Should I Extend My Loan Term When Refinancing My Car Loan
When evaluating refinance offers, dont forget to compare loan terms in addition to interest rates. If you can, try to get a lower rate and keep the same loan term. That way you save both monthly and over the life of the new loan.
Depending on your cars age and how far you are into your current auto loan, your lender may or may not give you the option to lengthen your loan term. However, if you do decide to get a longer term, paying extra toward principal every month can keep you from going too far upside down on your loan.
Do the math to see how much youll be saving with each option provided.
Try Our Calculator For Yourself
If youve learned anything today, we hope its that its important to weigh all factors when buying a vehicle, either new or used. Our car financing calculator will be a great tool to help you plan your next vehicle purchase.
It can help determine how much money you want to put down . Based on how much your trade-in value is, it can be a great help when deciding what kind of term you want to choose. Note: some interest rates are term-specific, so even if your credit history says you can get 1.99% interest, for example, you may have to choose a certain term length in order to qualify for that interest rate.
How To Calculate Interest For A Car Loan
Interest serves as your fee for using money that isnt yours. Your monthly interest payments can be computed by first dividing the interest rate by how many payments youre making per year. Multiply this to the amount you still need to pay off. This will give you that specific months interest.
In our example earlier, calculating for the interest of your first monthly payment will require you to divide 8.4% by 12 and then multiplying that to your remaining balance of 30,000. This will give you 210 dollars that you need to pay on top of your monthly repayment amount.
Take this 210 and subtract it from your monthly payment of 532 dollars. This gives you 322 dollars which is the amount youve repaid from your total loan. Subtracting this from your total balance of 30,000 will give you your new balance of 29,678. If you made a down payment, then subtract that amount from the total cost before doing any of these computations. Car loan calculators can help you with the entire process if you find any of this confusing.
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Best For Bad Credit: Oportun
- Capped at 35.99%
- Minimum loan amount: $300
Opportun is our choice as the best for bad credit since it offers personal loans with limited credit score requirements and an easy online application, and funds available within 24 hours.
Wide range of credit situations accepted
Easy online application with instant approval
Pre-qualify with a soft credit check
Only available in 35 states
High interest rates
Having less-than-perfect credit shouldnt keep you from getting the car you need. While you shouldnt expect the low rates those with great credit receive, you can avoid overpaying with Oportun. Through this online lender, you can get a loan for a car that you purchase from an auto dealer or a private party. Since buying through a private party can be cheaper, this can save you big bucks over dealerships.
Oportun will lend to people with limited or no credit history. You should have proof of income to apply. Loan amounts can range from $300 to $10,000, so you can get the car you want. Best of all, Oportun does not require a hard credit check when prequalifying and checking rates. So, looking around wont hurt the score youre trying to fix. The application takes only a few minutes, is completely online, and results in an instant decision. If you live in one of the states where Oportun is available, this is an excellent choice.
How Many Years Should You Finance A New Or Used Car
Depending on multiple factors, such as , some consumers may qualify for financing of 84 months an eight-year term or more. The average loan term at the start of 2021 was 69 months for new and nearly 66 months for used vehicles, according to Experian data.
Short vs. long-term car loans
There are several things you should keep in mind when considering how many months you should finance your vehicle for. Increasing the car loan term is an effective way of getting an affordable monthly payment. While a low payment is always appealing, a longer car loan period typically comes with higher interest costs.
Consider someone who takes out a loan for $29,039 the average amount for a new SUV says Experian over 60 months with a four percent interest rate. Their monthly payment is $534.80 and they pay $3,048.84 in interest by the end of the contract. Extend the loan to 84 months and the car payment falls to $396.93, but the total interest charge is $4,302.99 an extra $1,254.15.
Theres also the increased risk of negative equity, when you owe more than the vehicle is worth. With a lengthy loan, for example, you might still be making payments on an older, high-mileage vehicle thats fallen greatly in value. Taking into account the average length of new vehicle ownership is nearly seven years, you could find yourself changing cars without enjoying the benefits of debt-free driving, or face trading in while upside down.
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Average Auto Loan Rates By Credit Score
The credit score sweet spot is 760 or above. Those with a lower credit score may have higher interest rates. Scores below 580 imply an individual has had debt defaults, bankruptcy, or they are frequently late with their monthly payments. Those with a credit score at 580 or lower may not be approved for a loan or their interest rates may be notably high. In the U.S., the national average for a 60 month loan is 4.21 percent. Additionally, the typical APR for auto loans is 3 percent to 10 percent.
Individuals with poor credit are more likely to have longer loan terms than those with good or excellent credit scores. Make sure you’re aware of the advantages and disadvantages of both long and short-term loans to ensure you get one that fits your budget.
When Will You Gain Equity
Another danger of taking a long-term loan out on a car is how long the vehicle will be underwater. Investopedia.com defines an underwater mortgage as a home purchase with a higher balance than the market value of the home. This is the same for underwater car loans, except the item in question is the car. Longer car loansand their higher interest ratesmean that those vehicles are underwater longer than cars with shorter loans. Once car payments catch up with the value of the vehicle, the difference between the current value of the car and the loan balance is called equity, or the portion of the car owned by the person paying it off. To help drivers improve their financial position, it is optimal for them to accrue equity as soon as possible.
The deciding factor in car loan length is ultimately how much you can afford to spend each month. While longer loans might not be ideal, these loans exist so that you can have access to the vehicle you need in order to get to work and purchase essentials. Before making your final decision, consider all of your options and pick the one that works best for you.
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Clark Howard: 42 Months Should Be Your Max Auto Loan
Clark Howard has long advised people that shorter is better when it comes to auto loan terms.
The longest auto loan you should ever take out is 42 months, Clark says. If you cant afford the payment on a 42-month loan, then you should buy a cheaper car.
Buying a cheaper car may mean having to buy a used car instead of a new vehicle. But you might be surprised how much car you can get for not too much money.
Lets take a look at the best used car bargains under $15,000, according to iSeeCars data:
Get A Copy Of Your Credit Score And Report
Before you start looking for a loan, check your credit score and credit report.
You can get your credit score free from several online sites. The score may not be the exact same score a lender uses, but it will be close.
Each of the three are required to provide one free credit report each year.
Look for any errors, outdated or false information, and dispute them. A quick way to improve your credit score and get a better interest rate on a car loan is to lower your credit utilization. That is the ratio of your credit card balance to your available credit. The less available credit you use, the better your score, so be sure to keep credit utilization below 30%. One quick and easy fix is to pay off your credit cards twice a month instead of at the end of your billing cycle.
Lets see how your credit score affects the interest rate youll be charged. Lets assume youre buying a $20,000 car with a 20% down payment, so you need a $16,000 loan over four years.
Here is what the average car loan interest rate by credit score looks like:Credit Score vs Loan Interest
The graph demonstrates the impact your FICO Score, the most widely used credit score, has on your interest rate, monthly payment and total cost. The exact same car can cost thousands of dollars more depending on your credit score.
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Loan Terms Impact Auto Loans
When it comes to loan terms for a given amount, the longer the loan, the lower the monthly payment. However, interest, which is the cost to borrow money, is charged on virtually all loans expressed as an annual percentage rate . Due to the way interest is charged, the longer your loan term is, the more expensive the loan becomes.
Lets look at an example:
If youre financing a $10,000 vehicle at an interest rate of 11% for 48 months, you pay a total of $12,406, with a monthly payment of approximately $258. If you finance that same loan for 72 months, your monthly payment drops to approximately $190, but the total cost to finance increases to $13,705.
With that in mind, you may wonder how to get a car for the lowest possible price. The overall cost of financing comes down to your interest rate. If you want to save money, you need the best interest rate you can find, which isnt always easy with bad credit.
Things To Consider Before Financing A Car
If its not already obvious, there is a lot to consider before financing a car. If you have poor credit, the list gets even longer and the options fewer.
Before making the decision to finance, consider all the factors and how they work for you. Important things to consider include interest rates, loan terms, credit pulls, rate shopping, gap insurance, taxes and fees.
Factors to consider:
- Interest rate. This depends on the term of the loan, type of car and your credit score.
- Loan terms. It can range from 24 to 84 months.
- Rate shopping. Apply for pre-approval from several lenders to see the rate options.
- Some lenders only work with specific dealerships.
- Down payment. Money you put toward buying the car that you dont finance. The bigger down payment, the less you have to borrow.
- Gap insurance. Insurance you buy from a dealer or bank that closed the gap between what you owe on the car and what the primary insurer thinks its worth.
- Funding: An offer for the maximum loan you can get at the best interest rate. It can go right into your bank account or be a certificate that goes to the dealer.
No matter what your financial situation, the goal should be to pay the lowest amount possible over the term of the loan. One common mantra is that a car isnt an investment. Keep that in mind. An investment makes you money. A car costs you money. You want to be in the best position possible, particularly if youre on a tight budget.
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Does It Matter How Long My Term Length Is
The longer the loan term, the lower the monthly payment. But, paying for longer than 60 months on your auto loan could leave you owing more than your car is worth.
Cars depreciate quickly, and if you’re paying for more than five years on an auto loan, your loan could end up in this situation, also called being “upside-down.” As auto loans increase in length, auto loan delinquencies tend to increase, too.
Auto Loan Payment Calculator Results Explained
To use the car loan calculator, enter a few details about the loan, including:
- Vehicle cost: The amount you want to borrow to buy the car. If you plan to make a down payment or trade-in, subtract that amount from the car’s price to determine the loan amount.
- Term: The amount of time you have to repay the loan. In general, the longer the term, the lower your monthly payment, but the higher the total interest paid will be. On the other hand, the shorter the term, the higher your monthly payment, and the lower the total interest paid will be.
- New/Used: Whether the car you want to buy is new or used. If you don’t know the interest rate, this can help determine the rate you’ll get .
- Interest rate: The cost to borrow the money, expressed as a percentage of the loan.
After you enter the details, the auto loan payment calculator automatically displays the results, including the dollar amounts for the:
- Total monthly payment: The amount you’ll pay each month for the duration of the loan. Some of each monthly payment goes toward paying down the principal, and part applies to interest.
- Total principal paid: The total amount of money you’ll borrow to buy the car.
- Total interest paid: The total amount of interest you’ll have paid over the life of the loan. In general, the longer you take to repay the loan, the more interest you pay overall. Add together the total principal paid and total interest paid to see the total overall cost of the car.
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Bank Of America: Top Choice For Bad Credit
Starting APR:2.29% for new vehicles, 2.49% for used vehiclesLoan amounts:$7,500 purchase minimum Loan terms: 12 to 75 monthsAvailability:50 statesMinimum credit score:580
Bank of America is one of the largest banks in the world, so its no wonder it offers a wide range of vehicle loan services. The Charlotte, North Carolina-based bank offers competitive rates to borrowers with a range of credit scores, with some of the best auto loan rates for people with less-than-ideal credit.
Rates start at 2.29% APR for new vehicles at Bank of America, which is about average for the industry. Unfortunately, the purchase minimum of $7,500 rules out using the company to finance some budget-friendly used vehicles. With loan terms limited to 12 to 75 months, Bank of America auto loans are slightly less flexible than some of the other providers we reviewed. The company does not have an option to allow you to get preapproved for a loan like some lenders do.
Buying Used Could Mean Higher Interest Rates
Buying a new car may be more expensive, all in all, than buying used. But, new and used auto loan interest rates are rather different, no matter your credit score. Based on Experian data, Insider calculated the difference between new and used interest rates. On average, used car financing costs about four percentage points more than new financing.
The gap between how much more a used car costs to finance narrows as credit scores increase, but even for the best credit scores, a used car will cost over 1% more to finance than a new car.
Used cars are more expensive to finance because they’re a higher risk. Used cars often have lower values, plus a bigger chance that they could be totaled in an accident and the financing company could lose money. That risk gets passed on in the form of higher interest rates, no matter the borrower’s credit score.
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Best Credit Union For Auto Loans: Consumers Credit Union
Consumers Credit Union
- As low as 2.24%
- Minimum loan amount: None
No minimum or maximum loan amount
Offers new, used, and refinance loans
Offers transparent rates and terms
Lowest rates require excellent credit
Membership in credit union is required
Consumers Credit Union offers auto loan rates to its members as low as 2.24% for new car loans up to 60 months. Like other credit unions, it requires membership, but it’s easy to join. You can become a member by paying a one-time $5 membership fee. There are no geographic or employer requirements.
CCU doesn’t have a minimum or maximum loan amount. Your loan is approved based on your credit score, credit report, and vehicle information. There’s also no minimum loan termyou submit a request based on what you need.
Generally, borrowers with excellent credit will qualify for the lowest rates from Consumers Credit Union. But even members who have less than excellent credit have access to discounts. There’s a 0.5% discount available for those who autopay from a CCU account. The discount falls to 0.25% for those who make automatic payments from an outside financial institution.