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How To Lower The Interest Rate On Your Car Loan

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Getting Your Lowest Interest Rate

How To Refinance Your Car Loan to Lower Interest Rate (the BEST way) HINT: fix your credit

Getting the lowest auto loan rate you qualify for can take some work both before you hit the dealership, and after. To get the lowest possible auto loan rate for your situation, you need to have a combination of factors working in your favor.

It’s also up to you to do your homework on average interest rates, vehicles, and lenders to know what’s out there. Lastly, you have to know what you can negotiate, and how, in order to get a lower interest rate.

Can I Lower The Interest Rate On My Current Car Loan

If you already have a bad credit car loan, did you know that you could potentially lower your interest rate? Its true, you can do this by refinancing.

When you refinance, youre replacing your current loan with a new one. You can check with your current lender about refinancing, or you could apply with a different one. However, in order to refinance, you need to qualify for a new loan.

In most cases, your credit score needs to have improved since taking out your initial loan. In addition, your vehicle needs to qualify by meeting the lenders refinancing requirements this includes the cars age, mileage, current value, and total loan amount.

Is A Refi The Right Choice For Me

If you have a high interest rate on your car loan, and current market rates have dropped, you may want to consider refinancing. Interest rates are at near-historic lows right now, and you may qualify for a better rate.

Borrowers whose credit has improved significantly since they first took out the loan may also be eligible for a better rate. For example, if you had a bankruptcy or default fall off your credit report, your credit score may be much higher now.

If you can refinance with a co-signer or co-borrower, then you may receive better rates if you were the only borrower on the original loan.

Read Also: Usaa Car Loan Reviews

Can A Person With A Low Credit Score Buy A New Car

While you may enjoy driving your new car, you might not love your currently high interest rate. Many inexperienced car buyers, and buyers with poor credit, end up with a high interest rate at the time of purchase. Lowering the interest rate on your vehicle is possible, and it can save you a considerable amount of money over the life of your loan. You will need to find a lender or bank that can refinance your current auto loan with a lower interest rate and a better monthly payment.

TL DR

You can either refinance your current car loan with another lender or work with your current lender to reduce your interest rate.

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How to Get a Low Interest Car Loan

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Process Of Refinancing A Car

The process of refinancing vehicles is actually fairly straightforward. It works in a similar manner to the original purchase. However, unlike haggling about the value of the vehicle, you are locked into the cost associated with the original purchase. Essentially, the new lender buys your debt and then lends that amount to you, typically at a lower rate and with an improved term.

There is some key information to gather before taking the leap. Approach the lender and discuss the interest rates available, along with any fees you will be expected to pay. Find out if there are penalties associated with refinancing and learn what the term of the new loan will be. Determine whether the costs of refinancing, both immediate and over the long term. From there, you can decide if it is amenable to your financial situation.

The Bankrate Guide To Choosing The Best Auto Loans

Auto loans let you borrow the money you need to purchase a car. Since car loans are considered secured, they require you to use the automobile youre buying as collateral for the loan.

This is both good news and bad news. The fact that your loan is secured does put your car at risk of repossession if you dont repay the loan, but having collateral typically helps you qualify for lower interest rates and better auto loan terms.

Auto loans typically come with fixed interest rates and loan terms ranging from two to seven years, but its possible to negotiate different terms depending on your lender.

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At Bankrate, our mission is to empower you to make smarter financial decisions. Weve been comparing and surveying financial institutions for more than 40 years to help you find the right products for your situation. Our award-winning editorial team follows strict guidelines to ensure the content is not influenced by advertisers. Additionally, our content is thoroughly reported and vigorously edited to ensure accuracy.

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Capital One: Best For Convenience

Overview: Capital One will let you borrow as little as $4,000, but it requires you to purchase the car through one of its participating dealers. In a lot of ways, its financing works as a one-stop shop for your auto loan and vehicle purchase.

Perks: The Capital One Auto Navigator site lets you search for inventory in your area and gives you the ability to see how different makes, models and features will impact your monthly payment. This will give you a lot of information before you head to the dealer. Also, the quick prequalification allows you to check your rate through a soft inquiry, so your credit score wont be impacted.

What to watch out for: You can only use Capital One auto financing to shop at one of its participating dealerships, which makes this a poor option if you find a car you love elsewhere.

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How To Negotiate Lower Interest Rate

How to Get a Low Interest Rate on Your Car Loan

You can use any of the reasons we listed above about why a company might lower interest rates as a way to negotiate lower interest rates. Point out the interest rates a competitor offers. Explain how you cant make monthly payments at your current rate, offer to bundle other services with them, or as for a reward for consistent on-time payments.

Read Also: What Credit Score Is Needed For Usaa Auto Loan

Can I Get An Auto Loan With Bad Credit

It is possible to get a car loan with bad credit, although having bad credit will raise the rates you’re offered. If you’re having trouble getting approved or finding acceptable rates, try taking these steps:

  • Improve your credit: Before applying for an auto loan, pay down as much debt as you can and avoid opening new accounts, like credit cards.
  • Make a large down payment: Making a larger down payment will lower your monthly payment, but it could also help you qualify for better rates.
  • Consider a co-signer: A co-signer with good credit will take on some responsibility for your loan if you default, but they can also help you qualify.

Why Pay More Than Your Car Is Worth When You Can Pay Off Your Car Loan Early

About seven out of 10 people borrow money to buy their cars, and a car loan is one of the largestfinancial obligations you can have.

If youre one of them, you may have a loan that will take you 60 or 72 months to pay off.Thats five to six years! Thats too much interest to have to pay. So we want to help youget out from under that loan faster andsave money on interestby giving you 6 ways to pay off your car loan early.

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Option : Refinance To Lower Your Car Payment By Extending Your Term

For car loan terms, a shorter loan term means less interest paid over the life of a loan. However, lengthening your loan term can reduce your car payment every month, sometimes significantly. The car loan market is massive, with over one trillion dollars in loans outstanding. That means every kind of lender and investor is involved in the auto loan market. As a result, the variety of car loan terms available may surprise you. Loan terms extend all the way out to 84 months and beyond at the extreme.

Lets take a typical example. Assume you have a $25,000 principal loan balance and 50 months remaining on your car loan at a 5% interest rate. If you could refinance to a 60 month term at the same 5% interest rate, your monthly payment would drop from about $550 to $470. Thats $80 per month freed up in your budget. It is true that you will spend more in interest expense over the life of your new 60 month term, but there are times when that can make sense based on your other budgetary priorities.

What Happens If You Stop Paying Your Car Loan

Lower Your Monthly Payment

If you stop paying your car loan your lender will get in contact with you to discuss any issues youre having. If you still refuse to pay the loan, the lender will be forced to take drastic measures. If you have a secured car loan with the car as security, the lender may repossess your car to cover the cost of your loan. If you have an unsecured loan, the lender may take you to court to get their money back. In both cases, your credit score would likely drop significantly.

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Option : Refinance To Lower Your Car Payment With A Lower Interest Rate

If you have an existing car loan, the quickest way to lower your car payments is to refinance the loan to a better one. On average, you can reduce your interest rate by 2.4%. The interest rate you are paying, expressed as the Annual Percentage Rate or APR, is another way of describing how much a loan costs you. Why dont more of us look into refinancing our car loans? The answer is hiding in plain sight. Most of us do not know that we can refinance our car loans.

Although 2.4% sounds like a small number, it could add up to over $2,200 in savings over the life of your new loan. Thats nothing to sneeze at. The average car loan is about $32,000, and the average term is about 68 months . Lets assume you refinance five months after you bought your car. A 2.4% reduction in your interest rate would lower your car payment by over $30 per month. Multiply $30 by 64 months, and you save a total of $2,304. Now you can use that $2,304 to pay off some high cost credit card debt or take a vacation. Congrats!

Ways To Cut The Cost Of Your Car Loan

    With financial headwinds like rising gas prices, a slowly-recovering economy and continued job scarcity, reducing costs in every corner of our financial lives have become a necessity. Unfortunately, our cars aren’t concerned with our economic troubles. When they break down for the last time and we are forced to buy a new one, finding the best deal on financing becomes a necessity.

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    Simple Interest Car Loans

    Most auto loans are simple interest loans, which means that the amount of interest you pay each month is based on your loan balance on the day your payment is due. If you pay more than the minimum due, the interest you owe and your loan balance can decrease.

    On a simple interest loan, interest is front-loaded and amortized. With an amortized loan, part of your monthly car payment goes to the principal, which is the amount you borrowed, and part of your payment goes to the interest charges. Because the loan is front-loaded, a larger portion of each car loan payment applies to interest at the beginning of the loan term and at the end of the term more applies to the principal balance.

    For example, If you have a $25,000 car loan with a 48-month term and a 4% interest rate, youll pay an estimated $83 in interest and $481 in principal during the first month of the loan term. By the last month, youll only pay an estimated $2 in interest, and $563 will apply to the principal amount.

    How To Lower Auto Loan Interest Rates After Getting A Loan

    How to lower your interest rates

    Even after all your efforts, it’s still possible you won’t qualify for the interest rate you want. Fortunately, that doesn’t mean you’re stuck with a high interest rate for the entire term of your loan. If you can improve your credit score, you may be able to refinance your car loan with a different lender and score better terms.

    Here are a few actions you can take that will contribute to your overall creditworthiness:

    It’s not always easy to know when to refinance a car loan, but it’s generally best to consider it if your credit score has improved or interest rates have gone down since you took out the first loan.

    Again, as you go through this process, it’s a good idea to shop around and compare rates from multiple lenders. When you find the best deal for your situation and the lender approves the loan, it will pay off your original loan on your behalf.

    To give you an idea of your potential savings, let’s say you initially took out your car loan when your credit scores were much lower than they are now, and your $15,000 loan had a 15% interest rate and 60-month repayment termthat gives you a monthly payment of $357.

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    Send In Extra Principle In Your Monthly Car Payment

    Sending in extra principle has the effect of lowering your interest over the life of the loan.

    When I bought my first car, I was a very savvy buyer looking to save money on my financing in every nook and cranny I could squeeze a few incremental dollars out of. I sent in extra principal with my car loan payments, which accelerated the payoff on my car from 42 months down to 36 months.

    How do we do that? It’s all in the way mortgages and car loans work. In the early months of the loan you are paying almost no principle back and each monthly payment goes almost all to interest. But lucky for you folks, you can control this formula by forcing more principle down their throat with your monthly payments, which means you are paying the loan off sooner. Since you pay it off early, they don’t get to charge you all that interest anymore.

    When I first bought my house, I sent in $300 to $500 extra principle each month. Then, before you know it, I knocked over 10 years off the life of my loan and saved tens of thousands of dollars.

    There you have it, I bet you never thought you had so much control over the interest you will pay on your car loan. So remember, be patient and calm. If it takes a few more months, let it happen. Pay off all credit card balances if possible, finance online directly with lenders, refinance your existing car loans to lower rates, choose a shorter term auto loan and allow the lender to deduct your monthly payment directly from your bank.

    Does My Car Loan Qualify For A Refinance

    Auto lenders have rules on which cars are eligible for an auto loan refinance. Most lenders wont refinance a loan for a car with more than 100,000 miles or with a salvage title.

    The lender will also assess the cars value before approving a refinance request. If the value is too low, you wont qualify. The lender will calculate the cars loan-to-value ratio, which generally needs to be below 125% to qualify.

    Before you apply to refinance your car loan, determine the LTV ratio. To find the cars current value, use sites like Kelley Blue Book, Edmunds and NADAguides. Take the average from all three sites to find a general estimate.

    Calculating the LTV is simple. Divide the current loan balance by the cars value: the resulting percentage is the LTV. For example, lets say you have a $9,000 balance on a car worth $11,000. In this case, your LTV ratio would be 82%.

    But if the current balance is $15,000 and the car is only worth $10,000, your LTV would be 150%. This is much higher than what most lenders allow, so refinancing is likely impossible.

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    Refinancing A Car Loan During The Pandemic

    Consider these five factors before moving forward with a refinance:

    1. The interest rate on your loan. If the interest rate on your current car loan is higher than youd like, look around at different banks and credit unions to see what comparable lenders are charging. Getting a better interest rate is the main reason people refinance, as it means lower and more manageable monthly payments.

    Even if you can only reduce your car payment by just a bit, that small amount might be worth the effort and up-front expense. For example, lowering your car payment by just $25 per month when you have three years left on your loan can result in $900 of overall savings.

    2. The state of your credit scores. Your ability to secure a lower interest rate through refinancing depends on your credit history and credit scores. Therefore, you are in a good position to refinance if your credit has improved since you got your current auto loan. Refinancing can also help improve your credit scores if youre struggling to make your car payments on time and in full.

    If your credit has not improved since getting your original auto loan, you probably will not benefit from refinancing as its unlikely that youll qualify for a better interest rate.

    Additionally, its important to remember that a shorter loan term will mean that you increase the amount you pay each month, so make sure this additional expense is something youre prepared to cover in your monthly budget.

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