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Reasons you should Think about Refinancing your Car Loan

Even though many people are aware they can refinance their home loan, most people do not consider refinancing their auto loan. It is important to find auto loan refinancing as it can help you change your auto-financing situation. If one or more of the following represents your position, then refinancing may be worth thinking about.

Decreased interest rates

Over time, interest rates can fluctuate. If they have declined two points or more since you first obtained your auto financing, then you should consider refinancing to save a little each month.

Your credit score has increased

If you pay your auto finance payments (and your other bills) on time, your credit score can improve over time. When it does improve, you should think about trying to negotiate a better auto-financing rate with your lender. Because your credit score increased, you are not as high of a risk as you were before.

Your rate is simply too high

Does your rate seem too high? Is your rate making your auto finance loan too much for you to pay each month? By refinancing, you can lower your rate and start saving money on your monthly payments.

Your financial situation changes

Unexpected expenses or unemployment happen, and as a result, you need to take a closer look at your financial situation. Refinancing may help you get a better rate on your auto-financing loan, and you might find it easier to make your monthly car payments. Therefore, if your financial situation has changed, you should consider contacting your auto-financing lender. By doing this, you could be putting more money in your wallet.

Interest Rates and Credit Scores

When you shop for loans from various auto-financing companies, they mostly use your credit score to determine your interest rate. In addition to other personal documentation, auto-financing lenders will request your credit score. Your credit score helps auto financing companies to paint your financial picture. Your credit score mainly tells how risky it is to give you a loan. A high credit score means that a person is less dangerous to give a loan.

On average, these auto financing interest rates and credit score pairings are common:

•    850 – 740 credit score: 3.2% interest rate for auto financing loan

•    739 – 680 credit score: 4.5% interest rate for auto financing loan

•    680 and below credit score: 6.5-12.9% interest rate for auto financing loan

Your credit score needs to be in the 740 range if you want to be approved for an auto financing loan with a low-interest rate. You can still get auto financing if your credit score is in the high 600s. However, your interest rate will just be higher. Auto-finance companies consider you a "subprime" borrower if you have a credit score of 620 or below. You can still qualify for a subprime auto loan with a credit score of 620 or below—the loan will just have a higher interest rate. Subprime auto financing can help you mend your credit while helping you buy the car you need. You should check your credit score online before you visit a lender for auto financing. Checking ahead of time can ensure you are being offered the interest rate that is right for you.

How long is a typical auto loan?

Loans for new cars

For a new vehicle, the average auto-financing loan is around five years. Approximately, 20 percent of all auto finance loans are represented by six to seven-year terms. The average auto loan length has increased over time. However, interest rates have decreased over time.

Loans for used cars

For a used vehicle, the average auto-financing loan is around four to five years. Typically, auto-financing loans for used vehicles will require higher interest rates than the interest rates for new vehicles. Also, auto financers are not likely to offer seven-year loans on older vehicles. This is because a vehicle’s value decreases significantly by the time it is ten years old. Trade-in values are not good on older cars.

What loan works for you?

You must choose the loan that works for you and your financial situation. If you can afford it, you should go with the shortest auto loan. You will pay off your car loan sooner if you do this. But if you think that it will be hard for you to go with the shortest auto loan, you should not feel forced to make it work. Making your loan payment each month should be your priority. Making your payment every month helps your credit and could help you with future car loans.

Auto Loan Options: Dealerships, Bank Financing, and Credit Unions

When we buy a car, the auto financing part of the purchase can be overwhelming. You may see an ad with an auto-financing rate, but its small-print disclaimer explains that it is only applicable to qualifying customers. As these ads show, auto financing is not a one-size fit all process. Because we all have different credit histories and financial situations, it is important to consider your financing network of auto dealers, banking institutions, and credit unions.

Dealership Financing

Dealerships may offer incentives for financing auto loans through them. You should research these financing incentives, before deciding on a car or an auto financing company. Dealership financing may be appealing because it offers you an easy one-process shopping experience. It may be less stressful to secure financing at the dealership instead of worrying about going to another place to obtain financing. Evaluate what is important to you. While we all want to save money, you should be honest with yourself—what do you want your buying experience to entail? What will make you feel the least stressed?

Bank Financing

Your credit score is determined by using three different databases: Equifax, Transunion, and Experian. Your credit rating is typically determined by using an average of these three scores. Your credit rating score is called a FICO score, and it ranges from 300 to 850. 720 is considered an excellent score, 690 is considered a good score, 630 is considered an average score, and anything lower is considered a bad score. Most bank auto-financing advertisements are quoted for people with “good” credit scores. Further, there are essentially only two pieces to auto financing: (1) amount being financed and (2) interest rate. Other factors to consider when determining the monthly payment include your down payment and the length of the loan. These other factors are many times easily negotiated. Most of the banks in the U.S. offer auto financing, and they each have their auto financing rates and terms. Many times dealerships will have relationships with banks, but don’t let that stop you from looking into financing with banks outside of your dealer’s network.

Credit Union Options

Across the U.S. you can find around 6,500 credit unions that can provide auto loans. Because credit unions are membership-based, they typically have better interest rates. However, compared to banks, they do not offer as extensive of rewards and flexibility. Credit unions’ options may be limited. For example, they may only provide a single auto loan package with predefined terms. Also, many times, credit unions will serve a specific industry (e.g., educators and military). You could double your discounts if the dealership offers industry-specific discounts too.

Getting Pre-approved for an Auto Loan

To avoid the high auto financing rates that can come from dealer financing, you should try to get pre-approved for auto financing before car shopping. Doing so can also make your car buying process easier—car buying negotiations will go better if you know your budget ahead of time. Follow the steps below to get pre-approved for auto financing:

1. Know your credit score.

Access your credit report so you will know your credit score. This will give you a good idea of what financing rates you should expect to qualify for. You should also look closely at your credit score. Mistakes and fraud can happen. If something doesn’t look right, you need to get it taken care of as soon as possible. You could pay a higher interest rate for a mistake that is not your fault.

2. Shop around for the best rate.

Shop around for different rates. You should go to different banks and credit unions in your community to compare their various loan terms. Though, it is important to note, that generally, the best place to begin your auto financing search is usually at a financial institution you already go to. After you visit your bank or credit union, you can visit other places to compare rates.

3. Go to the dealership.

After you are pre-approved for auto financing, your lender will give you a "blank check.” This is a check that approves you for a set loan amount. The dealer means will finalize everything with your bank/credit union.

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