvals on a car loan are good from 30 to 90 days, depending on the lender.

What if I can’t get approved for an auto refi?

The first step in responding to a loan denial is to learn why you were turned down. The Equal Credit Opportunity Act requires lenders to notify borrowers in writing the reasons the application was denied. Reasons for denial may involve the credit score or red flags in your credit history. Too many hard credit inquiries might indicate that you’re desperate for a loan. Turn-down letters provide an opportunity to view the credit report that the loan underwriters evaluated.

You may have to wait awhile before applying for refinancing again, since it will result in another ding on your credit. Or, if you’re in the subprime and bad credit tiers, look at options of getting financing from banks, credit unions or financing companies that specialize in loans for Tier D and F categories. Learn more about the subprime options at MagnifyMoney.

Finally, you could take time out from refinancing while you report errors on your credit report and set about improving your credit score. MagnifyMoney has sound advice on building the highest credit scores. Steps include:

  1. Get a line of credit
  2. Keep a low credit utilization rate
  3. Pay your creditors in full and on time with each monthly statement
  4. Avoid or reduce credit card debt
  5. Protect your score

Helpful resources

The following links offer a wealth of financing information that can keep you out of trouble:

Auto Loans

The Consumer Financial Protection Bureau offers answers to frequently asked questions on car financing, including a section on how to avert repossessions.

Auto Loans Modification Scams

The FTC warns about companies that claim to change the loan to avoid repossessions and fines. They may charge significant upfront fees and do nothing on your behalf.

Auto Loans Advice, LendingTree

This collection of LendingTree articles on car loans covers a range of issues, including financing options, bad credit, financing a classic car, bankruptcy, car ownership, certified pre-owned cars, and more.

Credit Repair: How to Help Yourself

The FTC’s Consumer Information division has published an extensive guide to repairing credit, including information on credit report disputes, finding legitimate credit counselors, and consumer rights.

How to Get a Car Loan with Bad Credit in 2017

View MagnifyMoney’s comprehensive guide to refinancing bad-credit loans, getting a co-signer, and tips for avoiding financing scams.

National Auto Lending Study

Last year, a study by MagnifyMoney and Google Consumer Surveys found that seven-year terms can be a ticket to the horror upside-down loans, especially for subprime borrowers. Read the rest of the findings.

Understanding Vehicle Financing

The American Financial Services Association Education Foundation (AFSAEF), the National Automobile Dealers Association (NADA), and the Federal Trade Commission (FTC) have prepared this 16-page brochure to help consumers understand financing terms, laws regulating dealership financing, and strategies for visiting dealerships.

Gabby Hyman
Gabby Hyman |

Gabby Hyman is a writer at MagnifyMoney. You can email Gabby here

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Auto Loan, Reviews

The 6 Best Auto Loans for Buying a Used Car

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Source: iStock

Shopping for used cars can be tricky. Not only are you trying to avoid buying a lemon, you are looking for just the right model year, mileage, and price.

While all of these variables can make car shopping stressful, there are a couple of things you can do to simplify the process.

First, decide exactly how much you can afford to spend on a used car. Look at your budget and determine the absolute maximum your monthly payment can be. Also be aware of your total debt payments when compared to your income. Generally speaking, the total of all your debt payments – auto loans, student loans and mortgage – should not exceed 50% of your income. Make sure to factor your auto payment into the calculation.

Next, shop online for the best used-auto loan rates and get preapproved for the most attractive offer for which you are eligible. In order to strike the best deal possible on your used auto, it is best to walk into the dealership with financing already in hand.

Once you get to the dealership and find the car you want, negotiate the price of the car before telling the salesperson that you are approved for financing.

[Borrow Before You Buy a Car]

How To Apply

When shopping online for a used auto loan, the application process is very similar to that of a brick-and-mortar bank, but more streamlined. In general, be prepared with:

  • Your contact information: Name, address, phone number, email address
  • Vehicle information (if known – required for lenders that do not offer online preapproval) Make, model, mileage, VIN, dealership information.
  • Financial Information: employment information, gross income and expenses

The Best Auto Loans for Used Cars

LendingTree

With LendingTree, you can fill out one short online form and see real interest rates and approval information instantly. There are hundreds of lenders on LendingTree ready to compete for your business.

It is important to note that some lenders will do a hard pull on your credit and this is normal within the auto lending space. Keep in mind that multiple hard pulls will only count as one pull, so the best strategy is to have all your hard pulls done at one time.

Disclosure: LendingTree is the parent company of MagnifyMoney.

LendingTree

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LightStream

LightStream offers auto loans for used cars online with APRs ranging from 2.49% to 9.04%. It’s terms range from 24 to 84 months, it can finance up to $100,000, and it charges no origination fee. It does offer the ability to obtain preapproval online, before setting foot in a dealership, and if you are approved, you could receive funds into your bank account in as little as 1 business day. The funds can be used on any vehicle, from any dealership, with no restrictions concerning the year, make, model, or mileage of the vehicle you buy.

The 2.49% APR is dependent upon enrolling in AutoPay. If you choose not to enroll in AutoPay, your rate will be 0.50% higher, starting at 2.99%. While rates from LightStream start at 2.49%, they do depend upon the amount financed, and the financing term.

Because LightStream offers no telephone customer support, it offers a guarantee that you will love its service, from start to finish. If you aren’t completely satisfied with your experience, $100 will be deposited into your account, provided you fill out a questionnaire about your experience within 30 days of closing on your loan.


PenFed

Pentagon Federal (PenFed) Credit Union offers rates as low as 2.49% on used auto loans up to $100,000. It will finance terms of 36 to 72 months and charges no origination fee. Rates are dependent upon the amount financed, and the terms financed for, as shown in the chart below:

APR as low as*

Term

Loan Amount

Approx.
Loan Pmt.($20,000 Loan)

2.49% APR

36 months

$500 to $100,000

$577.14

2.74% APR

48 months

$7,500 to $100,000

$440.39

3.49% APR

60 months

$10,000 to $100,000

$363.75

3.99% APR

72 months

$15,000 to $100,000

$312.81

Because PenFed is a credit union, you will need to join in order to apply for an auto loan through it, but anyone can join by making a one-time donation to Voices for America’s Troops ($14) or National Miliary Family Association ($15). Also important to note is that even though the loan is entirely online, PenFed does not offer online preapproval.

In order to apply, you’ll need the following information about the vehicle you will be purchasing:

  • Year
  • Make
  • Model
  • Mileage
  • VIN
  • Dealer or private party information

Once approved, the loan proceeds will go directly to the vehicle’s seller, rather than into your bank account.


Capital One

Capital One offers auto loans with rates as low as 3.24% for new vehicles and 3.64% for used vehicles. Their terms range from 36 to 72 months. It can finance up to $40,000, and has no origination fee. Capital One also offers online preapproval through its Auto Navigator. You can then use the funds at any of 12,000 approved dealers. Proceeds from the loan will be sent directly to the seller, rather than deposited into your bank account.

Rates are dependent upon the financing terms, and subject to credit approval, as seen in the chart below:

Financing Type

36 or 48 or 60 mos

66 or 72 mos

Purchase New Vehicle

APR as low as

3.24%

3.24%

Purchase Used Vehicle(Dealer)

APR as low as

3.64%

4.14%


NEFCU

NEFCU is a credit union offering auto loan for used cars with rates as low as 2.240% for used vehicles. It can finance up to $70,000 for 12 to 84 months with no origination fee. NEFCU does not offer online preapproval.

NEFCU offers a $300 coupon offer valid at select dealers on your new or used auto.   You can apply online, at a branch or by telephone by calling 1-800-99-NEFCU. Your rate will be determined by creditworthiness, loan amount, year of the vehicle, and loan term, as per the rate chart.

In order to apply for an auto loan from NEFCU, you must be a member. You are eligible for membership with NEFCU if you:

  • Live in Nassau and/or Suffolk Counties
  • Work in Nassau and/or Suffolk Counties
  • Worship in Nassau and/or Suffolk Counties
  • Attend school in Nassau and/or Suffolk Counties
  • Regularly conduct business in Nassau and/or Suffolk Counties
  • Family Sponsorship – An existing NEFCU member can sponsor in an immediate family member (mother/father, brother/sister, child, grandparent or grandchild) or any household member
  • Membership is not open to individuals who live, work, worship, attend school and do business exclusively in East Hampton, Southampton and Shelter Island.
  • If you have any questions on membership or eligibility, please contact us at 516.561.0030 or at 800.99.NEFCU outside LI/NYC or send an email to info@myNEFCU.org. 

Navy Federal Credit Union

Navy Federal Credit Union offers auto loans for used cars with rates as low as 1.99% with terms of 12 to 96 months. It can loan up to $100,000 and charges no origination fee. Navy Federal Credit Union does offer online preapproval.

Rates from Navy Federal Credit Union are determined by the car’s model year, as well as the loan term, as seen in the chart below:

Auto Loan Rates

As of: December 5, 2017, 1:00 AM EST

Loan Type

up to 36 mos.
APR as low as*

37-60 mos.
APR as low as*

61-72 mos.
APR as low as*

73-84 mos.
APR as low as*

85-96 mos.
APR as low as*

New Vehicle

1.99% 

2.39% 

2.69% 

4.09% 

4.89% 

Late Model Used Vehicle

1.99% 

2.79% 

3.49% 

Used Vehicle

3.79% 

3.99% 

5.29% 

In the rate chart, new vehicles are year models 2016, 2017, and 2018 with 7,499 miles or less, and the minimum loan amount is $30,000 for terms 85-96 months. Late model used vehicles are described as 2016, 2017, or 2018 models with 7,500 – 30,000 miles. Used vehicles are vehicles (up to 20 years old) with 30,001 miles or more.

In order to apply for an auto loan from Navy Federal Credit Union, you must become a member. You are eligible if you are Active Duty Army, Navy, Marines, Air Force, Coast Guard, Army or Air National Guard, a member of the Delayed Entry Program, a Department of Defense (DoD) Officer Candidate/ROTC, a DoD Reservist, or a retiree from any of these service branches. You are also eligible as a civilian if you are a DoD civilian employee, a U.S. government employee assigned to a DoD installation, a DoD contractor, or a DoD retiree. Finally, if you are the immediate family member of anyone eligible to join, you are also eligible to become a member.

After loan approval, the proceeds will be sent directly to the dealership, rather than deposited into your bank account.


 You Should Shop Around

Often concerns arise about the effect of shopping around for auto loans on your credit score. However, all inquiries within a 30-day period count as one inquiry on your credit report, so as long as your shop used auto loan rates within a 30-day period, those inquiries will only have a minimal impact on your credit score

Check other auto loan offers here.

Gretchen Lindow
Gretchen Lindow |

Gretchen Lindow is a writer at MagnifyMoney. You can email Gretchen at gretchen@magnifymoney.com

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Auto Loan, Reviews

LightStream Auto Loan Review

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

LightStream Auto Loan Review
Updated November 06, 2017

Automobile shopping can be stressful. Besides trying to find just the right car for you or your family, there is the additional stress of finding the right price, the right financing, as well as factoring a monthly payment into your budget.

But with more online-only banks offering auto loans at extremely competitive interest rates, the auto loan game is changing. Today, your best bet is to obtain financing before setting foot in a dealership so you have a budget to stick to and you know exactly what your monthly payment will be.

The Offer

LightStream offers both secured and unsecured auto loans from $5,000 to $250,000 and rates as low as 2.49%. LightStream can get money in your account in as little as one day in some cases, and always with no fees whatsoever.

How To Apply

You can complete your LightStream auto loan application online, but you must 1) acknowledge receipt of LightStream’s Statement on the Use of Electronic Records, 2) agree to receive electronic records, and 3) agree to use electronic signature to sign your loan documents.

In order to apply, you will need:

  • The purpose, term and amount of desired loan
  • Your name
  • Your address
  • Phone number
  • Social Security number
  • Employment information
  • Annual income
  • Total amount of assets and equity in your home

During business hours, LightStream will email you regarding your application. If you are approved, you will be able to then go online, electronically sign your loan agreement, provide any additional information, as well as choose your funding and due dates. The funds will be transferred to your bank account on the funding date that you chose, on the same day in some cases.

To qualify, you must have either excellent or good credit. LightStream lists the following as criteria for excellent credit:

  • Five or more years of significant credit history.
  • A credit history with a variety of account types such as major credit cards (for example, Visa, MasterCard, Amex), installment debt (vehicle loans) and mortgage debt if applicable.
  • An excellent payment history with no delinquencies or other problems repaying debt obligations.
  • A proven ability to save evidenced by some or all of the following; liquid assets (stocks, bonds, bank deposits, etc.), cash down payments on real estate, retirement savings, and little, if any, revolving credit card debt.
  • Stable and sufficient income and assets to easily repay current debt obligations and any new loan with LightStream.

Good credit is essentially the same criteria as excellent credit, as seen above, but with fewer than 5 years of credit history.

Satisfaction Guarantee

LightStream does not provide any phone customer support for loans. Instead, it offers email support in an effort to keep costs low. Because the lack of phone support is unorthodox, it offers a $100 guarantee within 30 days if you aren’t satisfied with your loan experience. If you are not satisfied and wish to claim the $100 guarantee, you must contact customer service within 30 days of your loan and fill out a questionnaire.

The Fine Print

Your APR will be based on creditworthiness, loan amount, and loan term, as seen in the chart below for an auto-loan on a new car:

Loan Term(months)

Loan Amount

24-36

37-48

49-60

61-72

73-84

$5,000 to $9,999

3.49% - 5.74%

4.34% - 6.34%

4.54% - 6.54%

5.44% - 7.44%

N/A

$10,000to $24,999

2.49% - 4.94%

3.19% - 5.19%

3.19% - 5.19%

4.04% - 6.04%

N/A

$25,000 to $49,999

2.49% - 4.94%

3.19% - 5.19%

3.19% - 5.19%

4.04% - 6.04%

4.64% - 6.64%

$50,000 to $100,000

2.49% - 4.94%

3.19% - 5.19%

3.19% - 5.19%

3.84% - 5.84%

4.54% - 6.54%

Rates as of November 7, 2017 – New Auto Purchase

Rates in the chart above are shown inclusive of a 0.50% AutoPay Discount. If you choose not to enroll in AutoPay, your rate will reflect a 0.50% increase. AutoPay payments will come directly out of your bank account. Otherwise, you can choose to pay by invoice, which must be returned by mail. You cannot make payments at a SunTrust Bank branch.

LightStream does not charge any closing or disbursement fees. It also does not charge fees for prepayment. You can prepay principal on your loan by logging into your online account.

Pros

  • Rates as low as 2.49%
  • Can borrow as little as $5,000 or as much as $250,000
  • You can borrow for a new or used car
  • Terms from 24 to 84 months
  • No prepayment penalties
  • No closing or disbursement fees
  • Secured and unsecured loans

Cons

  • APRs as high as 9.04%
  • APR will increase 0.50% if you don’t enroll in AutoPay
  • Excellent or good credit required for financing

How It Stacks Up

If a low APR is your priority, consider looking into an auto loan from Capital One. It offers APRs from 3.24% to 3.24% and terms of 36 to 72 months on new vehicles.  There is no origination fee, but it only offers loans up to $40,000, with the option to get pre approval online before shopping.

New England Federal Credit Union is another option for an auto loan with used auto loan rates as low as 2.240% and terms from 12 to 96 months on new vehicles and 84 months on used cars. NEFCU can loan up to $70,000 with no origination fee, but there is no option for pre approval.

LightStream offers a fairly straightforward auto loan experience whether you’re buying a new or used auto with low rates, long terms, and no fees for closing, disbursement, or prepayment. As with any loan, make sure that you are getting the lowest rate possible, as even one percentage lower can save you thousands of dollars in interest.

Finally, make sure that you can afford the monthly payment. Auto loan terms are getting longer, and you do not want to have an auto loan payment that is more than you can afford for 6+ years.

Find other auto loan options here.

Gretchen Lindow
Gretchen Lindow |

Gretchen Lindow is a writer at MagnifyMoney. You can email Gretchen at gretchen@magnifymoney.com

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Auto Loan

How to Handle an Upside-Down Car Loan

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

iStock

Upside-down. Negative equity. Underwater. No matter what you call it, it means you owe more on your car than it’s currently worth. While it happens to most people who finance the purchase of a vehicle at some point, it’s not a good place to be — especially when you’re planning on selling the car or trading it in for a newer model.

It’s also a situation that’s becoming more common. According to the Edmunds Used Vehicle Market Report for the third quarter of 2016, a record 25 percent of all trade-ins toward a used car purchase have negative equity, and the average negative equity at the time of trade-in was $3,635 — also a record in the used-car market.

You can find out if you’re in this position by looking up the value of your vehicle using a research tool such as Kelley Blue Book. If the value is less than the balance on your current car loan, you are upside-down.

Part I: How do you get upside-down in the first place?

There are some reasons car loans may be upside-down.

Low down payment

Dealerships often offer incentives for new cars, including very low or no down payment loans. A new car loses about 20 percent of its value in the first year, so a small down payment can quickly cause the balance of your loan to soar above its actual value. A healthy down payment can help keep your loan balance in line with the worth of your car.

High interest rate

Remember to shop around for an auto loan, because the higher the interest rate, the less you’re paying toward principal each month. That makes it more likely you’ll become upside-down, even if you made a decent down payment.

Anthony Curren, a sales and marketing manager and salesperson with Rick Curren Auto Sales in Corning, N.Y., says he sees this happen pretty regularly when disreputable salespeople charge higher interest rates to make more money off a loan.

“This happened to my girlfriend before we met,” Curren says. “She had an 800-plus credit score and got stuck in a loan charging 5 percent interest. She should have been paying 2 percent or less at that time.”

Longer loan term

According to Experian’s State of the Automotive Finance Market report for the second quarter of 2017, the average length of a new auto loan is currently nearing 69 months. While longer loan terms may keep your monthly payment low, you’ll end up paying more interest, and you’re more likely to be upside-down.

Past upside-down loan

You could be upside-down because you carried negative equity over from your last car loan. Many dealers offer what’s known as a rollover loan: When people trade in an upside-down vehicle, the dealership rolls the negative equity into the purchase of their next car. With a rollover loan, you are upside-down before you even drive off the lot.

People who trade up for a new vehicle every couple of years are most likely to have car loans with rolled-over negative equity. In the first few years of a new car loan, your car depreciates faster while your loan balance declines the slowest due to interest. This means many people are upside down in the early years of their loans. The longer you keep the vehicle, the more likely it is that the loan balance will be less than the current value of the vehicle.

Being upside-down on your car loan may not pose a problem, as long as you are planning on holding onto the car until you have some equity in it. But if an unforeseen financial setback means you need to sell the car, you may need to come up with extra cash to pay off the loan difference. And if your car is wrecked or stolen, your insurance may not pay out enough to retire the loan.

Part II: How to get out of an upside-down car loan

The first step to dealing with an upside-down car loan is knowing your numbers.

Step 1: Figure out how much you owe.

The fastest and most accurate way to find out how much you owe on your loan is to contact your finance company. If you are planning on selling or trading in your car right away, you’ll need to know the payoff amount, not just the amount remaining on your principal. The payoff amount is how much you actually have to pay to satisfy the terms of your loan. It includes the payment of any interest you owe through the day you intend to pay off the loan, as well as any prepayment penalties.

You may be able to find this figure by logging into your lender’s online account portal. Otherwise, you’ll have to call the finance company.

Step 2: Figure out how much your car is worth

You can get a value estimate using Kelley Blue Book’s What’s My Car Worth tool. You’ll need to provide the car’s year, make, model, mileage, style or trim level (the alphanumeric code that helps identify at what level the vehicle is equipped), and the car’s condition. If you’re not sure how to rate your car’s condition, you can take a quick quiz to help you assess it.

Once you input those details, you’ll receive a range suggesting how much (or how little) you can expect to receive from a dealer for a trade-in. Keep in mind that every dealer is different, but you may be able to negotiate.

Step 3: Calculate your negative equity

If the payoff amount on your loan is greater than the value of your car, you are, as we’ve said, upside-down. Subtract the value of your car from the payoff amount to find out how underwater you are. If the difference is small, you may be able to make extra payments toward the loan’s principal to catch up. If the difference is significant, you may have to take more drastic steps.

Step 4: Strategize remedies

If you find yourself upside-down on your car loan, the most prudent course of action is continue to pay down the debt until you have some equity in the car. You can hasten the process by making extra payments toward the loan’s principal.

If that isn’t an option, here are a few other ideas.

Pay off the car with a home equity loan or line of credit

As with most things in life, there are pros and cons to paying off a car loan with a home equity loan or line of credit (HELOC). One advantage is that you can typically lengthen your repayment period, thereby reducing your monthly payment. HELOCs also have more flexible repayment options, compared with the fixed monthly payment that comes with an auto loan. This may be a good option if you’re having trouble making your monthly payment due to a temporary financial setback.

The second advantage of paying off your car loan in this fashion: The interest paid on your HELOC is typically tax-deductible, while interest on your car loan is not. Keep in mind that you’ll have to itemize deductions on your tax return to take advantage of this benefit. If you take the standard deduction, there’s no tax advantage.

But before you pay off a car loan with a HELOC, consider the downsides. First off, HELOCs are often variable-rate loans. If interest rates rise, your monthly payment could go up. Second, even if the interest rate on your HELOC is lower than the interest rate on your car loan, you could end up paying more in interest by stretching out the loan term. Finally, if you can’t make your HELOC payments, you could lose your home.

If you decide to take this route, make a plan to pay down the HELOC as soon as possible. Otherwise, it could well outlive your car, and you’ll be paying off the HELOC and a new loan for your next vehicle at the same time.

Pay off the car with a personal loan

Paying off a car loan with a personal loan could be a good option if you plan on selling your car without buying a new one. In that case, you would sell the car, use the proceeds to pay down the balance of the car loan, then refinance the remaining balance with a personal loan.

However, keep in mind that auto loans are secured by collateral (the car). If you’re unable to pay, the lender can repossess the car. Personal loans are unsecured. If you stop paying, the lender has fewer options for recovering the money. For this reason, personal loans usually come with higher interest rates than auto loans.

The Federal Reserve Bank’s survey of commercial bank interest rates for the second quarter of 2017 shows just how much higher those rates can be. The average 60-month new car loan comes with an APR of 4.24 percent. The average 24-month personal loan has an APR of 10.13 percent. So with the typical personal loan, you’ll pay more than twice as much interest in half the time. Hard to see that as a good deal.

Refinance the car loan

Refinancing your car loan can help in a few ways. You may be able to lower your interest rate and lower the term of your loan, both of which will help you get equity in your car sooner. Curren says deciding whether refinancing is the right option depends on the remaining loan term and interest rate.

He uses the hypothetical example of a person who, because of credit issues, used a subprime loan with an interest rate of 22.9 percent to purchase a car. “My advice to that person is to build their credit up as much as possible and as quickly as possible,” Curren says. “In one year, they should be looking at refinancing the loan with an interest rate as low as 6 or 7 percent, which is still relatively high, but much more palatable. It will save them thousands of dollars in repayment.”

However, Curren says he doesn’t offer the same advice to someone with only a year or two left on a loan. “At that point, the savings is minimal,” he says. “The better advice is to pay off the car quicker.”

Part III: What to watch out for when you have an upside-down car loan

Car dealers push the latest vehicle designs and advertise very attractive incentives for trading in your old vehicle, no matter how upside-down you are at the moment. But take heed: You’ll want to be very careful about trading in an upside-down vehicle for a new loan. Here’s a look at the problems that can arise:

Rolled-over negative equity

As we mentioned above, many car dealers are willing to roll the negative equity from your old car loan into a new loan. This is a popular option because it doesn’t require coming up with any money immediately. But it also means your new car will be underwater before you even drive it home. That new car may be fun to drive, but your monthly will be higher because it includes the cost of your new vehicle and the remaining balance on the old one.

Dealer cash incentives

Some car dealers offer cash incentives that can help pay off your negative equity. For example, if you have $1,000 in negative equity on your current car loan, you could buy a new car with a $2,500 rebate, use $1,000 of the rebate to pay off the negative equity, and still have $1,500 left over to use as a down payment on the new car.

But be wary of dealers advertising they’ll “pay off your loan no matter how much you owe.” The FTC warns consumers that these promises may be misleading because dealers may roll the negative equity into your new loan, deduct it from your down payment, or both. If the dealer promises to pay off your negative equity, read your sales contract very carefully to make sure it’s not somehow folded into your new loan.

Part IV: How to avoid an upside-down car loan

Being upside-down on your car loan, at least for a little while, is very common. But there are things you can do to prevent it from happening.

  • Make a larger down payment. Because a car depreciates by around 20 percent in its first year, putting down 20 percent of the total purchase price (including taxes and fees) can help you avoid going underwater.
  • Choose a car that holds its value. Some makes and models hold their value better than others. Kelley Blue Book, Edmunds and other car research sites regularly release lists of car brands and individual models with the best resale value. Do your research and pick out a car that will depreciate more slowly.
  • Opt for a shorter loan term. Longer terms are more likely to leave you underwater in the early years of the loan because you’re paying less toward the principal each month. Try not to finance a car for longer than you plan on keeping it.
  • Shop around for the lowest rate. The lower your interest rate, the more money you’ll pay toward principal each month. Don’t settle for the first offer you receive at a dealership. Shop around for a car loan before you go to the dealer, so you can feel confident you’re getting the best deal.
  • Avoid unnecessary options. Sunroofs, leather upholstery, rust proofing, extended warranties, fabric protection, chrome wheels — all these attractive add-ons are often overpriced. They’ll increase the purchase price of your vehicle, but rarely add long-term value.

Final thoughts

Being upside-down on your car loan is not an ideal situation, but you do have options. Understand the circumstances that led you to be upside-down in the first place can help keep the problem from recurring, or from carrying over to your next loan.

Janet Berry-Johnson
Janet Berry-Johnson |

Janet Berry-Johnson is a writer at MagnifyMoney. You can email Janet here

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Auto Loan Interest Rates and Delinquencies: 2017 Facts and Figures

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Led by a prolonged period of low interest rates, consumers now have a record $1.2 trillion1 in outstanding auto loan debt. Despite record high levels of issuance, the auto lending market shows signs of tightening. With auto delinquencies on the rise, consumers are facing higher interest rates on both new and used vehicles. In particular, over the last three years, subprime borrowers saw rates rise faster than the market as a whole. MagnifyMoney analyzed trends in auto lending and interest rates to determine what’s really going on under the hood of automotive financing.

Key insights

  1. Overall auto delinquency is on the rise, and the first quarter of 2017 saw near record volume ($8.27 billion) in new severely delinquent auto loans.54
  2. Interest rates are on the rise, with average new car loan rates up to 5.2%, 93 basis points from their lows in late 2013.2
  3. The average duration of auto loans (new vehicles) is up to 66.53 months. The longer loans make monthly payments more manageable even as interest rates rise.31
  4. The median credit score for an auto loan borrower dropped to 698.6 This broke a five-quarter trend for rising credit scores among auto loan borrowers.

Facts and figures

  • Average Interest Rate (New Car): 5.2%2
  • Average Interest Rate (Used Car): 9.02%3
  • Average Loan Size New: $28,5694
  • Average Loan Size Used: $17,0785
  • Median Credit Score for Car Loan: 6986
  • % of Auto Loans to Subprime Consumers: 34.3%7

Subprime auto loans

  • Total Subprime Market Value: $234 billion8
  • Average Subprime LTV: 113.4%9
  • Average Interest Rate (New Car): 11.35%10
  • Average Interest Rate (Used Car): 16.49%11
  • Average Loan Size (New Car): $27,85312
  • Average Loan Size (Used Car): $16,24013
  • % Leasing: 24.5%14

Prime auto loans

  • Total Prime Market Value: $733 billion15
  • Average Prime LTV: 97.91%16
  • Average Interest Rate (New Car): 3.96%17
  • Average Interest Rate (Used Car): 5.42%18
  • Average Loan Size (New Car): $31,96419
  • Average Loan Size (Used Car): $20,84720
  • % Leasing: 36.5%21

Auto loan interest rates

Interest rates for auto loans continue to remain near historic lows. Interest rates for used cars is now 9.02% on average. The average interest rate on new cars (including leases) is 5.2%. However, the historically low rates belie a tightening of auto lending, especially for subprime borrowers.

New loan interest rates

Consumer credit information company Experian reports that the average interest rate on all new auto loans was 5.2%, up 93 basis points from the trough in the third quarter of 2013.24 Compared to the previous year, interest rates are up 38 basis points for new cars. The interest rate increase reflected underlying tightening in the auto loan market for new vehicles.

During the last few years, lenders tilted away from subprime borrowers. In the second quarter of 2017, just 10.02% of new loans went to subprime borrowers compared with peak subprime lending of 11.48% in the fourth quarter of 2015. The movement away from subprime borrowers led to a smaller increase in new car interest rates.25

Across all credit scoring segments, borrowers faced higher average borrowing rates. Subprime and deep subprime borrowers saw the largest absolute increases in rate hikes, but super prime borrowers also saw an 18-basis-point increase in their borrowing rates over the last year. The average interest rate for super-prime borrowers is now 3.05% on average, the highest it’s been since the end of 2011.27

When comparing credit scores to lending rates, we see a slow tightening in the auto lending market since the end of 2013. The trend is especially pronounced among subprime and deep subprime borrowers. These borrowers face auto loan interest rates growing at rates faster than the market average. Consumers should expect to see the trend toward slightly higher interest rates continue until the economic climate changes.

Even with the tightening, interest rates remain near historic lows for borrowers with fair credit and above. However, the low rates aren’t translating to consumers are paying less interest on their vehicle purchases. The estimated cost of interest on new vehicle purchases is now $4,378,29 up 52% from its low in the third quarter of 2013.

Growth in interest paid over the life of the loan stems from longer loans and higher average loan amounts. The average maturity for a new loan grew from 62.4 months in the third quarter of 2008 to 66.5 months in early 2017.31 During the same time, average loan amounts for new vehicles grew 15.3% to $29,134.32

Used loan interest rates

Over the past year, interest rates for used vehicles swung to their lowest rates ever, but recent movements show that interest rates for used cars may be stabilizing or climbing. Year over year, used car interest rates increased by 5 basis points to 9.02%. The drop in average interest rates came from a dramatic increase of prime borrowers entering the used car financing market. In the second quarter of 2017, 46.91% of used-car borrowers had prime or better credit. The year before, 45% of used borrowers were prime.34

On the whole, borrowers in the used car market face modest increases in interest rates compared to this time last year. Super prime and prime borrowers saw upticks of 27 basis points and 19 basis points, respectively. This brought the average super prime borrowing rate up to 3.68% for used vehicles, and the prime rate to 5.42%.36 Despite the recent increases, interest rates for prime borrowers are still near historic lows.

On the other end of the spectrum, subprime and deep subprime borrowers saw larger than average interest rate increases last quarter. Deep subprime interest rates grew to 19.73%, a 44 basis point increase from the previous year. Subprime borrowers face rates of 16.49% for used cars, up 39 basis points from the previous year. Interest rate hikes for subprime borrowers are part of a broader trend that started in 2009. Since 2009, interest rates for subprime borrowers are up nearly two full percentage points, and interest rates for deep subprime borrowers are up 3.5 percentage points.

Along with interest rate increases, the estimated interest paid on a used car loan sits at $4,279, up $227 from this time four years ago. Rising interest rates factor into the increased interest costs, but they are not the primary driver of interest costs. A more important factor in the total interest cost is the longer average loan terms for used cars (61 months vs. 59 months),38 leading to more interest paid over the life of a car loan.

Auto loan interest rates and credit score

As of June 2017, the median credit score for all auto loan borrowers was 698.40 Following a five quarter increase in median credit scores of auto borrowers, median credit scores fell below 700 for the first time since 2016.

In the second quarter of 2017, just 34.3% of all auto loans were issued to subprime borrowers compared with an average of 35% over the past three years. Ally Financial, the nation’s largest auto lender, limited subprime lending to just 11.6 percent of their auto loan portfolio, and Wells Fargo, the nation’s third largest auto lender, announced intentions to limit subprime auto lending to less than 10 percent of their auto portfolio. Despite the actions of these big banks, trends towards lending to the highest quality auto borrowers may show signs of normalizing near the 35% number again.

Total auto loan volume decreased dramatically between 2008 and 2010. During that time, subprime and deep subprime lending contracted faster than the rest of the market. Since early 2010, auto lending rebounded to near pre-recession levels, but subprime lending lagged in recovery. However, in the last year and a half, subprime lending volume has shown signs of total recovery. In the second quarter of 2017, banks issued $50.9 billion to subprime borrowers, surpassing the average $48.2 billion of subprime auto loans issued each quarter between 2005 and 2007.

Loan-to-value ratios and auto loan interest rates

One factor that influences auto loan interest rates is the initial loan-to-value (LTV) ratio. A ratio over 100% indicates that the driver owes more on the loan than the value of the vehicle. This happens when a car owner rolls “negative equity” into a new car loan.

Among prime borrowers, the average LTV was 97.91%. Among subprime borrowers, the average LTV was 113.40%.44 Both subprime and prime borrowers show improved LTV ratios from the 2007-2008 time frame. However, LTV ratios increased from 2012 to the present.

Research from the Experian Market Insights group46 showed that loan-to-value ratios well over 100% correlated to higher charge-off rates. As a result, car owners with higher LTV ratios can expect higher interest rates. An Automotive Finance Market report from Experian47 showed that loans for used vehicles with 140% LTV had a 3.03% higher interest rate than loans with a 95%-99% LTV. Loans for new cars charged just a 1.28% premium for high LTV loans.

Auto loan term length and interest rates

On average, auto loans with longer terms result in higher charge-off rates. As a result, financiers charge higher interest rates for longer loans. Despite the higher interest rates, longer loans are becoming increasingly popular in both the new and used auto loan market.

The average length to maturity for new car loans in the second quarter of 2017 is 66.5 months.48For used cars, the average is 61.1 months.49 Loans for both new and used cars are now more than six months longer on average than they were in 2009. Based on data from Experian, the increase in average length to maturity is driven primarily by an increasing concentration of borrowers taking out loans requiring 73-84 months of maturity.50

In the second quarter of 2017, just 7.3% of all new vehicle loans had payoff terms of 48 months or less, and 33.8% of all loans had payoff periods of more than 6 years.51 Among used car loans, 17.7% of loans had payoff periods less than 48 months, and an equal number, 17.7% of loans, had payoff periods more than six years.52

Auto loan delinquency rates

Despite a trend toward more prime lending, we’ve seen deterioration in the rates and volume of severe delinquency. In the first quarter of 2017, $8.27 billion in auto loans fell into severe delinquency.54 This is near an all-time high.

Overall, 3.92% of all auto loans are severely delinquent. Delinquent loans have been on the rise since 2014, and the overall rate of delinquent loans is well above the prerecession average of 2.3%.

Between 2007 and 2010, auto delinquency rates rose sharply, which led to a dramatic decline in overall auto lending. So far, the slow increase in auto delinquency between 2014 and the present has not been associated with a collapse in auto lending. In fact, the total outstanding balance is up 36% to $1.19 billion since 2014.57

However, the increase in auto delinquency means lenders may continue to tighten lending to subprime borrowers. Borrowers with subprime credit should make an effort to clean up their credit as much as possible before attempting to take out an auto loan. This is the best way to guarantee lower interest rates on auto loans.

Sources

  1. Quarterly Report on Household Debt and Credit August 2017.” Total Debt Balance and Its Composition: Auto Loans, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed September 7, 2017.
  2. State of the Automotive Finance Market,” New Car Average Rates – Page 25, from Experian.TM
  3. State of the Automotive Finance Market,” Used Car Average Rates – Page 25, from Experian.TM
  4. Board of Governors of the Federal Reserve System (US), Average Amount Financed for New Car Loans at Finance Companies [DTCTLVENANM], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DTCTLVENANM, October 2, 2017.
  5. Board of Governors of the Federal Reserve System (US), Average Amount Financed for Used Car Loans at Finance Companies [DTCTLVEUANQ], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DTCTLVEUANQ, October 2, 2017.
  6. Quarterly Report on Household Debt and Credit August 2017.” Credit Score at Origination: Auto Loans, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed September 7, 2017.
  7. Quarterly Report on Household Debt and Credit August 2017.” Auto Loan Originations by Credit Score, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed September 7, 2017.
  8. Calculated metric: “State of the Automotive Finance Market” Loan Balance Risk Distribution Q2 2017 – Page 5, from Experian,TM and “Quarterly Report on Household Debt and Credit August 2017.” Total Debt Balance and Its Composition: Auto Loans, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed September 7, 2017.(3.71% of All Loans Are Deep Subprime + 15.97% of All Loans Are Subprime)X ($1.190 trillion in Auto Loans)
  9. U.S. Auto Loan ABS Tracker: January 2017,” from S&P Global Ratings. Accessed July 17, 2017.
  10. State of the Automotive Finance Market,” New Car Subprime Average Rates, Page 25, from Experian.TTM
  11. State of the Automotive Finance Market,” Used Car Subprime Average Rates, Page 25, from Experian.TM
  12. State of the Automotive Finance Market,” Average Loan Amounts By Tier, Page 19, from Experian.TM
  13. State of the Automotive Finance Market,” Average Loan Amounts By Tier, Page 19, from Experian.TM
  14. State of the Automotive Finance Market,” % Leasing By Tier, Page 16, from Experian.TM
  15. Calculated metric: “State of the Automotive Finance Market” Loan Balance Risk Distribution Q2 2017 – Page 5, from Experian,TM and “Quarterly Report on Household Debt and Credit August 2017.” Total Debt Balance and Its Composition: Auto Loans, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed September 7, 2017.(41.7% of All Loans Are Prime + 19.74% of All Loans Are Super Prime)X ($1.190 trillion in Auto Loans)
  16. U.S. Auto Loan ABS Tracker: January 2017,” from S&P Global Ratings. Accessed July 17, 2017.
  17. State of the Automotive Finance Market,” Average Interest Rate Prime Rating (New Car), Page 25, from Experian.TM
  18. State of the Automotive Finance Market,” Average Interest Rate Prime Rating (Used Car), Page 25, from Experian.TM
  19. State of the Automotive Finance Market,” Average Loan Amounts By Tier, Page 19, from Experian.TM
  20. State of the Automotive Finance Market,” Average Loan Amounts By Tier, Page 19, from Experian.TM
  21. State of the Automotive Finance Market,” % Leasing By Tier, Page 16, from Experian.TM
  22. Graph 1 – Auto Loan Interest Rates, data compiled from historic Experian State of Automotive Finance Reports.
  23. Graph 2 – Average New Vehicle Interest Rates, data compiled from historic Experian State of Automotive Finance Reports.
  24. State of the Automotive Finance Market,” Average Interest Rate Prime Rating (New Car), Page 25, from Experian.TM
  25. State of the Automotive Finance Market,” New Loan Risk Distribution, Page 15, from Experian.TM
  26. Graph 3 – % of New Car Loans Issued to Subprime Borrowers, data compiled from historic Experian State of the Automotive Finance Market Reports.
  27. Average Interest Rate by Credit Score, data compiled from historic Experian State of Automotive Finance Reports.
  28. Graph 4 – Average Interest Rate by Credit Score (New Car Loans), data compiled from historic Experian State of Automotive Finance Reports.
  29. Calculated metric: Total Interest over the Life an Auto Loan (New Car).
    1. Board of Governors of the Federal Reserve System (US), Average Amount Financed for New Car Loans at Finance Companies [DTCTLVENANM], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DTCTLVENANM, October 2, 2017.
    2. Board of Governors of the Federal Reserve System (US), Average Maturity of New Car Loans at Finance Companies, Amount of Finance Weighted [DTCTLVENMNM], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DTCTLVENMNM, October 2, 2017.
    3. Average New Car Interest Rate, data compiled from historic Experian State of Automotive Finance Reports.

    Calculated Total Interest is Amortized Interest as a function of Average Amount Financed,a Average Interest Rate on New Cars,c and Average Length to Maturity of new car loans.b

  30. Graph 5 – Estimated Interest on New Car Loan.
    1. Board of Governors of the Federal Reserve System (US), Average Amount Financed for New Car Loans at Finance Companies [DTCTLVENANM], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DTCTLVENANM, October 2, 2017.
    2. Board of Governors of the Federal Reserve System (US), Average Maturity of New Car Loans at Finance Companies, Amount of Finance Weighted [DTCTLVENMNM], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DTCTLVENMNM, October, 2017.
    3. Average New Car Interest Rate, data compiled from historic Experian State of Automotive Finance Reports.

    Calculated Total Interest is Amortized Interest as a function of Average Amount Financed,a Average Interest Rate on New Cars,c and Average Length to Maturity of new car loans.b

  31. Board of Governors of the Federal Reserve System (US), Average Maturity of New Car Loans at Finance Companies, Amount of Finance Weighted [DTCTLVENMNM], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DTCTLVENMNM, October 2, 2017.
  32. Board of Governors of the Federal Reserve System (US), Average Amount Financed for New Car Loans at Finance Companies [DTCTLVENANM], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DTCTLVENANM, October 2, 2017.
  33. Graph 6 – Average Used Vehicle Interest Rates, data compiled from historic Experian State of Automotive Finance Reports.
  34. State of the Automotive Finance Market,” Used Car Loan Risk Distribution, Page 15, from Experian.TM
  35. Graph 7 – Lending By Credit Score Q2 2016 vs. Q2 2017 “State of the Automotive Finance Market,” Used Car Loan Risk Distribution, Page 15, from Experian.TM
  36. State of the Automotive Finance Market,” Average Loan Rates By Credit Tier (Used Cars), Page 25, from Experian.TM
  37. Graph 8 – Average Interest Rate by Credit Score (Used Car Loans), data compiled from historic Experian State of Automotive Finance Reports.
  38. Board of Governors of the Federal Reserve System (US), Average Maturity of Used Car Loans at Finance Companies, Amount of Finance Weighted [DTCTLVEUMNQ], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DTCTLVEUMNQ, October 2, 2017.
  39. Graph 9 – Calculated metric: Estimated Interest on Used Car Loans.
    1. Board of Governors of the Federal Reserve System (US), Average Amount Financed for Used Car Loans at Finance Companies [DTCTLVEUANQ], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DTCTLVEUANQ, October 2, 2017.
    2. Board of Governors of the Federal Reserve System (US), Average Maturity of Used Car Loans at Finance Companies, Amount of Finance Weighted [DTCTLVEUMNQ], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DTCTLVEUMNQ, October 2, 2017.
    3. Average Used Car Interest Rate, data compiled from historic Experian State of Automotive Finance Reports.

    Calculated Total Interest is Amortized Interest as a function of Average Amount Financed,a Average Interest Rate on New Cars,c and Average Length to Maturity of new car loans.b

  40. Quarterly Report on Household Debt and Credit August 2017.” Credit Score at Origination: Auto Loans, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed September 7, 2017.
  41. Graph 10 – Credit Score at Auto Loan Origination “Quarterly Report on Household Debt and Credit August 2017.” Credit Score at Origination: Auto Loans, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed September 7, 2017.
  42. Graph 11 – % of New Loans Issued to Subprime Borrowers. Calculated metric from “Quarterly Report on Household Debt and Credit August 2017.” Auto Loan Originations by Credit Score ((<620+620-659)/Total Lending), from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed September 7, 2017.
  43. Graph 12 – Auto Loan Origination by Credit Tier “Quarterly Report on Household Debt and Credit August 2017.” Auto Loan Originations by Credit Score, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 17, 2017.
  44. U.S. Auto Loan ABS Tracker: January 2017,” from S&P Global Ratings. Accessed July 17, 2017.
  45. Graph 13 – Average LTV at Auto Loan Origination “U.S. Auto Loan ABS Tracker: January 2017,” from S&P Global Ratings. Accessed July 17, 2017.
  46. Understanding automotive loan charge-off patterns can help mitigate lender risk,” from Experian.TM Accessed July 17, 2017.
  47. State of the Automotive Finance Market Q4 2010,” Pages 25-26, from Experian.TM
  48. Board of Governors of the Federal Reserve System (US), Average Maturity of New Car Loans at Finance Companies, Amount of Finance Weighted [DTCTLVENMNM], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DTCTLVENMNM, October 2, 2017.
  49. Board of Governors of the Federal Reserve System (US), Average Maturity of Used Car Loans at Finance Companies, Amount of Finance Weighted [DTCTLVEUMNQ], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DTCTLVEUMNQ, October 2, 2017.
  50. State of the Automotive Finance Market,” Percentage of new loans by Term, Page 22, from Experian.TM
  51. Calculated metric: “State of the Automotive Finance Market,” Percentage of new loans by Term, Page 22, from Experian.TM
  52. Calculated metric: “State of the Automotive Finance Market,” Percentage of new loans by Term, Page 22, from Experian.TM
  53. Graph 14 – Average Auto Loan Length to Maturity (Months).
    1. Board of Governors of the Federal Reserve System (US), Average Maturity of New Car Loans at Finance Companies, Amount of Finance Weighted [DTCTLVENMNM], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DTCTLVENMNM, October 2, 2017.
    2. Board of Governors of the Federal Reserve System (US), Average Maturity of Used Car Loans at Finance Companies, Amount of Finance Weighted [DTCTLVEUMNQ], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DTCTLVEUMNQ, October 2, 2017.
  54. Quarterly Report on Household Debt and Credit August 2017.” Transition into serious delinquency (90+ days): Auto Loans, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed September 7, 2017.
  55. Graph 15 – New Severely Delinquent Auto Loans (90+ Days) “Quarterly Report on Household Debt and Credit August 2017.” Transition into serious delinquency (90+ days): Auto Loans, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed September 7, 2017.
  56. Graph 16 – % of All Loans Severely Delinquent “Quarterly Report on Household Debt and Credit August 2017.” % of Balance 90+ Days Delinquent: Auto Loans, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed September 7, 2017.
  57. Quarterly Report on Household Debt and Credit August 2017.” Total Debt Balance and Its Composition: Auto Loans, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed September 7, 2017. (Q1 2014 compared to Q2 2017.)
Hannah Rounds
Hannah Rounds |

Hannah Rounds is a writer at MagnifyMoney. You can email Hannah at hannah@magnifymoney.com

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Auto Loan

The Dark Side of Leasing: What Car Buyers Should Know

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Source: iStock

Leasing a car can be the right decision in some cases. You can enjoy driving a new car without putting down a large sum of money or slide behind the wheel of a used car with little investment.

The average lease payment in 2016 was $120 less than an average finance payment on a new car, according to a 2017 report from Edmunds, a car-comparison and research site. For large pickup trucks, the savings were even higher: $206.

Lease contracts also require less commitment because they last an average 36 months, while finance agreements average 69 months, Edmunds reports.

What you need to know about leasing a car

For drivers who are unlikely to exceed a contract’s mileage cap and will take good care of the vehicle, leasing can be a good option.

A growing number of Americans are leasing instead of purchasing, according to the 2017 Manheim Used Car Report. A record-breaking 4.4 million new leases originated in 2016, according to the Atlanta-based provider of vehicle remarketing services. (Edmunds puts that number at 4.3 million, but either way, it’s a new high.) Leases also exceed 30 percent of the new vehicle market for the first time ever in 2016, Edmunds reports.

But there’s a dark side to leasing. Autos were the number one subject of consumer complaints in 2016, according to the Consumer Complaint Survey Report conducted by Consumer Federation of America (CFA) and the North American Consumer Protection Investigators (NACPI). The report cited multiple complaints about leasing, including used-car leasing.

“It seems like more and more people are not wanting to fork out lots of money for a new car, which makes sense. But it’s very shocking to see a growing number of people lease used cars when they don’t have protection,” says Amber Capoun, president of NACPI.

While the cheaper price tag on a used car lease can be enticing, consumers leasing older cars may lose protection if it is no longer covered by a warranty, says Mark Anderson, a consumer protection attorney at Anderson, Ogilvie & Brewer in San Francisco.

Must-know facts about leasing

If you are considering leasing a car, watch out for these six pitfalls.

1. Credit score hit

When you lease a car, a credit inquiry is conducted, just like when applying for a car loan. Your credit score will fall slightly, but it can be rebuilt by making timely payments.

A lease payment may be less per month than a finance payment, but missing a payment or ending your lease early can further reduce your credit. If you don’t have a strong credit history, you may need a co-signer. However, both you and your co-signer should be aware that late payments can damage both credit scores.

2. High interest rates

At first glance, the interest rate — the amount you pay for borrowing the lease company’s money while you drive their car — may appear lower than the annual percentage rate (APR) you would pay to finance a vehicle. That is because the rate is expressed in the leasing agreement as the “money factor” and is a very small number, like 0.0022. To calculate your lease’s APR, multiple the money factor by 2,400, which would be 5.28% APR.

The interest rates on used cars are usually even higher, since the vehicle value at the end of the lease is difficult to predict. Don’t forget to multiply that low “money factor” to figure out your interest rate. It could make all the difference in your ability to afford leasing a car. Good credit will help you get a better interest rate.

3. Lack of consumer protection

An older car with higher mileage may have exceeded its warranty by the time you lease it, which means you are responsible for repairs that would have been covered under a warranty on a newer car, or a car with lower mileage.

The Consumer Leasing Act requires lessors to disclose certain information, including conditions for early termination, the lessor’s standards for wear and tear, and all fees and taxes before a lease is signed, but a company can take advantage of you if you are unprepared. Consumer protections and lemon laws differ state to state, Capoun says, and can leave drivers on the hook for costly repairs. While all lease agreements allow
for normal wear and tear, contracts vary greatly.

“You are the one who’s responsible if your car breaks down, so it’s very important to read the fine print before signing a lease and know what’s included in the contract,” Capoun says.

Consumers should also be wary of third-party “extended warranty” offers, which Anderson says are far more reliable than automakers in providing services and repairs.

“Lemon law applies to leases, but it won’t protect you if you don’t fulfill your payments. You’ll get hit by some steep fees,” Anderson says. “And people often forget leasing doesn’t mean you own the car. If you miss a payment and the car gets repossessed, you don’t have any rights.”

4. Hidden costs

Anything from a small scratch to ending your lease early could result in a hefty fee. The acquisition and delivery fees (which both range from $300 for compact cars to $900 for luxury vehicles) are some of the largest, and unexpected, expenses.

Upon returning your car, be prepared for the car to be looked over with scrutiny. The dealership wants the car returned in “salable” condition so it can be sold or leased to someone new at its highest value. Any damage or changes detract from that value, and you can be fined. If you want to make alterations to your car, they should not be permanent. You also will be responsible for the majority of the maintenance and repair costs, which add up the longer you lease.

Even leasing new cars can be dangerous, says Stacey Nix, a 52-year-old mother of three in Valdosta, Ga. Nix and her husband once leased a car, but say they never will again after being stuck with extra costs for exceeding the mileage limits stipulated in the leasing contract.

“I felt we were misled and not told all the facts,” she says.

Exceed that mileage limit — even by a mile — and you’ll be hit with another fee. Be sure to know exactly how many annual miles your contract allows, usually 15,000 miles or less, and keep an eye on your odometer. Mileage fees typically range from 15 cents to 30 cents per mile, depending on the vehicle.

5. Lack of equity

Over time you will likely end up paying more than the vehicle is worth, but you haven’t gained any equity toward buying a new vehicle. At the end of a lease, you do not own the vehicle, which means you cannot sell it and take advantage of its residual value and profit off the vehicle. Despite higher monthly costs, when you purchase a vehicle, its cash value is yours to do with it as you wish.

6. Pricey, and limited, exit options

Ending your lease early can result in having to pay anything from a fine to the remaining balance on your lease. No one can predict the future, so it is important to know your exit options, and how much each will cost, before signing your contract.

One exit option is buying the car outright. Each lease has different payoff or buyout options, some of which can be negotiated, but each car’s value varies so it is difficult to predict just how much your car will be worth. You also can trade in your car for one with a cheaper lease, but you will have to pay penalties and fees for ending the other lease early. Finding someone to take over your lease is another option, but yet again, you won’t avoid fees.

Tips for protecting yourself from a bad lease

1. Consider all of your options

Is leasing really for you? Once you sign a contract, you’re bound to that agreement. If you don’t think you will exceed the mileage allowance, damage the car, and have to end the lease early, and don’t mind not building equity, then leasing might be the right decision. The Federal Trade Commission has guidelines to help you decide whether you should finance or lease a car.

2. Remember the old school rules

Taking a car to a mechanic you trust first can prevent you from driving off the lot with a car full of problems. Asking about warranties and what is and isn’t covered by the dealership or the manufacturer can even save you legal trouble, Anderson says.

3. Negotiate, negotiate, negotiate

Everything from the overall price to aesthetic changes to a car can be negotiated. Good credit could give you the edge: Lessees had an average FICO Score of 716, eight points higher than new vehicle buyers, according to the Manheim survey. Other smaller fees, like document-processing fees to service fees, can be negotiated if you’re willing to put in the effort. Negotiations also can help save you money in unpredictable situations like accidents or terminating a lease early. Finally, never forget to ask about any leasing specials.

4. Understand your contract, down to the nitty-gritty

Leave with a copy of your lease so you always have the official contract to reference and can hold your lessor accountable to the agreement. You also can use the Consumer Leasing Act’s examination checklist to ensure all of the proper details are disclosed during a lease signing.

Martha Michael
Martha Michael |

Martha Michael is a writer at MagnifyMoney. You can email Martha here

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Auto Loan

How to Get a Car Loan With Bad Credit in 2017

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Part I: Auto Loan Options for Bad Credit

Shopping for vehicles with bad credit can be like walking through a minefield. It is possible to get across safely and into the car of your dreams, but it will require careful thought and strategy if you want to avoid overpriced lemons, crooked loans and outright fraud.

In this guide, we explain how to find the best deal on an auto loan if you have bad credit. We dig into the pros and cons of financing through credit unions, banks, personal loans and dealers. Finally, we bring to light the biggest auto financing scams and show you how to avoid them.

We geared this guide toward young adults with a short credit history; immigrants who have not established credit; anyone with a history of late payments, credit collections and bankruptcy; and someone who has suffered from identity theft, divorce or other negative credit events.

How bad credit impacts your cost of borrowing

When you have poor credit, it will be harder for you to find affordable auto financing but not impossible. You should be prepared to face higher interest rates, for one thing, and you may be required to have a co-signer or put down a larger down payment in order to get approved.

Most people think of their credit score as a single number, but when it comes to auto lending, that’s not entirely true. Most auto lenders care a lot more about your history with auto loans than about any other part of your credit history.

A good credit score isn’t just about interest rates. Bad credit may mean that you’re ineligible for a loan at any interest rate. The single most important factor in getting approved for an auto loan is whether or not you’ve had a repossession in the last year. People with recent repossessions will struggle to find a reputable lender. During bankruptcy proceedings, you may struggle to find financing.

However, shortly after completing bankruptcy, you’re likely to get flooded with auto loan offers. Lenders know that you can’t file bankruptcy for another eight years, so they may consider you a better credit risk.

If you have bad credit, you might find a lender to approve your loan, but you’ll likely pay a high interest rate. Just how much does bad interest cost? A borrower with a credit score below 500 will expect to pay $9,404 for a $16,000, 61-month car loan, according to interest rate estimates from Experian. That’s 4.1 times the interest that a prime borrower can expect.

People with bad credit face dramatically higher interest rates than borrowers with good credit. According to the Experian State of the Automotive Finance Market, used car borrowers with credit scores between 601 and 660 had average interest rates of 9.88% compared with the 16.48% rate faced by borrowers with scores between 501 and 600.

With such high interest rates, it’s usually best to avoid taking out an auto loan until you have decent credit. However, if you finance a car with bad credit, try to follow these rules:

  • Use a significant down payment. We recommend putting down at least 20 percent on any vehicle purchase. A larger down payment not only results in a smaller loan, but you’ll pay less in interest over time. Additionally, cars depreciate in value rapidly once you purchase them. By putting down 20 percent, you’re making sure you’re only financing what the car is actually worth.
  • Do your research first. Consult the Kelley Blue Book to determine the vehicle’s value, and have the vehicle inspected by a trusted mechanic before you buy it.
  • Avoid loan terms that are longer than four years. The average subprime borrower purchasing a used vehicle takes out a loan for over five years (61.6 months), according to Experian. Long loans may mean you’ll pay more in interest and possibly face costly repairs before you finish paying off the car.
  • Borrow only what you can afford to pay back. A good rule of thumb to follow is that the total cost of your monthly car expenses shouldn’t be more than 10 percent of your gross monthly income
  • Demand fair terms. If you have bad credit, you can’t expect a great interest rate on your loan, but you can expect fair terms. Don’t accept a loan with prepayment penalties or mandatory binding arbitration clauses.

These rules can help you protect yourself against predatory lenders and unaffordable loans.

Credit union auto loans for bad credit

The fastest growing issuers of auto loans are credit unions. According to Experian, at the start of 2015, credit unions held just $215 billion in open auto loans. Today they hold $286 billion.

Navy Federal Credit Union and USAA are two national credit unions that will work with people who have bad credit. Please note, neither credit union guarantees loan approval. However, they both offer courses to help you improve your credit, and they have car-buying programs to help you find a vehicle in your budget.

Navy Federal CU Navy Federal Credit Union

  • Down payment required: None
  • Loan terms: 12 to 96 months on new vehicles; up to 72 months for used vehicles
  • Credit score requirements: No minimum score. More likely to be approved if you have a low debt-to-income ratio and few major derogatory marks (such as collections or repossessions).
  • Full review

Navy Federal Credit Union is open to members of any branch of the U.S. military, civilian and contractor personnel, veterans and their family members. They do not have specific credit minimums for their loans, but they consider debt-to-income ratios and credit history.

Unlike most banks, NFCU will help you if you have negative equity in a vehicle. They lend up to 125 percent of the new vehicle’s value. Navy Federal Credit Union approves borrowers for both private party and dealership loans, and they have free online courses to help you make the best buying decisions.

USAA Auto Loan USAA

  • Auto loan APR: 7.74% and up for borrowers with poor credit
  • Down payment required: Varies based on credit history and income
  • Loan terms: 12 to 72 months for borrowers with poor credit
  • Credit score requirements: Not available

USAA is open to members of any branch of the U.S. military and their family members. USAA determines loan eligibility based off of your credit history, your income, and your other debt obligations. You may not qualify for a loan if you have a credit score below the mid 500s, a recent repossession, or other derogatory marks.

USAA does not always require a down payment for a vehicle purchase, but they advise putting down at least 15 percent on vehicle purchases.

Banks and subprime auto financing companies

It’s getting much tougher for people with poor credit to borrow high-interest, high-risk subprime loans, as many of the largest banks in the U.S. have started to shy away from the product.

Ally Financial, the nation’s largest auto lender, limited their subprime lending to just 11.6 percent of their total lending in 2017. In 2015, the nation’s third largest auto lender, Wells Fargo, announced their intentions to limit subprime auto lending to less than 10 percent of their portfolio.

Of the five largest auto lenders in the U.S., only Capital One continues pursuing the subprime auto market. They lend nearly one-third (31%) of their portfolio to consumers with credit scores less than 620.

You can gain pre-approval before you start shopping for a vehicle. This is the best way to shop for an auto loan if you have bad credit. You do not want to pursue auto financing from the scam artists at a dealership.

Below, are auto financing companies and banks that will issue loans directly to people with poor credit.

SpringboardAuto SpringboardAuto.com

  • Loan size: $7,500 to $45,000
  • Interest rate: 8% to 18%
  • Loan terms: 24 to 69 months
  • Down payment required: Minimum $250
  • Credit score required: 500
  • Vehicle requirements: 2009 or newer, mileage less than 125,000

SpringboardAuto.com is a direct-to-consumer, online auto lending platform. SpringboardAuto.com specializes in loans to people with imperfect credit histories. SpringboardAuto.com uses a soft credit inquiry to determine your loan eligibility. A soft inquiry allows you to shop for a vehicle loan without hurting your credit.

Road Loans RoadLoans.com

  • Loan size: $5,000 to $75,000
  • Interest rate: Up to 29.99%
  • Loan terms: 12 to 72 months
  • Down payment required: Dependent on multiple credit factors.
  • Credit score requirement: There is not a minimum score required, however applicants are required to complete a credit application. Credit score is not the sole factor, but it plays a key role in determining approval and loan terms.
  • Income requirement: $1,800 monthly minimum income

RoadLoans.com is a company owned by subprime auto lending giant Santander. Santander has suffered from more than its fair share of criticism in the subprime auto lending market. According to a March report by Moody’s Investors Service, the bank failed to verify incomes of 8 percent of borrowers whose loans it later bundled up into bonds and sold to investors. From a consumer’s perspective, it’s important that lenders verify your income before approving you for a loan because it’s never a good idea to borrow more money than you can reasonably afford to repay.

The scandals make this a reluctant recommendation, but the loans offered by RoadLoans.com are direct to consumer. That means you’ll see better rates and fair terms on the loans.

Capital One Capital One

  • Loan size: $7,500 to $40,000
  • Interest rate: 3.24%+
  • Loan terms: 36 to 72 months
  • Vehicle requirements: Must work with one of 12,000 nationwide dealerships. Vehicle must be a 2005 model or newer with less than 120,000 miles.
  • Down payment requirement: Must have a 10 percent down payment
  • Income requirement: $1,800 per month
  • Full review

Of the five largest bank lenders, only Capital One continues to expand their subprime auto lending operations. Capital One uses a soft credit pull to help you understand how much you may qualify for. Once you qualify for a loan, Capital One issues a “blank check,” which you can fill out at one of over 12,000 nationwide dealerships.

AutoPay Autopay.com

  • Loan size: $2,500 to $100,000
  • Interest rate: 1.99% to 22%
  • Loan terms: 24 to 84 months
  • Credit score requirements: 600 minimum score
  • Income requirements: $2,000 month income

Autopay.com is an online lender that specializes in auto lending for people with fair credit. You need a credit score of at least 600 and an income of at least $2,000 a month to qualify for a loan on Autopay.com.

How to compare auto loan rates

Once you’re serious about car shopping, take some time to get the best auto financing. When you apply for an auto loan, you’ll usually see a “hard credit inquiry” on your credit report. This will drag your credit score down by a few points. To limit the damage of hard credit inquiries, do all your comparison shopping inside a 30-day window. Any auto loan applications that you submit within 30 days will count as just one hard credit inquiry on your score.

Get pre-approved for an auto loan

Once you know your numbers, you might think it’s time to start car shopping, but that isn’t quite right. It’s important to get pre-approved for an auto loan first.

Loan pre-approval allows you to walk into a car-buying situation knowing that you’re looking for price and quality, not financing. It frees you to focus on the final price of the vehicle and the value of your trade-in. Even more important, pre-approval can keep you from getting scammed by shady dealers.

If you’re planning to buy from a private-party seller, pre-approval is even more important. Most individuals won’t wait around for weeks or months for financing to come through. Without a pre-approval, you’re unlikely to get the deal.

Using personal loans for auto financing

If you’ve had a car repossessed in the last few years, you may struggle to qualify for any auto loans. But you may still qualify for a personal loan. This is one of the few situations where a personal loan makes sense to finance a car.

Personal loans also make sense if you expect to pay off the loan in less than a year. For example, you may want to take out a loan as a “bridge loan” while you work out the private party sale of a vehicle. If you’re underwater on a vehicle, you may need a personal loan to help you pay off your original loan upon the sale of your older vehicle.

Most people using personal loans will want to look for an unsecured personal loan. Unsecured means that you don’t have an asset to back up the value of the loan. Interest rates on unsecured personal loans tend be higher than those of auto loans. If you have bad credit, the interest rates can be as high as 36%, according to the MagnifyMoney comparison tool.

If you own an insured vehicle, you may consider a secured personal loan. These also have high interest rates, but those are somewhat tempered by the collateral. Of course, if you sell your vehicle or otherwise ruin it, you have to repair the vehicle or pay back the loan right away.

These are some of the best options for personal loans if you have bad credit:

Avant personal loanAvant

  • Amount: up to $35,000.
  • Rates: 9.95% to 35.99%
  • Loan terms: 24 to 60 months
  • Upfront Fee: 4.75%
  • Full review

Avant specializes in unsecured personal loans for people with OK to bad credit. The interest rates are high, but these are one option for people with bad credit. We recommend these loans if you’re borrowing a small amount or for a short time and you cannot qualify for better terms.

APPLY NOW Secured

on Avant’s secure website

Avant branded credit products are issued by WebBank, member FDIC.

OneMain personal loan OneMain Financial

  • Loan size: $1,500 to $25,000
  • Interest rates: 17.59% to 35.99%
  • Loan requirements: May require a vehicle as collateral or a co-signer (or both)
  • Full review

OneMain Financial specializes in secured loans for people with bad credit. The loans carry super-high interest rates, but they may be the best rates available if you have bad credit. When you apply for a loan through OneMain Financial, you must complete the loan in a local bank branch.

Best egg personal loan Best Egg

  • Amount: Up to $35,000
  • Rates: 5.99% to 29.99%
  • Term: up to 60 months
  • Upfront fee: 0.99% to 5.99%
  • Full review

Best Egg is one of our highest rated personal loans for avoiding fine print. If your credit score is at least 660, you could get approved. It is very difficult to get approved below 660.

APPLY NOW Secured

on BestEgg’s secure website

The truth about dealer financing

Even with the best credit score, dealer financing is rarely a good deal. This is especially true if you buy a vehicle with an in-house loan office that claims, “No Credit, No Problem!”

Used car dealerships only work with a few auto lenders, so they can’t guarantee that you’ll get a great rate. On top of that, some auto financing companies let dealerships mark up the loan and keep the additional interest as a commission.

Even in the best-case scenarios, dealer financing can also get you focused on the wrong numbers. Salespeople will focus on the monthly payment amount rather than the price of the vehicle you’re buying and the value of your trade-in. To get the best possible deal, you want to know the price you’re paying for the vehicle.

Part II: Shopping for Auto Financing With Bad Credit

  • Essential Car-Buying Checklist

  • Check your credit score
  • Compare rates from several lenders and get pre-approved BEFORE going to the dealer
  • Follow the 20/4/10 rule: Put at least 20% down; finance the car for 4 years or less; car payments should be less than 10% of your monthly budget.
  • Check used cars for safety recalls (run the VIN at SaferCar.gov)
  • Have a trusted mechanic inspect the vehicle
  • Check Kelly Blue Book for price comparisons
  • Negotiate the vehicle price
  • Don’t waste your money on extended warranties
  • Buy insurance on your own
  • Complete the sale (at a local DMV if possible)
  • Transfer the title right away

4 numbers to check before you buy a car

If you’ve struggled with credit in the past, or you’re a new borrower, then you need to know your numbers before you shop for a vehicle. Knowing these numbers will help you make a wise purchasing decision.

  • Credit score
    • You can check your credit score for free from a number of websites. The scores you see on the free websites won’t exactly match the scores auto lenders use. They will use FICO® Auto Scores 2, 4, 5, 8, 9, which can be purchased from myFICO.com for $59.85. Don’t like what you see? Don’t hire a shady “credit repair” company. Our ebook will explain how to repair your credit on your own, for free!
  • Interest rates
    • Many banks and credit unions use soft credit inquiries to help you estimate your auto loan interest rates. You can compare rates at Lendingtree.com to see what rates you might qualify for.
  • Your budget
    • We recommend following the 20/4/10 rule: Put at least 20 percent down, finance the car for less than four years, and have a payment of less than 10 percent of your income. You can use the Auto Affordability Calculator to help you determine a budget.
  • Current car’s value
    • If you’re driving a paid-off car, you have an asset that can go a long way in making your new car more affordable. Many dealerships will let you trade in your old vehicle as a down payment on a newer vehicle. Use Kelley Blue Book to negotiate a fair trade in value.

Dealer financing scams and how to avoid them

“No credit? Bad credit? No problem!”

When you shop for credit at a place that advertises, “No Credit? No Problem!” the financiers smell desperation. They may stick you with a bad loan, or they may outright break laws. These are just a few scams you might encounter from dealer financing operations. According to Consumers for Auto Reliability and Safety (CARS) Foundation president, Rosemary Shahan, “In general, buy-here pay-here financing is just overpriced junk. […] We always recommend that people avoid financing at the dealership. There are just too many games that they can play.”

Yo-yo financing

Yo-yo financing is when dealers allow you to sign a contract at one rate, and then unilaterally change the terms of the contract a few weeks after you’ve taken home the vehicle. They usually claim that the “financing fell through” and you need to sign a new contract at a higher interest rate. This is an illegal practice, but it may require costly litigation to prove.

To protect yourself, keep copies of all loan documents you sign, and don’t drive away with a car until you’ve paid for it.

Mandatory binding arbitration clauses

Most dealer financing includes forced arbitration clauses. In this clause, customers waive the right to a jury trial and must settle disputes in private arbitration. Dealers can delay arbitration or fix outcomes by paying private companies.

Shahan claims, “When you go to arbitration, you’re almost always going to lose. The companies have them in their pockets.”

Overpriced extras

Some loan officers stuff contracts with overpriced extras with dubious value. For example, they may include service contracts, extended warranties and unclear fees. When you do the math on these products, they’re rarely worth the money.

If you plan to take out a loan for more than your car is worth, you may have to buy Guaranteed Auto Protection (GAP) Insurance. This insurance covers the difference between the amount of your loan and the value of your car. It helps you pay off your loan if your car gets totaled. Generally, you’ll want to buy this (and all other car insurance) on your own.

Undervalued trade-ins

Your old vehicle is an asset, and you should get close to Kelley Blue Book value for it. Some shady dealers will value your vehicle at pennies on the dollar. Because of a low valuation, you may be stuck financing a larger amount. A private sale will always yield the biggest bang for your buck, but that might be inconvenient for you. Even so, you need to negotiate for a fair trade in value.

Focus on the monthly payments

Salespeople often focus on monthly payments rather than true affordability. Because of that, you may lose track of the price you’re actually paying for a vehicle. When buying a vehicle, getting a loan pre-approval will help you focus on the price rather than the monthly payment.

Selling mechanically unsound vehicles

Some used car dealers sell vehicles that don’t work to unsuspecting customers. Even worse, some dealerships sell unsafe vehicles that are branded as “certified pre-owned.” Used vehicles can be sold as certified pre-owned despite the fact that they have unrepaired safety recalls.

The Federal Trade Commission requires banks to check for unrecalled safety recalls, but buy-here pay-here lots don’t have to. Unless you check for safety recalls yourself, you might buy a vehicle that the manufacturer has called unsafe.

In general, once you’ve purchased the vehicle, you can’t return it, and you have to pay for repairs on your own. Before you buy a used vehicle, have a trusted mechanic inspect it. Additionally, check the VIN number at SaferCar.gov. This database will tell you if the car you want to buy has unrepaired safety recalls.

Title scams

Some dealers fail to transfer a title within a timely manner. That opens you up to credit and legal risks. Car dealers should explain exactly when you should expect to see the title. Ideally, you can walk out of a dealership with an assigned title or certificate of transfer.

Know your rights

Car buyers do not have many ways to protect themselves from shady dealers or financiers, but if you know your rights, you can protect yourself from the most damaging problems.

  • Title rights. Every state has different rules surrounding title transfers, but in every state you have the right to a title when you purchase a vehicle. You should know exactly when to expect the title before you pay for a vehicle. When you buy from a private party, you should expect to transfer the title immediately regardless of state laws.
  • Insurance rights. A bank may legally require you to purchase vehicle insurance. However, you have the right to purchase the insurance on your own. Take advantage of this right; you’ll save a ton of money.
  • Refuse financing. Despite high-pressure sales tactics, you don’t have to take out financing from a dealer. You can take out a loan from a bank or credit union instead.
  • Contract rights. If you’ve signed a valid contract, a financing company cannot change the terms. They cannot force you to sign a new contract with less favorable terms.

Don’t work with dealers that don’t respect these rights. If you’re caught with a company that does not recognize your rights, complain to the Consumer Financial Protection Bureau right away. The CFPB helps customers connect directly with financial institutions and responds to issues within 15 days.

Since vehicle buyers don’t have many “inherent” consumer protection rights, you protect yourself.

Only work with private parties or dealers that allow you to do the following:

  • Inspect used vehicles
    • A trusted mechanic can help you evaluate the mechanical soundness of a vehicle. Most people cannot tell a lemon from a peach, and they need the help of a mechanic to determine the value of a vehicle.
  • Run the VIN through SaferCar.gov
    • Don’t buy a car that has an unrepaired safety recall. These vehicles are dangerous. If a vehicle has a scratched-out VIN, don’t buy it. It’s too big of a risk.
      Avoid mandatory binding arbitration
  • Avoid mandatory binding arbitration
    • Most loans include a jury waiver clause or an arbitration clause. These clauses keep costs down for the bank, but the clauses are nonbinding. That means you have the right to appeal if you believe the bank or credit union committed fraud. Dealerships and dealer financing often require mandatory binding arbitration. That means you can’t appeal even if the dealer defrauded you with an unsound vehicle or an unclear title or other problems.
  • Pay before you drive away
    • A salesperson should not push you to take home a vehicle before you’ve paid for it. When they do that, they are almost certainly going to stick you with a higher vehicle price, or worse financing terms. Pay for your car first, then drive it away

Understanding your auto loan contract

  • Mandatory binding arbitration – This means you cannot sue your financing company. Instead, all disputes are resolved through a private arbitration company paid for by the dealer. DO NOT work with companies that require mandatory binding arbitration.
  • APR – This is the effective interest rate that you’ll pay on your loan.
  • Dealer preparation fees – Unless a dealer has provided custom preparations for you, this is a bogus fee designed for the dealer to make extra money.
  • Origination fee – This is the fee that the bank charges to originate the loan. It’s usually baked into the cost of the loan.
  • GAP insurance – Guaranteed Auto Protection Insurance covers the difference between the value of your vehicle and the value of your loan. You may be required to purchase this if you have negative equity. However, you can buy this insurance on your own.
  • Extended warranties – An extended warranty means that the manufacturer will cover the cost of repairs for a limited time. Most of the time, the warranties cost far more than the repair costs down the road.
  • Loan term – This is the length of time required for you to pay your loan. We recommend keeping loan terms to less than four years.
  • Loan-to-value (LTV) – The LTV expresses the value of your loan relative to the value of your vehicle. We recommend a starting LTV of 80 percent or less. If you have an LTV greater than 100 percent, then you rolled negative equity into the loan.
  • Negative equity – When your vehicle is underwater (you owe more than the vehicle is worth), you have negative equity. It’s possible to buy a new car with negative equity, but we advise against it.
  • Trade-in value – A vehicle trade-in can help you go a long way toward having a 20 percent down payment for your vehicle. During a trade-in, a dealer pays you for your old vehicle. You can almost always get more money by selling your vehicle in the private market, but it’s not very convenient. A dealer will make a trade-in offer that you can either accept or reject. Use Kelley Blue Book to determine whether you’ve received a fair trade-in value for your old vehicle.

Getting a co-signer for an auto loan

People with bad credit stand to gain a lot from having a co-signer on their auto loan. You can expect to qualify for a larger loan with lower interest payments, but asking someone to co-sign an auto loan is no small request.

A co-signer agrees to make your car loan payments if you are unwilling or unable to fulfill your loan obligations. If you skip a loan payment, you ruin your co-signer’s credit. For that reason, we generally discourage most people from becoming a co-signer. However, spouses who share finances may find that co-signing the loan is helpful for the family finances.

A co-signer can help you qualify for lower interest auto loans by providing one of three attributes:

  • Their income may help you meet the minimum requirements for an auto loan.
  • Their credit history is better than yours.
  • They have a lower debt-to-income ratio than you.

If you’re a freelancer or small business owner, a co-signer may also offer the required income stability that puts you into a lower risk category.

When you ask someone to co-sign a loan, remember that they are putting their credit on the line for you. If you don’t think that you can make your loan payments, then you’re putting them at risk. Be careful about the request

How to refinance from a bad credit auto loan

If you’ve taken out a high-interest auto loan, you should be on the lookout for refinancing opportunities. Most people who make on-time auto loan payments and reduce their credit card debt will find their credit score increase over time. If you’re starting with a very bad credit score, you can see over a 100-point improvement within 12 to 18 months of good credit behavior.

Once your credit score is in the mid 600s, take a serious look at refinancing opportunities. People with credit scores between 601 and 660 paid an average of 9.88 percent on used auto loans, a full 6.6 percent lower than the rates paid by people with subprime credit.

Refinancing an auto loan is easy compared to shopping for initial car financing. That’s because the shopping process includes known variables. You know the value of your vehicle and the amount of financing you’ll need. You also know the interest rate you need to beat. If your current vehicle is underwater (you owe more than your car is worth), you may need to bring cash to the table to complete a refinance.

We recommend shopping for loan refinances through our parent company, LendingTree. LendingTree compares dozens of auto refinance offers all at once and shows you the best rates in the market. You can also compare offers to those you might find through myAutoloan.com or SpringboardAuto.com.

Part IV: Car shopping FAQ

Before you declare bankruptcy, you can buy a vehicle up to the motor vehicle exemption amount in your state. Unless the vehicle is expensive, you’ll probably get to keep the car during bankruptcy proceedings. However, your auto loan won’t be discharged in bankruptcy. You need to pay the auto note as required. If you include an auto loan in bankruptcy proceedings, you won’t be allowed to keep the vehicle.

Most people struggle to find auto financing after they’ve declared bankruptcy but before the bankruptcy is discharged. Courts even frown upon buying a car with cash during bankruptcy.

Once your bankruptcy is discharged, you can expect subprime lenders to flood your mailbox with auto loan offers. This is because lenders know you can’t declare bankruptcy for another eight years. However, it’s not necessarily a great time to finance a vehicle. Waiting a year or two for your credit to repair will allow you to finance a vehicle at a much lower interest rate.

If you don’t get approved for an auto loan, ask the bank why they didn’t approve you. Do you have insufficient income? Do you have a recent auto repossession on your credit report? Do you lack credit history? Perhaps your debt-to-income ratio is too high.

Once you know why you didn’t get the loan, you can work on fixing the problem. This guide can teach you how to improve your credit score for free. It’s also important to note that just because one bank didn’t approve your loan, doesn’t mean you can’t get a loan. Our parent company, LendingTree, helps consumers shop for multiple loans all at once. Using LendingTree or other loan aggregation sites can help you find a bank willing to lend to you.

Of course, you could resort to dealer financing, but we don’t recommend it, even as a last resort.

Some banks will not lend to you unless you have a co-signer (also known as a co-applicant). The co-signer agrees to pay for your loan if you stop making payments. If you have low income and bad credit, you’ll probably need a co-signer. However, most others can get around having a co-signer. If possible, we recommend avoiding loans that require a co-signer.

If you currently own a car, you can opt to trade in your vehicle at a dealership. When you trade in your vehicle, the dealership offers credit against the purchase of a newer vehicle. Many people use trade-ins in lieu of down payments.

Dealerships offer less money for a trade-in than you would get in the open market. However, private sales can be complex, and they often take a long time. Because of that, trade-ins can be a win-win for dealers and buyers. The key to a winning trade-in is not getting ripped off. Use Kelley Blue Book to determine your vehicle’s value, and use the KBB value to negotiate a fair trade-in price.

If you owe more than your car is worth, you need to be extra cautious about a trade-in option. When you trade in a vehicle with negative equity, you’re automatically starting your new loan underwater. To stop the cycle of negative equity, you need to find a vehicle that you can pay off in less than four years.

Most people cannot tell the difference between a high-quality and a low-quality used vehicle. We recommend paying a trusted mechanic to inspect the vehicle before you buy it. If a seller won’t let a mechanic inspect the vehicle, you don’t want to buy from them.

You should also personally check the nationwide vehicle registry to be sure a vehicle does not have any unrepaired safety recalls. If the vehicle has unrepaired safety recalls, don’t buy it. It’s not safe to drive.

Hannah Rounds
Hannah Rounds |

Hannah Rounds is a writer at MagnifyMoney. You can email Hannah at hannah@magnifymoney.com

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Auto Loan

Why You Shouldn’t Take Out an 84-Month Auto Loan

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Part I: The Truth About Long Term Auto Loans

When poor credit and high monthly payments are keeping you from buying the car you need, it may be tempting to lower your payments by signing up for a 72-, 84- or even 96-month term loan. Before you do, it’s important to know exactly what you’re signing up for — and be sure you’re making the right move for your finances.

Lower car payments with longer terms mean you’re paying more in interest, and loan companies love this for obvious reasons. Evidently, consumers do, too. In the first quarter of 2017, new car loans with terms from 73 to 84 months represented 34.9 percent of all auto financing. For used cars, they represented 19.5 percent.

Most of the big dealerships offer 84-month financing through banks like Ally Financial or Santander. Local dealers are also known to offer longer term financing offers, typically through third party financing companies, credit unions, or insurers like Nationwide.

Let’s take a look at what you’re getting into when you choose a longer term on your auto loan…

Note: These numbers don’t include tax, title, or registration, which will only increase the amount of interest you pay if you include those costs in the total amount you borrow. These numbers also don’t include any down payment or trade-in you may have, which will decrease the amount of the loan and the amount of interest paid.

5 reasons long auto loan terms are a bad idea

  1. More interest. As you saw in the example above, you’re going to pay a lot more interest on a car loan with a longer term. If you spend more than those average amounts on a new or used car, the amount of interest you pay is only going to go up.
  2. Your loan will outlast your warranty. Most manufacturer’s warranties last 3 to 5 years, so you’ll be paying on your loan for an additional 2 to 4 years after the warranty runs out. Which leads to…
  3. New car payment, old car repair costs. Think about this. You’re going to be making your car payment for the next seven years. With a shorter term, you’d have paid off your vehicle before you started paying for costly repairs. But with an 84-month loan, you’re going to be paying both your monthly loan and the inevitable repair costs that come with an older vehicle.
  4. Negative equity. Stretching out a car loan over time means you’re paying less on the principal and more in interest with each payment. As your vehicle continues to decline in value each year, you’ll continue to be upside-down on your loan unless you made a significant down payment.
  5. Unable to refinance. If you’re upside-down on your loan, meaning you owe more on your loan than the vehicle is worth, you’ll be unable to refinance your loan.

When it makes sense to get an 84-month auto loan

  • You absolutely can’t afford a car any other way. This is probably the number one reason why people choose longer terms on their auto loan. An 84-month auto loan will lower your monthly payment, allowing you to purchase that vehicle that otherwise would be just out of reach. However, you should consider whether you’re borrowing too much if you can’t afford the monthly payment on a shorter term loan. Can you compromise by buying a used car at a lower price point? Or, could you scrounge up more money for a larger down payment to reduce the amount you need to borrow?
  • You have higher interest debt to worry about. If you have other loans at a higher interest rate, it may make sense to get a lower monthly loan payment so you can free up capital each month. That way, you can use the extra money you’re saving to pay down higher interest loans.

How to make the most of a long-term loan

  • Compare rates. Companies like LendingTree and MagnifyMoney allow you to compare auto loan rates from multiple lenders. So you can make sure you’re getting the best deal and a low APR. (Disclosure: LendingTree is the parent company of MagnifyMoney)
  • Buy now, refinance later. If you’re absolutely bent on getting a certain car now, you can always choose to refinance down the road, when your financial situation improves.
  • Make a larger down payment. Getting out of a bad car loan can be difficult when you’re upside-down. By putting more down on your vehicle up front, you’ll prevent this from happening while saving money in interest and avoiding gap insurance.
  • Buy used. The average used car payment is $145 less than the average new car payment, according to Experian, so save yourself some money with a more affordable monthly payment by buying a used vehicle.

5 tips to lower your costs of borrowing

  1. Keep your car after it’s paid off. Once your car is paid off, keep it — especially if it’s reliable and gets good gas mileage.
  2. Make an extra payment each month. By paying an extra $100 per month, you could save $1,819 in interest and own your car in a little over five years when you buy a $30,534 new car with an 84-month loan. When it comes to that $19,126 used car, you’d save $1,598 in interest and pay it off in under five years.
  3. Compare rates. Shop around for the best rates, and get multiple offers from lenders to compare. A difference of 3 percent on your interest rate could save you $3,689 on that 84-month new car loan of $30,534 and $2424 on that $19,126 used car.
  4. Buy used. With used car payments an average of $145 less than new, you’ll save a lot when you buy used over new.
  5. Don’t finance extras. Pay up front for your license, tax, and registration. If you purchase an extended warranty or prepaid maintenance package, don’t finance those into your loan either.

Part II: Understanding the Auto Loan Process

84-month auto loan
Source: iStock

Most people do it backward — they go shopping for a car first, then shop for a loan. When you do this, you’re making yourself vulnerable to high-pressure sales associates and putting yourself at a disadvantage when it comes to financing your vehicle.

When you get pre-approved for auto loans before heading to a dealership, you have an understanding of how much money you can qualify for, so you’re not shopping for vehicles that are too expensive. You also have a loan amount and interest rate to compare any other financing that’s offered to you.

How to get pre-approved for an auto loan

You can get pre-approved with a bank, credit union, auto finance company, or dealership finance center.

  1. Research rates online. Many sites, like MagnifyMoney’s parent company Lendingtree.com, will offer auto loan rates online. It’s a good idea to check them out so you have an idea of what’s being offered. Keep in mind that your creditworthiness will affect the rates you’re able to qualify for, and the credit score for an auto loan is a little different from other loans.
  2. Gather your documents. Get everything you need together before calling or taking a visit to your lender. This may include:
    1. Personal information, like your name, address, phone number, and Social Security number.
    2. Employment information, like your employer’s name and address, your title and your salary
    3. Financial information, including what kind of credit you have available now, your current debts and your credit score.
  3. Apply. Choose a few lenders and apply online or in person for your auto loan.
  4. Get a quote. Once you’ve completed the loan application and you’ve been pre-approved, you’ll receive a loan quote showing how much you qualify for, the interest rate and the length of the loan. You can take this to the dealership with you when you’re shopping and use it as a negotiating tool.

For more information on your loan choices, check out these resources:

Getting a cosigner for an auto loan

Having a co-signer can help you qualify for a loan you wouldn’t otherwise get. As long as the co-signer has a strong credit score, it’s likely you’ll qualify for a better interest rate using a co-signer too. And making on-time payments on this type of loan will help build your credit.

The drawbacks of having a co-signer are that the cosigner is responsible for the loan if you fail to pay. If this happens, chances are you’ll negatively affect your relationship with whoever cosigned for you. If that’s a friend or family member, (which it usually is) look out! Think twice about the responsibilities of having a co-signer, and the importance of paying back the loan, so you don’t leave your cosigner on the hook for money you borrowed.

Understanding your auto loan contract

Here are some key terms you’ll need to know when it comes time to signing a contract.

  • Sticker Price – A manufacturer’s suggested retail price that is printed on a sticker and affixed to a new automobile
  • Purchase Price – This may be less than the sticker price, and is the price you agree to purchase the vehicle for from the dealer.
  • Amount Financed – This is how much money you are borrowing and the amount you’ll pay interest on. Be careful about financing extras into your loan, as doing so may put you upside-down in the vehicle.
  • Down Payment – An amount of cash provided at the time of vehicle purchase and credited toward the purchase price of the vehicle to reduce the amount financed.
  • Interest Rate – The amount of money charged for loaning money, expressed as a percentage of the Amount Financed.
  • Fixed-Rate Financing – With a fixed rate, your interest rate will never change and you’ll always pay the same amount each month.
  • Variable Rate Financing – A variable interest rate is subject to change and may increase your monthly payment amount.
  • Monthly Payment Amount – This is how much you’ll pay each month.
  • Finance Charge – This is a fee, charged by the lender, for extending you credit.
  • Annual Percentage Rate (APR)APR includes both the interest and fees expressed as a percentage, making it easier for you to compare multiple loan offers.
  • Term — This is the length of the loan expressed in months, usually 36, 48, or 60.
  • Extended Warranty Contract – An extended warranty covers the vehicle beyond the manufacturer’s warranty for a fee.
  • Guaranteed Auto Protection (GAP) – If you owe more than the car is worth, you’ll be offered GAP insurance, which will cover the difference if the vehicle is lost, stolen, or totaled.
  • DMV Fees – These may include title, license, and registration.
  • Title — The legal document proving ownership of a vehicle.

Auto loan contract traps

Here are few traps dealers can use against you. Know them so you can protect yourself and avoid getting ripped off

  • Rate mark ups. Your dealer is getting financing from a bank, and they mark up the rate, charging you an extra percentage or two when you could have just gone directly to the bank in the first place.
  • Yo-yo financing. The dealer says you’re approved and you drive away. Later, the dealer says you were denied, and asks for a larger down payment or increases the interest rate. If you refuse, you must return the vehicle, and the dealer may try to keep any deposit you made.
  • Falsified credit application. Sometimes dealers will falsify information on your credit application, like increasing your income, to help you qualify for a vehicle you wouldn’t otherwise qualify for. Be sure to check your credit application before signing.
  • Selling extras. Whether it’s GAP insurance, prepaid maintenance, or extended warranties, the dealership is going to try to upsell you on some extras to rack up the charges and, if you agree to roll it into your financing, increase the amount of interest you pay. Be careful when selecting these extras and make sure you understand what you’re getting and know it’s worth the expense.
  • Negative equity financing. If you owe more on your trade-in vehicle than it’s worth, dealers will try to offer you a deal where you roll the negative equity into your new auto loan.
  • Extra charges. Look over your contract for any extra charges. One way to spot these is if they’re pre-printed on the contract. Many of these charges are not required and can be negotiated down.

Using an auto loan to improve your credit

If you’re working toward improving your credit, there are two rules you must follow. And while going from good to excellent isn’t easy, there are a few ways your auto loan can help you improve your score.

  • Payment history. On-time payments are 35 percent of your FICO score, so paying your auto loan on time will help with your payment history.
  • Credit mix. Because having a mix of different types of credit (home loans, personal loans, credit cards) makes up 10 percent of your FICO, throwing an auto loan in there will certainly improve your mix.
  • Report to credit bureaus. Make sure the lender you’re working with reports your payments to the three major credit bureaus. Beware of “Buy here, pay here” dealerships who may or may not report your payments to the credit bureaus.

And if you want to prevent your credit from getting worse, make sure you don’t do any of the following:

  • Make late payments on your auto loan.
  • Stop making payments and get sent to collections or have your car repossessed.
  • Include your car loan in your bankruptcy (if applicable).

When it makes sense to lease vs. buy a car

If you’re taking out a longer term loan in order to lower the monthly payment, you may want to consider leasing as an option. There are some things you should know before leasing a car, especially if you’re comparing leasing to buying. And while leasing isn’t for everyone, it can be a viable alternative to taking out an 84-month lease. in fact, according to Experian data, the number of people taking out a lease continues to increase.

“Another reason why we see consumers increasingly choose to lease, is they’re generating around $100 lower payment. And the biggest difference is in non-prime, [where there’s a] $109 difference between a loan and a lease,” says Melinda Zabritski, senior director of sales at Experian.

The Pros and Cons of Leasing a Car

Pros:

  • Lower monthly payment. The payment to lease is an average of $100 less than buying according to Experian’s 2017 report.
  • Warranty coverage. The average lease lasts 36 months and during that time, you’ll have full warranty coverage for anything that goes wrong with the vehicle.

Cons:

  • Mileage penalties. Most leases have a limit on how many miles you can drive (10,000 per year for an average lease), and you’ll pay for additional miles you drive unless you secure an extra-mileage or unlimited-mileage lease upfront.
  • Wear-and-tear fees. Nicks, scratches, stains — they all amount to extra wear and tear on your leased vehicle, and you’ll pay for them at the end of your lease. So if you’re hard on your vehicles, buying may save you some money here.

The Pros and Cons of Buying a Car

Pros:

  • Ownership. Once you’ve paid off your loan, the vehicle is yours.
  • No mileage penalties. Drive as much as you like, you won’t pay a dime for “extra” miles you drive like you would with a lease.

Cons:

  • Maintenance and repairs. With ownership comes responsibility. In addition to being responsible for the maintenance, once the manufacturer’s warranty expires, you’ll be responsible for all any repair costs needed. That’s why some people consider buying an extended warranty.
  • Loss of value. Although you won’t pay fees for wear and tear, or extra miles you put on the car, those things will still lower the value of the vehicle when it comes time to sell it. And every year you own it, the value of the vehicle is likely to continue to decrease.

The Bottom Line: Is an 84-month auto loan ever a good idea?

In our opinion, no. Most people make the choice to take out a longer term auto loan in order to lower their monthly payments to afford the car they want. ‘Want’ being the operative word here. Chances are, you can purchase a less expensive car that would give you the same monthly payment. Although it’s difficult, putting your emotions aside can really help you make a financially sound decision when it comes to choosing the terms of your auto loan. If you know this is an area where you struggle, ask for help from a friend or family member who can be the voice of reason.

If you do choose to go with an 84-month auto loan, just understand that you’ll be paying more interest on your loan. And hopefully, you have a good job for the next seven years to help you pay for it.

Ralph Miller
Ralph Miller |

Ralph Miller is a writer at MagnifyMoney. You can email Ralph here

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Auto Loan

Shopping for a New Car? Use the 20/4/10 Rule

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

auto car driving drive

Imagine you’re in the market for a new vehicle. Where do you begin your car-buying process? Do you already have a dream make and model in mind? What’s your budget? Are you already browsing the interwebs for the car you want? If you are, you’re already starting off on the wrong foot — at least according to the 20/4/10 rule.

What is the 20/4/10 rule?

The 20/4/10 rule helps car shoppers figure out how much car they can actually fit into their budget before falling in love with a vehicle they can’t afford. It emphasizes calculating what you can afford before you set out shopping.

The rule might seem obvious — before you buy something, you should make sure you can afford it, right? — but it gets tricky when it comes to financing, and many don’t take the time to include annual ownership costs. If you don’t, you could end up with monthly transportation costs that could force you to live paycheck to paycheck or take on more debt.

Follow the 20/4/10 rule, and you might avoid accidentally biting off more than you can chew.

Rule #1: Put down at least 20%

A vehicle is a depreciating asset. The experts at Carfax estimate a new car loses 10% of its value the moment you drive off the lot. And the depreciation continues from there. Edmunds.com estimates a new vehicle loses over one-fourth of its value in the first year alone. For that reason, you should be prepared to put down at least 20% of the purchase price. If you do this, you’ll finance payments for the vehicle’s actual estimated value when you leave the lot instead of the full purchase price, which the vehicle isn’t worth anymore.

Take this example: You finance a new car for its full purchase price of $34,000, then lose your job the next day. Now, you might need to sell your new car, but you can sell it for only $30,600 — because the car already lost 10% of its value once it left the lot. Since you put $0 down at financing, you’ll still owe $34,000 after the sale. On the other hand, if you’d put down at least $6,800, you could sell the car that day for its estimated value and only lose out on half your down payment.

You might not be able to estimate exactly how much car you can afford, but if you are able to put down at least 20% of the purchase price, you should be in an OK financial position. On top of that, you’ll have smaller payments and possibly finance it for a shorter period.

Rule #2: Finance the vehicle for no more than four years

The longer your financing agreement is, the more you’ll pay in interest over time. So don’t be swayed by dealers or lenders who try to sell you on a lower monthly car payment — chances are your payment is so low because the term of your loan is long.

You can use the MagnifyMoney loan calculator to see this rule at work. If you borrow $25,000 to purchase a car (at a 4% APR) and agree to a six-year financing deal, you’ll wind up paying $3,161 in additional interest charges by the time you pay off the loan.

If you agree to a four-year loan instead, you’ll pay just $2,095 in interest — a savings of over $1,000. Of course, that shorter term loan also comes with a higher monthly payment — $564 versus $391 — but you are saving more over the long term.

Think of it this way: If you can’t afford the monthly payment required to pay off the car in four years or fewer, it’s probably outside of your budget.

Rule #3: Keep your total transportation costs under 10% of your monthly income

This last part is where it gets easy to overspend. You should try to keep your total transportation costs — your car payment, insurance, gas, and maintenance — under 10% of your monthly income.

So, if you earn $5,000 per month, your total transportation costs shouldn’t cost more than $500.

How to save on the cost of a new car

Try these tips to keep your overall transportation costs low.

Get pre-approved for financing

Avoid financing your vehicle through the dealer, and get pre-approved for financing at a lower rate before you show up at a dealership. Financing your auto loan at a lower rate can reduce your monthly loan payment. If you walk onto the lot with a pre-approved auto loan rate from a bank or credit union, you can use that as leverage for negotiation.

However, if you let the dealer find the loan for you instead, you’ll lose negotiating power, and there won’t be a way for you to tell if the dealer’s loan rate is the best offer you can get. Avoid making these other common mistakes when searching for a car loan.

Buy used

More people are purchasing used cars than ever before and saving a bundle in the process, according to Edmunds. Over 38 million vehicles sold in 2015 were used, a year-over-year increase of 5.6%.

When you buy used or certified pre-owned vehicles, you avoid financing a larger balance, and could even skip financing altogether if you’ve got enough cash on hand. If you buy used, avoid engine trouble by having the vehicle inspected by an independent mechanic before you sign off. You can use a resource like Car Talk to find a mechanic in your area.

Buy a car that holds its value

Depreciation is a car owner’s largest transportation expense during the first five years of ownership, more than fuel, maintenance, and even insurance.

A car that holds value well will depreciate less over time compared to the average vehicle, so you may not lose out on as much in depreciation costs if you sell the vehicle after a few years. Carmakers like Honda and Porsche are known for building vehicles that hold their value well over time according to Kelley Blue Book.

Lease instead

Leasing a car will usually result in a lower monthly payment, and you’ll likely save money with a lower down payment and lower tax fees over time. However, you could be subject to extra charges if you ding up the vehicle, or drive more miles than stated on the lease agreement. It doesn’t always work for everyone, so consider your personal needs first.

On the plus side, you’ll upgrade to a new vehicle every few years and won’t need to deal with the hassle of selling a car.

Look for gas savings

Gas isn’t always an unavoidable expense. You can make a few changes to your fueling habits like filling up before you hit “E” or signing up for a gas rewards credit card to save money. You could also cut down transportation costs by cutting back how often you drive or by carpooling some days to school or work. Learn more ways to reduce your gas spend here.

Comparison shop

Don’t get lazy with must-haves like maintenance and insurance for your vehicle. Comparison shopping is the best way to save on costs like these that may differ from provider to provider. Insurance companies have made it easier to compare quotes with online comparison portals like this one from Progressive. You could also try going through your bank or credit union for discounted rates with select companies.

Don’t just take the first estimate you get for a repair. Mechanics are known to pad the bill with unnecessary repairs from time to time. After you figure out what’s wrong with you vehicle, get an estimate from a few different mechanics in your area. That way you’ll make sure you’re getting the best value before paying for maintenance and repairs.

Brittney Laryea
Brittney Laryea |

Brittney Laryea is a writer at MagnifyMoney. You can email Brittney at brittney@magnifymoney.com

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This Brooklyn Grandmother Fought Back Against a Shady Used Car Dealer and Won

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Rhoda Branch, 52, lost thousands of dollars and her mobility when a used car dealer took her for a ride. But with the help of a consumer protection group, she fought back — and won.

This story is Part II of a MagnifyMoney investigation into the risky business of subprime auto lending. Read Part I here

Rhoda Branche’s rocky road began with Superstorm Sandy in 2012. After the hurricane totaled her car, she turned to Giuffre Motors in Brooklyn to shop for a new vehicle.

“They said they would help me,” recalled Rhoda. “They were very friendly – and then they just starting pushing the papers through.”

She said the dealership promised her $4,000 in incentives to buy a used 2004 Volvo SUV – and offered to arrange a loan for her.

According to a copy of the contract obtained by MagnifyMoney, the incentives were missing from the sales contract Rhoda signed. The financing was no bargain either – a subprime loan with an annual interest rate of 23.5%.  Subprime customers are typically high-risk borrowers who pay more in finance charges because of poor credit histories.

Worst of all, Rhoda’s $13,000 SUV would soon stop running. Instead of repairs, the dealership gave her the runaround.

“It was a vehicle that shouldn’t be on the road,” Rhoda said. “They just said the vehicle was fine. It looks good on the outside, but it was a lemon.”

In desperation, she took the Volvo to other mechanics and spent $3,000 from her own pocket, but the SUV kept breaking down. As a last straw, she surrendered the title of ownership to the finance company that held her loan.

Without a car, it often takes Rhoda two buses, a subway ride, and 90 minutes to travel nine miles from her apartment in Coney Island, N.Y., to a hospital where she frequently seeks treatment.

“I have to take public transportation,” said Rhoda, who suffers from injuries that required operations on both knees. “It is very time-consuming. It causes a lot of pain. I have pains all over my body because I had surgery.”

Not the Only One

“Many sellers of cars to people with subprime credit sell you junk. And they know they’re selling you junk,” said Remar Sutton, a former car dealer turned consumer advocate. He wrote about the tricks of the used car trade in his book, “Don’t Get Taken Every Time.”

“They sell you a car they know you cannot pay for, or they know will break down, and they repossess it because you can’t pay for it or it breaks down,” said Sutton. “And then they sell it again.”

Rhoda did not know she was the latest in a long line of customers who were victims of the dealership’s unethical sales tactics.

The New York attorney general sued Giuffre in 2010 on behalf of 42 customers who claimed they were cheated. In Kings County Supreme Court, a judge ordered the dealership to pay more than a half-million dollars in fines and restitution for its illegal business practices.

Giuffre had “a common practice of strong-arm sales methods and unethical conduct,” wrote Judge Bernard Graham in his 2011 decision. “The list of grievances is extensive and unsettling.”

Rhoda was one of at least one dozen consumers who filed complaints against Giuffre with New York City’s Department of Consumer Affairs. Under pressure from the DCA, Giuffre agreed to pay $180,000 in fines plus $100,000 into a restitution fund as part of a consent order in April 2014, nine months after Rhoda’s complaint.

From the settlement, Rhoda confirmed she received roughly $4,600 in restitution. And two months after the consent order, Kings County Civil Court dismissed a $5,000 claim against Rhoda by a finance company that tried to collect the unpaid amount of her car loan.

Owner John Giuffre could not be reached for comment. His lawyer did not respond to MagnifyMoney’s interview requests.

As a result of the DCA consent order, Giuffre was forced out of the car business in New York City. His last dealership closed in December 2014; its doors and windows remain boarded shut. But consumers have plenty of reasons to remain cautious.

“There are, unfortunately, thousands of companies in America that will deliberately sell you cars that they know are going to break down,” said Sutton.

Rhonda hopes she can afford to buy another car someday. But she’s afraid of being ripped off again.

“Now I’m very skeptical going to other places because I remember what I went through,” she lamented. “I don’t know what dealership I should trust when I’m ready to buy another vehicle.”

How to Buy a Used Car Without Being Cheated

Shop for financing before you look for a vehicle: The subprime interest rate a credit union can offer may be half of what a car dealer charges you. Don’t assume that your poor credit history means you won’t have a shot at getting a loan from a reputable lender. It’s perfectly fine to get your own financing outside of a dealer — and, as our story shows, it’s often much more affordable. To make matters better, if you come in with a verified offer from another lender, the dealer has an incentive to try to beat their offer.

Check your credit score yourself: Don’t take a dealer’s word on it when it comes to your credit. Your score may be good enough to qualify for a better rate on a loan elsewhere, but the dealer may not want you to know that.  You can check your credit score on a number of sites for free, including the Discover Scorecard. And again, if you shop around for rates before you go to the dealer, you will know exactly what rates you deserve — and when they are offering you a bad deal.

Buy a car that works: Bring a mechanic or a knowledgeable friend to check it out before you decide. You can also check the vehicle’s background by getting a vehicle history report through resources such as the National Motor Vehicle Title Information System, CARFAX, and AutoCheck.

Buy a car you can afford: If a dealer makes promises, be sure to get it in writing. Go in with a firm idea of what kind of car you want and how much you can afford to pay.

And slow down: Never sign a contract in a hurry. Dealers may be friendly, but they’re not really your friend. To double-check a dealer’s reputability, check out their reviews and rating on the Better Business Bureau website.

Additional reporting by Mandi Woodruff

Mark Lagerkvist
Mark Lagerkvist |

Mark Lagerkvist is a writer at MagnifyMoney. You can email Mark here

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