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How to Get a Car Loan With Bad Credit in 2017

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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: 3.47% to 8.58%
  • 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 - $45,000
  • APR: 8.29% to 23.00%
  • Loan terms: 12 to 72 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.

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Road Loans RoadLoans.com

  • Loan size: $5,000+
  • APR: 8.00% to 25.00%
  • Loan terms: 12 to 84   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 - $40,000
  • APR: 3.39%+
  • Loan terms: 24 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.

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AutoPay Autopay.com

  • Loan size: $5,000 - $100,000
  • APR: 1.99% to 25.00%
  • 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.
  • APR: 9.95% to 35.99%
  • Loan terms: 24 to 60 months
  • Upfront Fee: Up to 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.

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

OneMain personal loan OneMain Financial

  • Loan size: $1,500 to $30,000
  • APR: 16.05% 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
  • APR: 5.99% to 29.99%
  • Term: 36 or 60 months
  • Upfront fee: 0.99% - 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.

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.

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Hannah Rounds
Hannah Rounds |

Hannah Rounds is a writer at MagnifyMoney. You can email Hannah here

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Auto Loan

What to Look for When Buying a Used Car

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Used car checklist
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You probably already know the biggest advantage of a used car over new: lower cost. The average used car price was $16,000 below the average new car price in the third quarter of 2018, according to Edmunds. But is the potential savings worth the risk of buying a vehicle with a mysterious past?

Perhaps — if you’re armed with the right know-how. We’ll tell you where to find reliable information about the car you’re considering and what to look for in your own vehicle inspection.

What to look for when buying a used car: 6 steps

Step 1: Research the specific used car

Before you leave home to go test drive the car, do some internet sleuthing. It may save you a trip to see it if you find that type of vehicle usually has issues.

Expert reviews and user reviews

Look for expert and user reviews for the specific model you’re interested in, which could tell you whether that type of car is reliable or has major issues. Almost every used car has some type of common issue, from simple things that may not affect you, like the AM radio not working, to large things that can result in the engine melting.

Steer clear. If that car tends to have major or expensive problems, you may want to find another used car.

Where to find it. In Google or another search engine, type in the car’s year, make, model and the words “review” or “problems” to see what pops up. You could also use a free industry standard site like Kelley Blue Book or Edmunds to see their reliability scores and auto expert reviews. And you can look up safety reviews at the National Highway Traffic Safety Administration and the Insurance Institute for Highway Safety.

Vehicle history report

If the car passes your preliminary internet research, you could look up a vehicle history report on the car, which can tell you whether the car is marked as stolen, was in an accident, got flooded, is considered salvage and how many owners it’s had and more.

Steer clear. If it is stolen — report it to the police. Otherwise, ask the owner about any red flags you see on the vehicle history report. If it’s a small thing, like fender bender, you could use that to negotiate a lower price. If it’s a large thing, such as a major accident, you may want to pass.

Where to find it. Many car dealerships provide free vehicle history reports. If they are not willing to give you one, that could be a red flag in and of itself. If you are buying a car directly from another person, you could ask them to provide one or buy one yourself from National Motor Vehicle Title Information System, AutoCheck or CARFAX.

Vehicle value

Before you go look at the car, an easy and useful thing is to look up its value. You should not pay more than that to buy the car and if you can negotiate a price less than that, you got a good deal.

Steer clear. Before you go look at it, if the car’s advertised price is exceedingly low compared with its value, it might be a scam. After you look at it, if the car’s seller refuses to sell it for around that value, you can probably get a better deal elsewhere.

Where to find it. You could use NADAguides or Kelley Blue Book. Both are free internet resources. You can put in the car’s information and it will tell you the fair price for it depending on the car type, condition, location and seller (a dealership or a person).

Step 2: Perform a visual inspection of the car

The best time to inspect a used car is in daylight on a dry day. If you’re meeting a private seller rather than buying from a business, a public parking lot near an interstate is usually ideal. Have the car parked on even, flat pavement that doesn’t have any oil marks or puddles on it already.

Leaks

Turn the car on and have it idling for at least 30 seconds, or leave it on while you check the cosmetics. Then pull the car forward enough so that you can check the ground where it used to be parked for any puddles or fluids that the vehicle may have leaked.

Steer clear. Any leaks is not good news, especially oil. If the AC was running, some water is normal.

Where to look. Any fluids that leaked from the engine will of course be on the ground from where the front part of the car was. A gas leak may have come from the gas tank, which is usually at the back of the car.

Cosmetics

Look for any sagging, dents, scratches, uneven gaps between the car doors and the body of the car, rust and duct tape. While some of these things may be just cosmetics, lots of rust isn’t good and dents in certain places can seriously affect the car.

Steer clear. A ton of rust could mean there are or there may soon be holes in the car, and people generally like their vehicles to be watertight so you don’t get rained on while driving or have to deal with mold inside. Dents in the car’s frame could affect its driving and safety.

Where to look. Don’t forget to look at the roof of the car for rust. To check the frame, either look or feel under the front and back bumpers for the metal bar. The bar shouldn’t have dents, kinks or lots of rust. You could also look in the trunk in the spare tire compartment, if the car has one. This compartment is usually made of curved metal, to fit the tire. If the shape of the metal isn’t smooth, the car may have been in an accident.

Tire tread

Looking at the tread on the tires can tell you more than just whether they are old or new. They can tell you whether the suspension of the car is good.

Steer clear. The tire tread should be “penny deep.” An old tip is to use a penny to check the depth of the tire tread. If the penny shows, then the tread is low and the car will likely soon need new tires. And if the tread is worn unevenly, the car probably has a suspension problem.

Where to find it. To fully check the tires, turn the car’s steering wheel sharply in one direction so you’ll be able to see the whole flat of the tire. Do look at all of the tires and check for uneven tread on both the right and left sides of the car.

Step 3: A closer look inside the car

This is where you will hopefully spend most of your time with the vehicle, so make sure it doesn’t smell like mold, have a lot of wear and tear, and that it’s generally up to snuff.

Diagnostic check

This is the first thing many mechanics will do when testing a vehicle. There’s little point in popping the hood and getting dirty when you can get a full overview by only plugging in a scanner. The scan reports problems so you can quickly know what, if anything, is wrong with the car.

Steer clear. If the scanner reports a lot of “fails,” states only one result that means “all codes were cleared,” or says “not ready” or “pending” on many items, be wary. The seller could have cleared warning codes to hide major problems. In any of these cases, the car may have many costly problems. Each item should ideally say “OK.”

Where to find it. At an auto parts shop, such as AutoZone or O’Reilly Auto Parts, an employee could run the test for you for free. Or you could buy a scanner from them or online for less than $20, which could be especially useful if you’re going to look at a few cars.

Internal equipment

As you may take the car on a test drive soon, make sure you can comfortably see via the mirrors and sit well. Adjust the mirrors and the driver’s seat. Blast the AC, heat and radio to test that they work. Push buttons to see that the power windows, navigation, touchscreen backup camera and any technology the car may have works.

Steer clear. You shouldn’t smell anything burnt when you turn up the heat. You shouldn’t hear any crackling from the audio speakers. Everything should work as it’s supposed to. If it doesn’t, you could look up the cost to fix it and ask the owner to deduct that cost from the price of the car. Or you may decide buying a car without a working heater in the dead of winter isn’t worth the trouble.

Where to find it. If the car is supposed to have something that you can’t find or figure out how to work, ask the owner or the salesperson. If they don’t know, you could consult the owner’s manual or look it up on the internet.

Step 4: Pop the hood

Checking the part of the car that makes it go – the engine – is a good idea. You don’t have to be a mechanic to look at a few basic things.

Engine oil

The oil lubricates the moving parts of the engine. It should be dark brown or black and very smooth when you rub a dab of it between your fingers. With the engine off, take the dipstick out, wipe it off, put it back in and take out it again to check the level of oil. It should come up to the appropriate mark on the dipstick showing it has enough oil; not too much, not too little.

Steer clear. If it is very gritty, has metallic flakes or is light colored. These signs mean the engine is damaged and could fail soon. An odd level of oil is not the best either, especially a low level.

Where to find it. The dipstick to check the oil may be yellow and should be marked as “oil.” If you have trouble finding it, ask the seller, check the owner’s manual or look online where the oil dipstick is located for that type of car.

Transmission fluid

The transmission is the part of the engine that allows you to go different speeds, instead of forever putting along at five miles an hour. It needs a different type of lubricant that is much thinner than oil and should be a light red color.

Steer clear. If it is brown or black or smells burnt. This means the transmission is in bad shape, might stop working soon, and a new one is usually at least a couple thousand dollars.

Where to find it. There should be a cap maybe four inches wide that is labeled, but usually not clearly, so a flashlight may help. Again, check online, check the manual or ask the seller if you have trouble.

Belts and hoses

Touch the belts and hoses you see to feel whether they’re firm, not frayed, not cracked and don’t have leaks.

Steer clear. The belts and hoses should be taut and flexible but should not be loose. If you can wiggle them or pull them free, that’s not good. If they are leaking, coming apart by fraying or cracking, that’s also not good. Most of these things are easy enough and relatively cheap to replace, but leaking hoses could mean the engine hasn’t been getting enough fluids and could be damaged.

Where to find it. These should be easily visible. Lean down and peer around the engine in the front and on the sides to see more.

Exhaust

The color of the engine exhaust can tell you a lot about the engine’s health. Ask the owner or a friend to turn the car on and rev the engine while you stand behind the vehicle and watch for the exhaust.

You should check this twice; once when the engine is cold and once when it is hot. An engine is “cold” when it hasn’t been running for a while and “hot” when it’s been running and warmed up.

Steer clear. A small amount of water vapor is normal, but blue, white, black and gray smoke are all signs of a problem that could mean anything from a small, easily repaired crack in the coolant container to a split engine block. If there is smoke but the car has passed your other tests thus far, consider taking it to an independent mechanic to determine the problem.

Where to find it. The exhaust pipe should be at the back of the car near the rear bumper. There may be two pipes and the pipe itself may be under the bumper, not easily visible.

Step 5: Take a test drive

If the car has passed all of your tests so far and you think you’d like to buy it, take it for a test drive. Drive it over potholes and speed bumps. Listen for any squeaks and rattling.

Accelerate

When appropriate, such as on an on ramp to a highway or interstate, punch the gas and accelerate quickly. Go from a low speed up to the speed limit.

Steer clear. If the car jerks or makes funny noises there may be a transmission or engine issue.

Brakes

Give the owner or salesperson in the car with you a warning that you’re going to stop quickly to test the brakes. Make sure there is no one else around that could hit you or whom you could hit if the brakes don’t work.

Steer clear. The car should come to a smooth stop without a lot of noise. A jerky or particularly loud stop means the brakes need work.

Turns

When appropriate, turn the steering wheel sharply to one side and then the other to test that the car will indeed go where you want it to go.

Steer clear. If the steering squeaks a lot, it may be a case of needing more steering wheel fluid (a simple fix). If it is awfully loose or tight, there may be a bigger problem.

Looking for auto financing? Check out our top picks for auto loans.

Step 6: Check the paperwork

Check the VIN

Finally, if everything seems good and you want to buy the car, make sure the VIN on the paperwork matches the VIN on the car. And if you’re buying from a private seller, make sure the name on the title matches the name on their driver’s license so you’re sure the person has the right to sell the car. If the title lists two names as the current owners with the word “or” between them, you don’t need the other owner to sign as well. However, if the word between the name is “and,” you will need both owners to sign the title over.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Jenn Jones
Jenn Jones |

Jenn Jones is a writer at MagnifyMoney. You can email Jenn at jennifer@magnifymoney.com

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Auto Loan

Buying a Car Out of State: The Complete Guide

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Buying a car out of state
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If you’ve found a car out of state that you want to buy or if you’re thinking about shopping for one, you might have a few questions. What taxes do you pay, and to which state? What about emission requirements, loan approvals or getting the car shipped to you?

To help you know what goes on behind the thick curtain of car buying and the government, we will go over the basics of how to buy a car out of state and what you should look for.

Why buy a car in another state?

Why even attempt this feat in the first place? The short answer is that buying a car out of state could be the best way to get what you want and a good deal.

Dealer incentives. You might live close to a state border. A dealership right over the line could have great customer incentives that dealers in your state don’t have, like two years of free maintenance or a lifetime powertrain warranty.

Rebates. Car manufacturers establish rebates based on supply and demand in different markets, so different places will have different rebates. It might be that in your state, the car you want doesn’t have any rebates, but a couple states over has $4,000 worth of rebates on it.

Online shopping. You could have found the car you wanted online, either from a site like Carvana or from a private seller who offered the best deal. Only after you fell in love with the car did you realize it was in another state. You can look here for tips on how to buy a car online.

What to know before buying a car out of state

Here are some things to keep in mind, all of which will affect the bottom line of what you’ll pay. If budget is a concern for you, check out our story on how much car you can afford.

Taxes
Car taxes depend on where you will register the car, not where you buy the car. You register the car based on your residential address. So you’re in luck if you live in a sales tax-free state and find your one-true-love of a vehicle outside state lines. On the other hand, if you live in California and you’re thinking of buying a car in Alaska to skip out on sales tax, you’re out of luck. You’ll still have to pay California sales tax.

Your tax rate is also dependent on your city and county, too. Pennsylvania charges a 6% sales tax, but Philadelphia County charges 2% on top that for an effective rate of 8%. You can look up the taxes and fees you’ll have to pay by going to your state’s DMV website.

Inspections and emissions requirements
Like taxes, the inspections and emissions requirements your car must meet depend on the state where you live. Certain states have inspections and emissions requirements, others don’t. It’s a good idea to make sure the car can pass the necessary inspections before you buy it, since the vehicle must pass the tests before you can register it. California has very strict emissions requirements in particular. You could run into some major trouble in registering car if it does not pass the requirements. You can see more here from the California Air Resources Board.

Insurance requirements
Most states require all drivers to get auto insurance. How much insurance you are required to have can differ. Also, if you are getting an auto loan to purchase the car, most lenders require that you keep “full coverage” auto insurance as well. Check with the dealership, the lender or the auto insurance company for more information so you can meet all requirements. Make sure to note which state you will register the car in so they can provide the correct information.

Shipping
If you are not driving the car back home, you’ll need to pay someone else to transport it. Some car-buying websites charge a flat fee. Other transport companies charge based on the distance the vehicle needs to go and its size and weight.

How do I handle the paperwork for buying a car out of state?

If you are getting the car from a dealership, the salesperson or finance manager should tell you what to do and what’s going on as you slog through the paperwork. But if you are getting the car in a private sale, you might need to be more knowledgeable.

Who needs to sign what?
The buyer and the seller both need to both sign most, if not all, paperwork.

Who is the buyer?
As you’re filling out the paperwork for buying a car out of state, the buyer is the person who is either paying for the vehicle or wants to be registered as the vehicle owner. Usually this is straightforward, but it can get confusing sometimes. For example, if a father is buying a car for his daughter, paying for it himself, but wants his daughter to be registered as an owner of the car as well, both father and daughter would sign the paperwork as buyers.

Who is the seller?
The seller is the person listed as the owner on the title of the vehicle for sale. A daughter wouldn’t be able to legally sell her father’s car if she is not listed on the title. You can’t sell something that doesn’t belong to you. Ask to see the seller’s driver’s license to make sure it matches the name that is on the title.

There are exceptions to this in cases where the owner has died or the other person has power of attorney, but we recommend consulting a lawyer or finding another car in these cases.

What if there are two names on the title?
If there are two names listed on the car’s title, look at how they are listed. If the word “and” is between the names, you will need both people to sign over the title. If the word “or” is between the names, you only need one of the owners to sign over the title.

Is there special paperwork for buying a car out of state?

Sometimes. Again, a dealership will take care of all of this, but you’ll need to make sure you have everything in order if you’re buying a car from another person instead. Check with your state’s DMV site to confirm exactly what you’ll need (links are below), but here are the most common things you’ll need to sign when buying a car out of state. Most are required for any car sale. Don’t head back home until you have them all.

Title
A vehicle’s title is the official form that says who owns that exact vehicle. Both the buyer and the seller need to sign it.

Title application
To officially change the title to your name and register the vehicle with you as the owner, you’ll have to fill out a title application form. Some states, such as Texas, require that the buyer and seller sign the title application as well at the title. Other states, such as Virginia, only require that the buyer signs the title application.

VIN verification
VIN stands for vehicle identification number, and every vehicle in the U.S. has one. A VIN verification or a VIN inspection form confirm exactly what is being sold.

Bill of sale
The bill of sale lists the buyer, the seller, the car and the car’s purchase price. The bill of sale serves as both a contract and a receipt.

Odometer statement
The odometer on a car keeps track of how many miles the car has been driven. This is important because vehicles only last so many miles, and the mileage will affect how much it’s worth and whether it’s still under warranty. The odometer can also tip you off on how likely the car may break down or need repairs.

Proof of insurance
When getting insurance for the car, ask for the auto insurance company to send proof of insurance. The declaration page shows the vehicle, the name(s) of the insured driver(s) and how much the car is insured for. At least one of the people who is buying the car needs to be an insured driver of the car.

How do I get the forms?

The seller needs to have the title. Everything else you should be able to find on your state’s DMV website. Download and print a couple of copies of the forms so that both you and the seller can have copies, and maybe take some extras in case anyone makes a wrong mark somewhere.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Jenn Jones
Jenn Jones |

Jenn Jones is a writer at MagnifyMoney. You can email Jenn at jennifer@magnifymoney.com

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Auto Loan

How Much Does a Tesla Cost?

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Tesla Roadster
Tesla

Teslas are the newest, spiffiest electric vehicles on the block. The first models were priced as luxury vehicles, but Elon Musk promised to make an EV affordable for most Americans by rolling out the Model 3 at an advertised price below $35,000. There is more to the price, however, as we’ll explain.

Musk’s fancier models will cost you a pretty penny — up to $250,000 — along with Tesla’s upgrades. Availability and price depend on the model and the trim you choose. For the whole picture, keep reading.

How much does each new Tesla model cost?

In order of price, Tesla offers four consumer car models: 3, S, X and the upcoming second-generation Roadster, which you can reserve now. It speaks to company founder Elon Musk’s sense of humor that if you put the first models in the order they were produced you get “S3X.”

*It’s important to note that the advertised prices don’t include a $1,200 destination and document fee, and they do include a $7,500 federal tax incentive and an estimated savings in gas over five years. Neither price includes taxes or registration fees.

What about the tax credit?

Time is running out on the full $7,500 federal tax credit available to the first 200,000 people who buy a new Tesla model. Because Tesla reached that point in July, the tax credit is being phased out and will end in 2019, barring an extension by Congress. Customers need to have their new car delivered on or before Dec. 31, 2018 to get the full amount of the credit.

Customers who have their Teslas delivered in the first half of 2019, between Jan. 1 and June 30, get half of the tax credit amount, $3,750. Those with vehicles delivered in the second half of the year, July 1 to Dec. 31 get half of that, $1,875. In 2020, there is no scheduled tax credit.

The good news? There are state tax credits you may be able to use for your new Tesla. The following states and Washington D.C. offer incentives like tax credits, tax exemptions and reduced rates for EV charging: Arizona, California, Connecticut, Colorado, Delaware, Hawaii, Louisiana, Maryland, Massachusetts, Nevada, New Jersey, New York and Pennsylvania.

How much does a Model 3 cost?

The Model 3 is Tesla’s least expensive car. You may be able to drive away in one for a minimum of $47,200. If that amount surprises you, then you know the Model 3 is often highlighted as costing less than $35,000. So why the discrepancy?

The quoted $34,200 price tag is after estimated savings, including the expiring $7,500 federal tax credit and the fuel savings you would have over five years if you owned a gasoline-powered car. Add those back in and you get to the sticker price of $46,000. Then, tack on Tesla’s standard $1,200 delivery and document fee to get a price of $47,200, not including tax and registration fees.

How to read the trim levels
The Model 3 trims are named in a self-explanatory way, but the trims for the next two models are named with numbers and letters that may need clarification. The trim levels for the Model S and X are named with numbers and the letters “P” and “D.” The number is the size of the battery — how many kilowatt hours it can hold. “P” stands for performance model and it’s the top, most expensive trim. “D” stands for dual drive, meaning the car is all-wheel drive. The higher the number, the farther you can go on a single charge. The 75D is the lowest trim level and the least expensive, followed by 100D and then P100D.

How much does a Model S cost?

The sticker price for the 75D trim of a Model S is $78,000. For a greater driving range by about 76 miles, the 100D trim comes in at a $96,000 sticker price. And for a greater performance, the P100D goes from zero to 60 in 2.5 seconds, a 64% faster acceleration for $39,000 more than the 100D.

How much does a Model X cost?

While models 3 and S are sedans, the Model X is an SUV with optional third-row seating. The lowest trim, the 75D, has an $84,000 sticker price. The next trim up, the 100D, has a sticker price of $99,000 and will get you 58 miles more in driving range. The top trim P100D for $140,000 will get you from zero to 60 mph in 2.9 seconds, instead of 4.7 seconds that the 100D achieves.

How much does a Tesla Roadster cost?

The most expensive Tesla model is the second-generation Roadster. A Founders Series Roadster is $250,000; although you could get a base Roadster for $200,000. Given the $50,000 price difference between the Founders Series Roadster and the base Roadster, which is enough to buy a whole other Tesla, the Founders Series Roadster has got to offer something special — and it does. You can go from zero to 60 in 1.9 seconds and from zero to 100 in 4.2 seconds, which is pretty dang quick acceleration.

Can you negotiate?

Most car brands let you negotiate on prices. We even wrote about how to negotiate a car price. With Tesla, however, there is no price negotiation. James Wolf, a senior engineer at LendingTree, the parent company of MagnifyMoney, bought his Model 3 in October 2018. He explained, “There is no negotiation when it comes to the price, only your options [can] adjust the price.”

There are no back-and-forth, tit for tat price negotiations on a new Tesla. The price is the price, take it or leave it. The only negotiation on a new Tesla is the one you may have with yourself and your budget: there are plenty of drool-worthy option upgrades, the cheapest of which adds a cool $1,000 to the price tag. More on that later.

Tesla fees and options

As with any car purchase, there will be unavoidable fees and some enticing options you could add to the vehicle. Both will increase the final price.

Can you avoid the destination and document fees?
No. Of the $1,200 fee, $1,000 is the delivery fee, which is charged in the U.S. and Canada regardless of delivery method or location, even if you pick it up hot from the factory floor. Why? It’s government-mandated. The delivery fee, also known as the destination charge, has to be separate from the MSRP and clearly disclosed. The remaining $200 is the document fee.

How much do options cost?
The least expensive upgrade is getting a black and white interior in a Model 3, rather than the all black. The most expensive is adding autopilot after you buy the car for $7,000, instead of ordering it for $5,000 when you get the car new.

**For Models S and X the interior options of Black and White, and Cream are available for purchase on the two lower trims only. The Black and White option is available for no up-charge on the top trim, but the Cream is not available on the top trim.

How much is tax?

Property tax. Vehicle property tax depends on your state and your county or city of residence. It varies pretty wildly, so check your state’s Department of Motor Vehicles website for more information.

Sales tax. If you’re lucky enough to live in state without sales tax (Alaska, Delaware, Montana, Oregon, New Hampshire), you may not have to pay taxes on the car’s purchase.

For the rest of the country, state sales tax applies. You may also have local sales taxes to contend with. The highest average combined state and local sales tax rate is in Tennessee at 9.46% as of July 2018. The lowest is Alaska at 1.43%. And the average in California is 8.55%.

Is tax included in the final amount I pay for the Tesla? If you live in a state where Tesla has a sales license, the applicable taxes you’ll have to pay will be included in your total. If you live in a state where Tesla does not have a sales license, taxes will not be included in the total, but you will have to pay them when you register the car in your state.

Do I have to pay California sales tax? If you pick the car up in California and you live in a different state where Tesla does not have a sales license, Tesla, by law, has to charge California sales tax. For further information on this, see a tax professional or talk to a Tesla representative.

Where does Tesla have a sales license? Tesla has a sales license to directly sell vehicles in about half of U.S. states. Different states have different automotive sales laws. You could see a thread on the Tesla Motors Club website with a map on Tesla sales licensure.

Financing a Tesla

If you’re not paying cash, you may be able to get a loan through Tesla or another lender. It does not hurt your credit to apply to multiple lenders any more than it does to apply to one lender, as long as you do so within a 14-day window. It’s always good idea to shop around for a car loan just as you would for the car itself — only talking to one lender is one of the common mistakes people make when they need an auto loan.

Tesla financing and leasing. Once you create a Tesla account, which you may do here, you can submit a credit application online and hear back from Tesla within 48 hours. Tesla financing is only available in these states: California, Colorado, Florida, Georgia, Hawaii, Illinois, Indiana, Maryland, Massachusetts, Minnesota, Missouri, Nevada, New Jersey, New York, North Carolina, Ohio, Oregon, Pennsylvania, Tennessee, Virginia and Washington.

Financing with your own lender. If you have your own lender, you’ll need to provide the name of the lender, the exact dollar amount of the loan and the lender’s address and phone number to Tesla. In turn, the lender will want the VIN, which you can find in your Tesla account.

How much does a used Tesla cost?

Despite it being a relatively new car company, there are used Teslas available for sale. Some models are almost 10 years old, as the first generation Roadster came out in 2008. It’s these older models that are the least expensive Teslas you’ll find, priced in the upper $30,000 range. Tesla itself offers used models that passed a rigorous inspection and come with a warranty. You can also find used Teslas for sale off third-party car buying sites, such as AutoTempest and CarGurus.

Because they are used, you won’t have to pay the $1,000 destination fee, which only applies to new cars; unless, of course, you’re getting the car shipped to you specially. If you buy the car from a dealership rather than a private person, you will still face all of the typical dealer fees. And no matter how you buy the car, you’ll need to pay the appropriate taxes.

The bottom line

The least expensive new Tesla will cost you $47,200 before taxes and before any available tax credits. You can’t negotiate on the price of a Tesla, but you can pick and choose options that suit you. If you’d like to see what else is out there without leaving your couch, you could look at the best online car buying sites for 2018.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Jenn Jones
Jenn Jones |

Jenn Jones is a writer at MagnifyMoney. You can email Jenn at jennifer@magnifymoney.com

TAGS:

Advertiser Disclosure

Auto Loan, Reviews

The Best Auto Loans: 2018 New & Used Car Loan Rates

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

The best auto loan for you depends on your priorities, but two common goals are to get the most competitive rate and the lowest monthly payment. That’s why longer-term loans are so popular right now, with more people stretching out new and used car loans over 60 months or more. Despite that, new and used car payments hit an all-time high in 2017, meaning that people are spending more than ever on their vehicle purchases. That’s why MagnifyMoney has compiled a list of the best auto loans in 2018. We know that with rising rates, you need as much help as you can get finding the best rates to secure the vehicle you want and need.

Compare offers from top auto lenders using lendingtree’s secure form.

Rates
Loan Amount
Loan Terms
SoFi
3.99% to 10.28%
$4,000 to $40,000
36 to 72
SoFi
3.34% to 8.34%
$5,000 to $100,000
24 to 84
SoFi
3.00% to 6.00%
Any amount, as long as it’s a vehicle listed on the Carvana website
Up to 72 months
compare offersLendingTree is our parent company

How we picked the best auto loan rates

Using information from LendingTree, we compiled auto loan data over a six month period (August 2017 through January 2018) spanning across 22 auto lenders. We analyzed the loan data by applicant credit tier, and whether the loans were to purchase a used or new car to determine 1) the lenders consumers chose most often, and 2) the lowest average APR offered by the lender.


Start with LendingTree

With LendingTree, you can fill out one short online form, and there are dozens of lenders ready to compete for your business. Upon completing the form, you can see real interest rates and approval information instantly. Some auto lenders will do a hard pull on your credit and this is common with auto lending. It’s important to remember, multiple hard pulls will only count as one pull, so the best strategy is to have all your hard pulls done at one time.

APR
Terms
Fees
SoFi
As low as
3.09%
24 to 84
months
Varies

LendingTree is our parent company. LendingTree is unique in that they allow you to compare multiple, auto loan offers within minutes. Everything is done online. LendingTree is not a lender, but their service connects you with up to five offers from auto loan lenders based on your creditworthiness.

Where people with good credit (680+) get the lowest rates

LightStream

LightStream is the online consumer lending division of SunTrust Bank. LightStream seeks to make the online lending process easy, so you may apply, be approved, sign your loan agreement and receive your funds all through your computer or mobile device — no papers to fill out or sign.

Why we chose Lightstream
Out of the lenders compared, borrowers with good and excellent credit were most likely to choose a loan with LightStream and receive the lowest APR. You can read our full LightStream review here.

New auto loan product details

  • APR: See table below
  • Terms offered: 24 – 84months
  • Loan amounts: $5,000 - $100,000

Lightstream New Auto Loan APRs

Loan Amount

Loan Term (months) *

24 - 36

37 - 48

49 - 60

61 - 72

73 - 84

$5,000 to $9,999

4.24% - 6.04%

5.09% - 6.64%

5.29% - 6.84%

6.19% - 7.74%

6.79% - 8.34%

$10,000 to $24,999

3.34% - 5.24%

3.69% - 5.49%

3.69% - 5.49%

4.54% - 6.34%

5.14% - 6.94%

$25,000 to $49,999

3.84% - 5.24%

3.94% - 5.49%

3.94% - 5.49%

4.79% - 6.34%

5.39% - 6.94%

$50,000 to $100,000

3.84% - 5.24%

3.94% - 5.49%

3.94% - 5.49%

4.59% - 6.14%

5.29% - 6.84%

As of 11/05/18. Includes a 0.50 point discount for autopay. Exact rates depend on your credit profile.

Used auto loan product details

  • APR: See table below.
  • Terms offered: 24 – 72 months
  • Loan Amounts: $5,000 - $100,000

LightStream Used Auto Loan APRs

Loan Amount

Loan Term (months) *

24 - 36

37 - 48

49 - 60

61 - 72

73 - 84

$5,000 to $9,999

4.44% - 6.24%

5.29% - 6.84%

5.49% - 7.04%

6.79% - 8.34%

6.79% - 8.34%

$10,000 to $24,999

3.34% - 5.24%

3.94% - 5.84%

3.94% - 5.84%

4.79% - 6.34%

5.39% - 6.94%

$25,000 to $49,999

3.84% - 5.94%

3.94% - 5.84%

3.94% - 5.84%

4.79% - 6.34%

5.39% - 6.94%

$50,000 to $100,000

3.84% - 5.24%

3.94% - 5.84%

3.94% - 5.84%

4.59% - 6.14%

5.29% - 6.84%

As of 11/05/18. Includes a 0.50 point discount for autopay. Exact rates are dependent on your credit profile and for purchases made from dealer. 

What we like

  • Fixed rate, simple interest fully amortizing installment loans. This means you won’t pay interest on your interest, and if you follow the payment schedule, your loan will be fully paid off at the end of the term.
  • No fees or prepayment penalties
  • No restrictions on the vehicles year, make, model or mileage
  • If you’re not 100% satisfied, Lightstream will pay you $100 (conditions apply)

Where it may fall short

  • Loans may not be used for a cash-out refinance
  • Secured loans may not be used for commercial vehicles
  • Vehicle must be classified as automobile, sport-utility vehicle (SUV), light-duty truck, passenger or conversion van
  • No phone support for customer service. Everything is handled by email

How to apply

Before you apply, keep in mind that you’ll need to:

  • Have good credit
  • Have sufficient income and assets
  • Agree to electronic records and signatures

Applying is done entirely online. You’ll provide:

  • Personal information. Name, address, phone, Social Security number, driver’s license, etc.
  • Employment information. Employer name and address, income and other financial assets
  • Loan information. Loan purpose, loan amount and term
  • Security information. Create a username and password
LightStream

APPLY NOW Secured

on Lightstream’s secure website

Where people with fair (620-679) & bad credit (500-619) get the lowest rates

Capital One Auto Finance

Capital One is a Fortune 500 company and a trusted name in banking and other financial services. In the fourth quarter of 2017, Capital One originated $6.215 billion worth of auto loans, making it one of the top five U.S. banks offering auto loans.

Why we chose Capital One

The most borrowers with fair and bad credit chose a loan with Capital One, and it came in second in terms of lowest average APR.

New auto loan product details

  • APR: See table below
  • Terms offered: 36 – 72 months
  • Loan Amounts: $4,000 - $40,000

Capital One new auto loan APRs

Credit

Loan Term (months) *

36

48

60

72

Rebuilding

7.73%

7.73%

7.73%

10.08%

Average

4.29%

4.93%

4.93%

6.22%

Excellent

3.99%

3.99%

3.99%

3.99%

As of 11/05/18

Used auto loan product details

  • APR: See table below
  • Terms offered: 36 – 72 months
  • Loan Amounts: $4,000 - $40,000

Capital One used auto loan APRs

Credit

Loan Term (months) *

36

48

60

72

Rebuilding

9.13%

12.43%

12.43%

13.78%

Average

5.90%

7.22%

7.22%

8.86%

Excellent

4.33%

4.40%

4.40%

5.15%

As of 11/05/18

What we like

  • Easy to pre-qualify online without a hard inquiry on your credit
  • Minimum monthly income required is $1,500 or $1,800, depending on your credit
  • 12,000 auto dealers work with Capital One

Where it may fall short

  • The best rates require excellent credit with 20% down on the vehicle
  • Vehicles must be 2006 or newer
  • Vehicles must have less than 120,000 miles
  • Dealers may charge additional fees, including document fees, dealer preparation fees and delivery charges
  • Maximum loan amount may not cover the cost of the vehicle you desire

How to apply

Apply using Capital One’s Auto Navigator. Enter your personal information including your Social Security number to get pre-qualified for an auto loan without affecting your credit. Then take your financing certificate to the dealership to shop for cars and make a selection. Once you’ve selected a vehicle, the dealer will have you fill out a credit application and you’ll finalize the paperwork for your vehicle purchase with the dealer.

Capital One

SEE OFFERS Secured

on LendingTree’s secure website

Carvana

Carvana specializes in helping you shop for a car online. It uses things such as 360-degree photos, free vehicle history reports, details and specs, ratings and reviews to provide you with the maximum amount of information.

Why we chose them

We looked at the three used auto lenders chosen most often in each credit tier, and Carvana was the only lender in the top three in every tier. That’s why we chose Carvana, even though other lenders offered lower average APRs on used auto loans.

Product details – Used auto loans only

  • APR: APR depends on credit history, vehicle type and down payment.
  • Terms offered: Up to 72 months.
  • Minimum loan amount: None
  • Maximum loan amount: Any amount, as long as it’s a vehicle listed on the Carvana website.

What we like

  • High level of detail on vehicles makes online shopping easy
  • Online application personalizes your shopping experience and doesn’t require a hard pull on your credit
  • You can return the vehicle within seven days and get your money back (Make sure you’re familiar with the limits on this policy before you buy)
  • All vehicles are certified with a 150-point inspection

Where it may fall short

  • Only available for used vehicles
  • Carvana is a car dealership, and you must select a vehicle through their website

Online experience Carvana provides a lot of information about each vehicle. You won’t have to visit other sites to find specs or read reviews

When you fill out the online application, you’ll see a breakdown of your monthly payment, minimum required down payment and your APR, making your shopping experience truly personalized.
How to apply You may get pre-qualified with Carvana without a hard pull on your credit by filling out the online application. After you complete it, you may start shopping for a used vehicle, and your payment, down payment and APR will be displayed for each vehicle. Keep in mind, with Carvana, you must purchase a vehicle in their inventory.

Carvana

SEE OFFERS Secured

on LendingTree’s secure website

Understanding the auto loans process

How do auto loans work?

For the lenders we detailed above, you may apply for a loan online and receive personalized loan rates without a hard pull to your credit. So while you don’t see rate tables on certain lender websites, don’t be discouraged. If you’re serious, just fill out an application to see what you may qualify for.

Once you’ve completed the initial application, you’ll be able to shop for a vehicle knowing which type of financing you’ll likely qualify for.

Once you’ve selected a vehicle, you’ll need to submit a full application for the loan. This can be done online or with a dealer, if you’re working with one. Once again, most lenders are streamlining this process online, so for the lenders we discussed on this page, you may upload your documents using a computer or mobile device.

Once you’ve purchased the vehicle and completed your loan documents, you’ll just need to make payments. Making payments has moved online as well, and many lenders offer apps to help you manage your payments and loan information using your mobile device.

Tips when shopping for car loans

Here are some tips to help you avoid common mistakes and shop confidently for a car loan.

  • Set a budget. Everyone says it, but it’s not always easy to do. If you aren’t keeping a budget, here’s how to start in four easy steps.
  • Know how much you can afford. MagnifyMoney suggests you keep your total car expense less than 10% of your monthly budget. This is part of the 20/4/10 rule, which also says you should put down at least 20% and choose a maximum loan term of four years.
  • Save for a down payment. The amount of your down payment is likely to affect the interest rate you receive when financing your vehicle. So saving for a larger payment will help save you money and putting more down will lower your monthly payment, too.
  • Check your credit. You’re entitled to a free copy of your credit report from each of the three major credit bureaus every 12 months, and it’s easy to get your free credit score from a variety of sources.
  • Consider a co-signer. If your credit score is low or you have a limited credit history that needs improvement, having a co-signer with good credit on your auto loan could significantly lower your interest rate.
  • Shop around. It’s smart to get multiple rate quotes, so you may compare loans.
  • Get pre-approved. Shopping for a vehicle doesn’t make a lot of sense if you don’t know how much money you’ll have to work with. Shoppers have many options for getting auto loan quotes without a hard inquiry on their credit, but if you’re serious about buying a car, doing all your loan shopping in a short period of time will minimize the potential impact on your credit score, if loan applications result in a hard pull.
  • Talk to local credit unions. While banks and online auto loan companies offer easy-to-use online tools, don’t forget to talk to your local credit union to see if it has a more competitive rate.
  • Beware of extra fees. Keep in mind you’ll need to pay state taxes and title fees. In addition, dealers may charge fees, including document fees, dealer preparation fees and delivery charges. These fees will affect your APR if you finance them into your loan.
  • Check your paperwork. Everyone makes mistakes. When you get the final copy of your auto loan, check to make sure you got everything you were promised and there are no extra fees.

How to apply for an auto loan

From choosing the right car to getting approved for financing, this article will walk you through the complete online car buying process.

When you apply for an auto loan, it will help to have your documentation ready. This will include proof of identity, proof of income, credit and banking history and proof of residence. If you’ve selected a vehicle, you also want that information, including VIN, mileage, year, make and model.

While many online lenders advertise the loan process as being quick, be prepared for roadblocks. Sometimes a lender may request additional information or take time to verify information, and that may delay the process.

Be proactive! Once you’ve started the auto loan process, the lender will walk you through what’s needed. But that doesn’t mean you have to wait for your lender to get back to you. If the loan process has stalled, make a call or send an email to your lender asking what’s needed. In many cases, you’ll have an online login that will allow you to see your loan status, or take the next step online.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Ralph Miller
Ralph Miller |

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

TAGS:

Advertiser Disclosure

Auto Loan, Reviews

The Best Auto Loans: 2018 New & Used Car Loan Rates

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Disclosure : By clicking “See Offers” you’ll be directed to our parent company, LendingTree. You may or may not be matched with the specific lender you clicked on, but up to five different lenders based on your creditworthiness.

The best auto loan for you depends on your priorities, but two common goals are to get the most competitive rate and the lowest monthly payment. That’s why longer-term loans are so popular right now, with more people stretching out new and used car loans over 60 months or more. Despite that, new and used car payments hit an all-time high in 2017, meaning that people are spending more than ever on their vehicle purchases. That’s why MagnifyMoney has compiled a list of the best auto loans in 2018. We know that with rising rates, you need as much help as you can get finding the best rates to secure the vehicle you want and need.

Overview of the best auto loans in 2018

Company name

Best for

Loan types offered

 

LendingTree

Comparison shopping auto loan rates - LendingTree is not a lender.

New, used, refinance, lease-buyout

SEE OFFERS Secured

on LendingTree’s secure website

LendingTree is our parent company

LightStream

Car buyers with good or excellent credit

New, used, refinance, lease-buyout

APPLY NOW Secured

on Lightstream’s secure website

Capital One

Car buyers with fair or poor credit

New, used, refinance

SEE OFFERS Secured

on LendingTree’s secure website

Carvana Auto Loan

Buying a used car online

Used

SEE OFFERS Secured

on LendingTree’s secure website

How we picked the best auto loan rates

Using information from LendingTree, we compiled auto loan data over a six month period (August 2017 through January 2018) spanning across 22 auto lenders. We analyzed the loan data by applicant credit tier, and whether the loans were to purchase a used or new car to determine 1) the lenders consumers chose most often, and 2) the lowest average APR offered by the lender.

A closer look at the best new and used auto loans

Start with LendingTree

With LendingTree, you can fill out one short online form, and there are dozens of lenders ready to compete for your business. Upon completing the form, you can see real interest rates and approval information instantly. Some auto lenders will do a hard pull on your credit and this is common with auto lending. It’s important to remember, multiple hard pulls will only count as one pull, so the best strategy is to have all your hard pulls done at one time.

LendingTree
APR

As low as
3.09%

Terms

24 To 84

months

Fees

Varies

SEE OFFERS Secured

on LendingTree’s secure website

LendingTree is our parent company. LendingTree is unique in that they allow you to compare multiple, auto loan offers within minutes. Everything is done online. LendingTree is not a lender, but their service connects you with up to five offers from auto loan lenders based on your creditworthiness.

 

Where people with good credit (680+) get the lowest rates

LightStream

LightStream is the online consumer lending division of SunTrust Bank. LightStream seeks to make the online lending process easy, so you may apply, be approved, sign your loan agreement and receive your funds all through your computer or mobile device — no papers to fill out or sign.

Why we chose Lightstream
Out of the lenders compared, borrowers with good and excellent credit were most likely to choose a loan with LightStream and receive the lowest APR. You can read our full LightStream review here.

New auto loan product details

  • APR: See table below
  • Terms offered: 24 – 84months
  • Loan amounts: $5,000 - $100,000

Lightstream New Auto Loan APRs

Loan Amount

Loan Term (months) *

24 - 36

37 - 48

49 - 60

61 - 72

73 - 84

$5,000 to $9,999

4.24% - 6.04%

5.09% - 6.64%

5.29% - 6.84%

6.19% - 7.74%

6.79% - 8.34%

$10,000 to $24,999

3.34% - 5.24%

3.69% - 5.49%

3.69% - 5.49%

4.54% - 6.34%

5.14% - 6.94%

$25,000 to $49,999

3.84% - 5.24%

3.94% - 5.49%

3.94% - 5.49%

4.79% - 6.34%

5.39% - 6.94%

$50,000 to $100,000

3.84% - 5.24%

3.94% - 5.49%

3.94% - 5.49%

4.59% - 6.14%

5.29% - 6.84%

As of 12/05/18. Includes a 0.50 point discount for autopay. Exact rates depend on your credit profile.

Used auto loan product details

  • APR: See table below.
  • Terms offered: 24 – 72 months
  • Loan Amounts: $5,000 - $100,000

LightStream Used Auto Loan APRs

Loan Amount

Loan Term (months) *

24 - 36

37 - 48

49 - 60

61 - 72

73 - 84

$5,000 to $9,999

4.44% - 6.24%

5.29% - 6.84%

5.49% - 7.04%

6.79% - 8.34%

6.79% - 8.34%

$10,000 to $24,999

3.34% - 5.24%

3.94% - 5.84%

3.94% - 5.84%

4.79% - 6.34%

5.39% - 6.94%

$25,000 to $49,999

3.84% - 5.94%

3.94% - 5.84%

3.94% - 5.84%

4.79% - 6.34%

5.39% - 6.94%

$50,000 to $100,000

3.84% - 5.24%

3.94% - 5.84%

3.94% - 5.84%

4.59% - 6.14%

5.29% - 6.84%

As of 12/05/18. Includes a 0.50 point discount for autopay. Exact rates are dependent on your credit profile and for purchases made from dealer. 

What we like

  • Fixed rate, simple interest fully amortizing installment loans. This means you won’t pay interest on your interest, and if you follow the payment schedule, your loan will be fully paid off at the end of the term.
  • No fees or prepayment penalties
  • No restrictions on the vehicles year, make, model or mileage
  • If you’re not 100% satisfied, Lightstream will pay you $100 (conditions apply)

Where it may fall short

  • Loans may not be used for a cash-out refinance
  • Secured loans may not be used for commercial vehicles
  • Vehicle must be classified as automobile, sport-utility vehicle (SUV), light-duty truck, passenger or conversion van
  • No phone support for customer service. Everything is handled by email

How to apply
Before you apply, keep in mind that you’ll need to:

  • Have good credit
  • Have sufficient income and assets
  • Agree to electronic records and signatures

Applying is done entirely online. You’ll provide:

  • Personal information. Name, address, phone, Social Security number, driver’s license, etc.
  • Employment information. Employer name and address, income and other financial assets
  • Loan information. Loan purpose, loan amount and term
  • Security information. Create a username and password
LightStream

APPLY NOW Secured

on Lightstream’s secure website

Where people with fair (620-679) & bad credit (500-619) get the lowest rates

Capital One Auto Finance

Capital One is a Fortune 500 company and a trusted name in banking and other financial services. In the fourth quarter of 2017, Capital One originated $6.215 billion worth of auto loans, making it one of the top five U.S. banks offering auto loans.

Why we chose Capital One
The most borrowers with fair and bad credit chose a loan with Capital One, and it came in second in terms of lowest average APR.

New auto loan product details

  • APR: See table below
  • Terms offered: 36 – 72 months
  • Loan Amounts: $4,000 - $40,000

Capital One new auto loan APRs

Credit

Loan Term (months) *

36

48

60

72

Rebuilding

7.73%

7.73%

7.73%

10.08%

Average

4.29%

4.93%

4.93%

6.22%

Excellent

3.99%

3.99%

3.99%

3.99%

As of 12/05/18

Used auto loan product details

  • APR: See table below
  • Terms offered: 36 – 72 months
  • Loan Amounts: $4,000 - $40,000

Capital One used auto loan APRs

Credit

Loan Term (months) *

36

48

60

72

Rebuilding

9.13%

12.43%

12.43%

13.78%

Average

5.90%

7.22%

7.22%

8.86%

Excellent

4.33%

4.40%

4.40%

5.15%

As of 12/05/18

What we like

  • Easy to pre-qualify online without a hard inquiry on your credit
  • Minimum monthly income required is $1,500 or $1,800, depending on your credit
  • 12,000 auto dealers work with Capital One

Where it may fall short

  • The best rates require excellent credit with 20% down on the vehicle
  • Vehicles must be 2006 or newer
  • Vehicles must have less than 120,000 miles
  • Dealers may charge additional fees, including document fees, dealer preparation fees and delivery charges
  • Maximum loan amount may not cover the cost of the vehicle you desire

How to apply
Apply using Capital One’s Auto Navigator. Enter your personal information including your Social Security number to get pre-qualified for an auto loan without affecting your credit. Then take your financing certificate to the dealership to shop for cars and make a selection. Once you’ve selected a vehicle, the dealer will have you fill out a credit application and you’ll finalize the paperwork for your vehicle purchase with the dealer.

Capital One

SEE OFFERS Secured

on LendingTree’s secure website

Carvana

Carvana specializes in helping you shop for a car online. It uses things such as 360-degree photos, free vehicle history reports, details and specs, ratings and reviews to provide you with the maximum amount of information.

Why we chose them
We looked at the three used auto lenders chosen most often in each credit tier, and Carvana was the only lender in the top three in every tier. That’s why we chose Carvana, even though other lenders offered lower average APRs on used auto loans.

Product details – Used auto loans only

  • APR: APR depends on credit history, vehicle type and down payment.
  • Terms offered: Up to 72 months.
  • Minimum loan amount: None
  • Maximum loan amount: Any amount, as long as it’s a vehicle listed on the Carvana website.

What we like

  • High level of detail on vehicles makes online shopping easy
  • Online application personalizes your shopping experience and doesn’t require a hard pull on your credit
  • You can return the vehicle within seven days and get your money back (Make sure you’re familiar with the limits on this policy before you buy)
  • All vehicles are certified with a 150-point inspection

Where it may fall short

  • Only available for used vehicles
  • Carvana is a car dealership, and you must select a vehicle through their website

Online experience
Carvana provides a lot of information about each vehicle. You won’t have to visit other sites to find specs or read reviews

When you fill out the online application, you’ll see a breakdown of your monthly payment, minimum required down payment and your APR, making your shopping experience truly personalized.
How to apply
You may get pre-qualified with Carvana without a hard pull on your credit by filling out the online application. After you complete it, you may start shopping for a used vehicle, and your payment, down payment and APR will be displayed for each vehicle. Keep in mind, with Carvana, you must purchase a vehicle in their inventory.

Carvana

SEE OFFERS Secured

on LendingTree’s secure website

Understanding the auto loans process

How do auto loans work?

For the lenders we detailed above, you may apply for a loan online and receive personalized loan rates without a hard pull to your credit. So while you don’t see rate tables on certain lender websites, don’t be discouraged. If you’re serious, just fill out an application to see what you may qualify for.

Once you’ve completed the initial application, you’ll be able to shop for a vehicle knowing which type of financing you’ll likely qualify for.

Once you’ve selected a vehicle, you’ll need to submit a full application for the loan. This can be done online or with a dealer, if you’re working with one. Once again, most lenders are streamlining this process online, so for the lenders we discussed on this page, you may upload your documents using a computer or mobile device.

Once you’ve purchased the vehicle and completed your loan documents, you’ll just need to make payments. Making payments has moved online as well, and many lenders offer apps to help you manage your payments and loan information using your mobile device.

Tips when shopping for car loans

Here are some tips to help you avoid common mistakes and shop confidently for a car loan.

  • Set a budget. Everyone says it, but it’s not always easy to do. If you aren’t keeping a budget, here’s how to start in four easy steps.
  • Know how much you can afford. MagnifyMoney suggests you keep your total car expense less than 10% of your monthly budget. This is part of the 20/4/10 rule, which also says you should put down at least 20% and choose a maximum loan term of four years.
  • Save for a down payment. The amount of your down payment is likely to affect the interest rate you receive when financing your vehicle. So saving for a larger payment will help save you money and putting more down will lower your monthly payment, too.
  • Check your credit. You’re entitled to a free copy of your credit report from each of the three major credit bureaus every 12 months, and it’s easy to get your free credit score from a variety of sources.
  • Consider a co-signer. If your credit score is low or you have a limited credit history that needs improvement, having a co-signer with good credit on your auto loan could significantly lower your interest rate.
  • Shop around. It’s smart to get multiple rate quotes, so you may compare loans.
  • Get pre-approved. Shopping for a vehicle doesn’t make a lot of sense if you don’t know how much money you’ll have to work with. Shoppers have many options for getting auto loan quotes without a hard inquiry on their credit, but if you’re serious about buying a car, doing all your loan shopping in a short period of time will minimize the potential impact on your credit score, if loan applications result in a hard pull.
  • Talk to local credit unions. While banks and online auto loan companies offer easy-to-use online tools, don’t forget to talk to your local credit union to see if it has a more competitive rate.
  • Beware of extra fees. Keep in mind you’ll need to pay state taxes and title fees. In addition, dealers may charge fees, including document fees, dealer preparation fees and delivery charges. These fees will affect your APR if you finance them into your loan.
  • Check your paperwork. Everyone makes mistakes. When you get the final copy of your auto loan, check to make sure you got everything you were promised and there are no extra fees.

How to apply for an auto loan

From choosing the right car to getting approved for financing, this article will walk you through the complete online car buying process.

When you apply for an auto loan, it will help to have your documentation ready. This will include proof of identity, proof of income, credit and banking history and proof of residence. If you’ve selected a vehicle, you also want that information, including VIN, mileage, year, make and model.

While many online lenders advertise the loan process as being quick, be prepared for roadblocks. Sometimes a lender may request additional information or take time to verify information, and that may delay the process.

Be proactive! Once you’ve started the auto loan process, the lender will walk you through what’s needed. But that doesn’t mean you have to wait for your lender to get back to you. If the loan process has stalled, make a call or send an email to your lender asking what’s needed. In many cases, you’ll have an online login that will allow you to see your loan status, or take the next step online.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Ralph Miller
Ralph Miller |

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

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17 Best Online Car Buying Sites for 2018

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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As soon as you get to a dealership, the pressure is on. There are ways to reduce the stress of buying a new car (we recommend getting preapproved for an auto loan before you go), but nowadays, you don’t even have to go to a dealership at all. Dozens of car-buying websites let you complete the whole process online.

To help you choose which auto site to use, we’ve rounded up the best online car buying sites out there — whether you want to do everything online, shop around for fun or just arm yourself with knowledge.

Best car buying sites for doing everything online

From your smartphone or computer browser, these three companies let you car shop, loan shop and order a vehicle to be delivered directly to you.

Carvana

Surf the Carvana website to get a car (and a car loan) delivered to your driveway with extremely minimal interaction with another person.

Pros: Carvana owns the cars it sells. The listings for each car are extensive, including 360-degree photos and a free Carfax report. Each vehicle has a seven-day return policy and a 100-day or 4,189-mile dealer warranty.

Cons: You don’t have the option to negotiate on price, and unlike peer-to-peer sites and dealerships, you can’t see or test-drive a car before you buy it. Delivery fees aren’t included and if you have a trade-in, you have to deliver it to one of their local markets.

Vroom

On Vroom, you can both buy and sell a car completely online. You can trade in your vehicle without needing an appraiser, and Vroom will even buy your car without requiring you to buy one of theirs.

Pros: Vroom only sells vehicles that pass multiple inspections and have clean titles. Photos, descriptions and a free AutoCheck vehicle history report are on each vehicle listing. All vehicles have a seven-day or 250-mile return period, as well as a 90-day or 6,000-mile complimentary warranty and one year of free 24/7 roadside assistance.

Cons: Vroom’s inventory is smaller than competitors, and the $499 delivery fee isn’t included in the car’s price.

Fair

Fair is an app that allows you to car-shop, secure financing and trade in your old vehicle, all online. But in a twist, you cannot actually buy a vehicle on Fair. Instead, the site offers a middle ground between renting and leasing. Prices are generally lower than renting a car, and the terms are shorter than your typical 36-month lease.

After you download the Fair app and get prequalified, you can browse the inventory and see the monthly payments and how many miles each car has. When you choose one, you’ll drive (and pay for) that car until you don’t want it. At that point, you can turn it in and get a new one that suits you.

Your monthly payment is similar to what you would pay on a loan if you had purchased the car. The vehicles Fair lists are described on its website as “high-quality, pre-owned and certified pre-owned,” under 5 years old with less than 70,000 miles on them.

Pros: Warranty, maintenance and roadside assistance are included in your monthly price. You are not billed in advance, and pricing is prorated if you swap in a car mid-month.

Cons: Your money never goes toward building equity and owning the vehicle.

Best peer-to-peer car buying sites

These sites facilitate private used car sales and generally don’t make many assurances about their condition or value. They can be great ways to find deals, but also expose the buyer to more risk.

Remember: No matter what site you find your next used car on, always perform due diligence — have a mechanic check the car to make sure it’s not a lemon. Many states do not protect used car buyers by excluding used cars, especially privately sold used cars, from falling under their lemon law. Check out our guides to how to avoid buying a lemon car and how to navigate a used car inspection to know what red flags to look for when you check out your potential new car.

Shift

This company helps buyers and sellers in the peer-to-peer auto market by doing much more than just providing a website with for-sale ads. Each car posted to Shift has passed a thorough mechanic inspection and a review of its vehicle history report. Each listing has professional photos and an expert description.

Shift allows you to do everything completely online if you wish. You can apply for financing through Shift and have the company handle the paperwork to transfer the title and vehicle registration. The company also can have the car delivered to you; however, if you live near one of the company’s seven California locations, you have the option to test drive a car with a Shift employee who takes the car to you and can answer any questions you may have.

Pros: Shift reduces the risk of buying from an independent seller. On the flip side, it makes being an independent seller easier, as buyers can more easily trust that the deal isn’t a scam and the car isn’t a lemon.

Cons: While you can have the car delivered anywhere in the U.S., the option to test-drive through their website service is only available at its seven California locations.

Craigslist

This is perhaps the most old-school car-buying website out there. Anyone can create a free car listing to sell their private vehicle, and each metro area has its own sub-website so you can browse locally. There are usually a lot of options and a large price range. However, Craigslist doesn’t offer a vetting process on the vehicle, and there are no seller profiles. — so this site is buy- and sell-at-your-own-risk.

Pros: If you are careful and knowledgeable, you could find good deals.

Cons: Craigslist potentially has a mix of honest sellers and people who are out to scam you, and telling the two apart can take some savvy. You can check out our guide to avoiding Craigslist car scams for more information.

Facebook Marketplace

Facebook allows its users to list for sale all manner of items and markets them to people in the surrounding area. This site offers a way to vet a seller and buyer more thoroughly than you could through other platforms. Most people use Facebook as a social media platform and as such, their profile is tied into their social lives; you can see any of their profile information that they make publicly available by following the link from the for-sale posting.

Pros: Depending on privacy settings, you may be able to see the buyer or seller’s profile. This can help you get an idea of whether the person wants to do an honest transaction or if the seller or buyer is actually just a profile shell built by someone trying to scam you or sell stolen goods.

Cons: The Facebook Marketplace may provide a more limited pool of listings or available buyers, since most people don’t think “Facebook” when they think of selling a car. In addition, used car dealers are starting to get in on the platform by creating Facebook business pages, making it less of a pure peer-to-peer site.

eBay Motors

On eBay, there are two ways of buying and selling a car: a fixed-price system and an auction system. The fixed-price method lets buyers shop listings with set prices, and the first person who clicks to buy the car gets it. In the auction system, the seller posts the vehicle with a minimum price and sets a time period to accept bids. When the time is up, the person who bid the most is announced as the winning buyer.

Pros: When buying on eBay, you get a Vehicle Purchase Protection (VPP) plan included at no additional cost. This protects you against certain losses associated with fraud. To qualify, your transaction must be made through eBay (not Western Union, Moneygram, or similar services.). The vehicle also has to be less than 10 years old and listed as having a clear title.

Cons: You don’t want to place bids on more than one vehicle. If your bid wins, you are usually contractually obligated to buy it. To avoid suddenly having to buy five cars and a truck, you’ll probably only want to bid on one thing at a time — which isn’t the most efficient thing to do if you need to buy a car quickly. If you want to retract a bid or cancel a winning bid, you can fill out a bid retraction form, talk to the seller or contact eBay customer service.

Best car-buying services

If the thought of negotiating gives you the chills, but you can’t find the car you want on an online-only site, consider a car-buying service. The range of services you can get from these companies varies widely. Some give you up-front information you can use to shop confidently; others offer a full-service program that delivers the car and the contract for you to sign to your door.

Be aware that many car-buying services focus on sticker price negotiation, not total cost. Dealers make the most profit not on the price of the car, but on the financing of the car — signing you up for a loan. One of the best ways to save money in car buying is to know what loan you qualify for and negotiate on the whole deal, not only the sticker price of the car.

TrueCar

TrueCar compiles and lists local prices on the type of car you want from their network of dealers, and tells you the price people recently paid for that same car. This information is offered for free and helps users know if they’re getting a fair deal on the car’s price.

The service is free to you because the dealerships pay TrueCar to be in its certified network; TrueCar makes its money by acting as a sales lead generation business.

Pros: Buyers can use TrueCar to see comprehensive pricing and communicate with certified dealers. The transparency of the TrueCar number helps push prices down overall.

Cons: As soon as you fill out the online form, expect calls and texts from a few dealers.

CarBargains

Run by the nonprofit company Consumers’ Checkbook, CarBargains charges $250 to collect bid prices from at least five dealers in your area on a certain type of car you’re looking for, making the dealers compete for your business.

Pros: Experienced people negotiate the car price for you, so you don’t have to sweat it. You won’t have to talk with salespeople or do the leg work of visiting different dealerships. Also, you’re paying directly for the service — CarBargains isn’t taking any commission from dealerships, so there’s less conflict of interest.

Cons: It’s a rather expensive service for what amounts to five phone calls and a free internet search. You could do the work yourself by researching listings and using free online guides like Kelley Blue Book or NADAguides to find the industry-standard value on what the cars are worth.

Authority Auto

Authority Auto offers more than car price negotiation help — it’s a true concierge service and offers as much or as little service as you’d like, from a free review of a final contract before you sign it to delivering a car and the contract for it to your door. Pricing is either commission-based, or potential customers can call for pricing.

Pros: There are multiple levels of service according to your needs. Authority Auto doesn’t take commissions from dealerships, so there’s less likely to be conflict of interest. Plus, some services they offer are commission-based on a percentage of what they save you, which motivates them to find you savings.

Cons: Authority Auto can take a big chunk of the money you save. If you choose to have them review your final contract before you sign it and they find savings of $4,000 or more, the total commission they take can go up to $2,000.

Best car-buying websites with mixed inventory

These sites pull postings of vehicles that match what you’re searching for from a multitude of other websites. These can be useful when you’re first starting your search.

CarGurus

If you’re not sure whether you want a new or a used car, or whether you want to get it from a dealership or another person — but you do know you want it to be red, check out CarGurus. It features new, certified pre-owned and used vehicles.

Pros: Once you find a car you like, you can sign up on the CarGurus app or by email for notifications letting you know if the price drops. Their search result page is prioritized by how well the car is priced under market value (excluding the sponsored listings at the top). It also has dealer ratings and links to a map with the car’s location and directions on how to get there.

Cons: You might have to scroll past sponsored listings at the top of your search results, since they may not match what you want. Vehicle history reports are summarized for free on each listing, but the full reports aren’t free.

AutoTempest

AutoTempest pulls search results from major used car sites like eBay, CarSoup, CarsDirect, Oodle, Craigslist and others. You can choose to see used cars from both dealers and private sellers, and you’re able to search in your local area or across the country.

Pros: Each search listing shows photos of the car, its price, mileage and location, options for a free vehicle history report and shipping quotes. It also has consumer education guides on price negotiation and how to avoid scams.

Cons: Because it pulls from so many sites, there isn’t a standard for quality of posts or any type of vetting — some leave a lot to be desired regarding information and photos.

Autotrader

Autotrader provides useful starting resources for car buyers, such as top 10 lists of new and used vehicles under certain price points. It’s also a search engine for used cars.

Pros: The auto research, reviews and tools are easy to understand and use. You can search by listing features, and filter search results by type of seller or whether the listing includes photos or a video.

Cons: The top results you get from each search are sponsored ads that may drastically differ from your search criteria, while on the resource page the regular car buyer may have to click around to find news that isn’t for car junkies.

Best websites for new car buying

While most car sites focus on used cars, there are a few that specialize in new cars. Here’s our favorite.

CarsDirect

CarsDirect doesn’t simply pull inventory postings from dealerships in your area: it keeps up-to-date on cash rebates, so you have a better idea of the actual sales price you would pay for a car.

Pros: Besides tracking cash rebates, CarsDirect has links to news and expert reviews about the car you’re looking at, right on that car’s result page. There is also a separate section with videos, how-to-choose articles and a “versus” section that will link you to similar competitor car models.

Cons: CarsDirect may not show results from all of the dealers in your area, so be sure to look around for prices. It also doesn’t track all rebates you may be able to get on a vehicle. You won’t find rebates based on credit or profession (military, educator or student discounts) and other new-car incentives the manufacturer or local dealer may offer aren’t given. You’ll have to visit the manufacturer’s website or a dealer for information on them, which may add up to be worth more than the cash incentives CarsDirect does track.

Industry standards

These three companies have been around the block and have established reputations for being among the best online car buying sites.

Kelley Blue Book

KBB first became famous as a guide for determining vehicle value, and now doubles as an online car buying site. It offers the slick feature of showing you inventory, prices and a vehicle’s fair market value in one place. It also has a four-star mobile app in the Google Play Store.

Pros: For each vehicle, you can see ratings from KBB experts and consumers, the car’s fair market value and the seller’s price, for easy comparison. The search filters are useful in a common-sense way; you can easily see who’s selling what for how much and how far away they are from you. If you’re selling your car, KBB also has an instant cash offer program.

Cons: Vehicle history reports aren’t free. If you click the “get a loan” button, remember still to shop around for your auto loan to make sure you get a good deal.

NADAguides

Similar to Kelley Blue Book, the National Automobile Dealers Association (NADA) guide functions as a source for you to determine what a car is worth. When you’re shopping, you can look for new or used vehicles to see what models and trims are available and their prices.

Pros: You can search by vehicle type, see current cash rebates on new cars in your area or use a comparison tool to put cars side-by-side.

Cons: While you can see car prices, NADAguides doesn’t offer direct listings on their site. Once you choose a vehicle, you’re sent to another site with the actual listing. If you’re interested in a new car, NADAguides will send you to a dealership; if you’re interested in a used car, it will send you to Autotrader.

Edmunds

Edmunds has direct listings posted on its site and a large number of reviews and road tests on new and used cars.

Pros: Each listing on the result page priced below market value has an icon showing if it is a fair, good or great deal.

Cons: Like most sites with used cars, there are some scam artists who post on Edmunds — so be careful if you see a vehicle that’s priced for less than half of what it’s worth. Some vehicle listings also require that you submit personal contact information to the seller in order to see the price — we don’t recommend doing that.

Methodology: In order to be chosen as a best online website, sites generally had to be easy to navigate as well as informative, but each company also had to meet the following qualifications:

  • It could not have its own brand of physical dealerships where consumers can visit and test drive vehicles.
  • Operations could not be limited to one state.
  • It has to sell regular consumer vehicles, not only company fleet vehicles or classic cars.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Jenn Jones
Jenn Jones |

Jenn Jones is a writer at MagnifyMoney. You can email Jenn at jennifer@magnifymoney.com

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Auto Loan

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

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

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

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How Often Can You Refinance Your Car Loan?

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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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

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

National Auto Lending Study

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.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

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

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Auto Loan

How to Handle an Upside-Down Car Loan

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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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.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Janet Berry-Johnson
Janet Berry-Johnson |

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

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