Managing a Car Loan

Friday, August 5, 2011

Options for Refinancing a Car

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Refinancing your car loan offers the opportunity to lower your car payment or save money over the term of your loan. You may be able to lower your interest rate, change your loan term or provide a down payment to lower monthly payments. Before applying for a loan refinance, determine if the option is beneficial.

Apply for your refinance at any bank or credit union that offers car loans. Check interest rates before choosing your car loan provider. Many lenders advertise rates on their websites. Credit unions or nationally based lenders with a local presence likely exist in your area. Online lenders without local presence are also available. If you don't find used-car rates advertised on lender websites, call to verify. Some lenders may have term or down payment restrictions depending on the age and mileage of the vehicle you want to refinance.

You can change your loan term when you apply for refinancing. Most lenders offer a 24- to 72-month loan option, although rates increase for terms beyond 60 months. Because your balance has likely decreased over the term of your current loan, it should prove beneficial to obtain a shorter loan term; your payment should remain the same or decrease. Use an auto loan calculator to view monthly payment differences for rates and term options. Also, view your overall payback amount to determine which term is most beneficial.

You can offer a down payment toward your loan refinance, which decreases your monthly payment and overall loan payback amount. If you paid off half of your car loan with your current lender, you would not see a difference in monthly payment, although you would pay off your loan early. You may be required to provide a down payment if your current loan is relatively new. Most lenders offer 60 to 120 percent of vehicle value, based on credit rating and vehicle year, make, model, options and mileage.

If rates have decreased since your original loan, refinancing can save you money. If you didn't originally obtain a good rate on your current loan because you were unprepared, uninformed about rate options or had credit issues, you can save thousands if your credit has improved or your credit qualifies for a better rate. If you are experiencing financial hardship, you may want to pursue a loan that allows you to extend your term without necessarily lowering your rate. This way, you can lower your monthly payment even though your rate may cost you more in the long run.

Buying a New Car Vs. Old Car

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Various vehicle options exist for new or used car purchases that can suit your budget. Depending on the vehicle you choose, you may find that prices for new and used cars are somewhat competitive. Before pursuing a vehicle purchase, determine your vehicle needs and overall costs of ownership.

Research pricing, safety ratings, fuel economy, specifications and values at manufacturer websites for new cars. Use Edmunds.com or the Kelley Blue Book website to obtain used car information. You may find that a particular SUV costs over $30,000 brand new but only $20,000 if used. Manufacturers' websites also list any discounts or special rates. Also compare competitors' vehicles. For example, a Honda Civic may be priced higher than a Nissan Versa, although both offer comparable room and options.

Details for new-car warranties are advertised on manufacturer websites. Used-car information websites offer information on original factory warranty time periods. Even if a used car has had multiple owners, the factory warranty transfers to the car's new owner. Consider your vehicle's warranty, which can save you money if you need repairs. You can always purchase an extended warranty for a used car, although doing so adds money to your purchase price. Consider the total cost of a used car if purchasing an extended warranty to fairly assess cost differences between new or used options.

Leasing is available for new cars, which may prove beneficial if you traditionally trade out of your car every 3 years and don't drive more than 15,000 to 18,000 miles per year. Leasing allows you to drive a new vehicle under warranty, which you can return to the bank at the end of the contract term without concern for market value. Term and mileage restrictions apply. You are free to lease or finance a new vehicle once your contract is satisfied. Leasing options for used cars are rarely available, and if you can pursue the option, the payment is often more expensive than financing. If leasing a brand-new car, expect to pay less than a comparable finance.

Lenders require a full-coverage insurance policy during the term of your loan. Banks also require a lower deductible and higher bodily injury and property damage coverage than your state requires, which increases the cost of your insurance. Leasing banks often require you to purchase gap insurance, which pays for the difference between the vehicle's payoff balance and insurance payout amount in the event of a loss. Talk to your insurance agent to determine cost differences for any vehicles you're considering.

Borrowed Car Agreement

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Borrowed-car agreements are used frequently at car dealerships to allow prospective car buyers the option of borrowing the car they are contemplating purchasing. The agreement allows the buyer to borrow the vehicle for a specified period.

A person deciding to purchase a car may ask the dealer if it offers borrowed-car agreements. Such an arrangement allows a person to take a car home for the night or for a specified amount of hours. This time allows the buyer to decide if the car is something that is really needed and suitable for this person's needs.

A borrowed-car agreement states the customer's name, address, insurance company name, insurance policy number and the customer's driver's license number. It lists the vehicle's description and Vehicle Identification Number. It outlines the agreement between the dealer and the customer and lists fees if the contract is violated. A car inspection form is completed by the borrower and the borrower then signs the contract.

Borrowed-car agreements allow customers to avoid buyer's remorse, the syndrome people feel after making an impulse purchase. This also gives the customer time to negotiate prices and get a feel of the vehicle.

Does Paying Off an Auto Loan Earlier Improve One's Credit Score?

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Credit bureaus use five distinct categories to determine your credit score, which lenders use to determine your creditworthiness. Payment history, outstanding debt, length of credit history, new credit applications and types of credit are the five categories that determine consumer credit scores, and some categories carry more weight than others. The benefit of paying off debts such as car loans ahead of the amortization schedule depends on the other type of credit accounts you have and the amount of money you owe on those accounts.

The length of credit history and your payment history combined account for 50 percent of your credit score. Making timely payments on your credit accounts is a key factor to boosting your credit score. In addition, continuing to pay long established counts not only shows that you have a good payment history for specific loans, but this shows that you have a track record of making timely payments across the board for all of your debts. So, if your car loan is one of your oldest credit accounts, paying of the loan will cause this portion of your credit score to decrease.

The type of credit or loan account you own make up 10 percent of your credit score. Banks and credit bureaus not only like to see a stellar payment history, but they also look for varied types of credit accounts. The reason being, if you can pay varying types of loans in a timely manner, this shows that you can handle all of your bills responsibly. Because car loans are paid in monthly installments, similar to mortgage loans, these accounts are considered installment accounts. If the only other type of debts you owe are non-installment accounts, paying off your car loan early could lead to a dip in your credit score.

The outstanding amount of money you owe on credit accounts makes up 30 percent of your credit score. For this portion of your credit score, scoring models tend to assess how much you owe on a particular account in comparison with the account's credit limit. Since you can't borrow against your car loan continuously like a credit card, paying off your car loan early could boost this portion of your credit rating, especially if your total outstanding debt is considerably high.

If your car is old or in poor condition, or your car loan is your highest interest loan, paying of the debt early will help you save money. Using extra money to pay off your car loan early is comparable to investing the money at an interest rate similar to your car loan. In addition, paying off your car loan early can help you reduce the amount of insurance coverage required on for your car, saving you even more money. However, if you must pay your car loan off early, wait 12 to 24 months to capitalize on the credit amount on the account.

How to Add a Lien Holder to a Certificate of Title

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A title to a car can be corrected or another lienholder added fairly easily in most states. Usually, the owner of the vehicle does not add the additional lienholder; instead the person who holds the lien will file it with the state. However, if a lienholder was omitted from the original title, the vehicle owner may have to file the amendment. It's important to get the correct forms for adding a new lienholder on your vehicle's title and to make sure the new title is clear about ownership.

Instructions

Contact your state's department of motor vehicles and ask for the appropriate form for amending a title. Alternatively, you can visit the department's website and download the appropriate form.

Fill out the form completely. In Massachusetts, a Title Amendment Form is required and must include the registration number of the vehicle as well as the year, make and vehicle identification number. Include the original title number and the contact information for the vehicle owner.

Add the name of the additional lienholder, their code, if applicable in your state, the date of the lien and the address of the lienholder.

Provide the address to which a new copy of the title must be sent.

Fill out another title application if your state requires it, as in Texas.

Attach the original title to the form and either mail them into the motor vehicle department at the address indicated on the form or bring it into a branch in person.

Pay the appropriate fee to add the lien holder. In Massachusetts, this is $25 and in Texas it's $33. Check with your state to find the correct fee amount.

Auto Refinance Options

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You have several options available to you when refinancing your loan. You can ask your lender for lower rates and loan incentives and you can alter your loan term and provide a down payment. Before you apply for a car loan refinance, determine which loan factors you can change to obtain a more affordable loan.

To refinance your car loan, you can choose whichever lender you'd like. Rates vary for used car loans, so check websites of local and online auto loan providers or credit unions. If you choose a local bank, you may want to choose one with incentives for banking or holding a checking account; most banks require borrowers to open a checking account to initiate a loan. Look for incentives like an automatic monthly payment option; some lenders offer up to a one-point interest rate deduction.

You don't have to apply for the same term that you have left on your auto loan. You can increase your loan term to lower your car payment if necessary. If you can obtain a significantly lower rate than you currently have, you may be able to shorten your loan term and pay the same or less of a monthly payment. Shortening your loan term also results in a decrease in your overall loan payback amount, which is worth consideration if you don't plan to pay off your loan early.

If you have extra money to put toward your refinance, do so to lower your payment and overall loan payback amount. Every $1,000 you offer toward your down payment results in roughly a $20 monthly payment discount per month. Use an auto loan calculator to determine the differences a down payment makes to your monthly payment and loan payback amount. Edmunds.com offers several free calculators. You may find that a several thousand dollar down payment allows you to decrease your term while still providing an affordable payment.

Your auto loan provider may approve your loan but restrict your options. If your vehicle's value is less than your requested loan amount, you may not obtain an approval for the amount for which you apply. In this event, your lender will require a down payment. If your credit has suffered since your original loan, you may find that the lender restricts your term or raises your rate, which effects your monthly car payment. Based on your current credit or vehicle value, it may prove beneficial to keep your current loan and refinance at a later date.

How to Renegotiate Auto Financing

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There are two options for financing an automobile: Purchase financing in which the consumer takes out a loan to purchase the vehicle, and lease financing, where the consumer leases the vehicle for a predetermined term. In the former instance, the consumer incurs the depreciation of the vehicle and must cover any repairs or maintenance not included in the purchase--while in the latter, a consumer is shielded from depreciation, and leasing often includes maintenance but has limitations on mileage.

In either case, a consumer may renegotiate their form of financing by requesting a change of terms, temporary suspension of payments, or both.

Instructions

Determine the value of the vehicle. The value of a vehicle can be determined by visiting auto value websites or by reading schedule books that establish value based on make, model, year, mileage, condition and ratings comparability to class and trim models.

Because cars always decrease in value through wear and tear depreciation, the vehicle will not be worth the price you originally negotiated before securing purchase financing or lease financing. In the event you cannot successfully renegotiate the financing, selling the vehicle may be an option.

Contact the lender. Lenders should be contacted as soon as the vehicle owner is aware that present or near future circumstances will not allow them to keep current on their lease or auto loan. (Consumers should note that most lease or purchase financing institutions will not renegotiate a lease or auto loan that is current but will have options once payments fall in arrears.)

Renegotiate the financing. Your lender may have options for accommodating your particular situation. Most financing institutions have "hardship" option that allows a lessee or borrower to miss up to three payments and defer those payments to the end of the financing term. For leased vehicles, a "market adjustment" option might be available. In instances where a lease was recently taken and the market fluctuates downward, the lease financier can readjust the lease amount to be in-line with the new market value. Another option may be to extend the term of the lease or finance loan. Extending the term will mean a longer commitment, but will also lower the monthly obligation of the consumer.

Refinance the vehicle or terminate the lease early. Purchase finance consumers should seek to refinance the vehicle for a better interest rate, thereby lowering their monthly payment obligation. Lease consumers may inquire as to early lease termination. Early lease termination will include early termination fees and may also appear as a repossession on the consumer's credit report because it is a form of repossession.