One major source of problems is when people buy a new car before the old one is paid off. With some auto loans, online lenders may offer to roll over the balance on the old loan. In order to make the loan affordable it is extended longer than a normal loan, often to seven or more years.
Rolling over a loan is already an expensive choice. The remaining balance on the first loan will charge the borrower interest over a longer period and cost more money. More importantly though, since the loan is for more than the car is worth, the borrower is in an "upside-down" situation. In the event of financial setback, the buyer can't sell the car to settle the debt.
This is made even worse when a couple of years later, the borrower decides to buy another new car, getting another rollover loan, falling deeper in debt, and making it harder to break the cycle.
Why Is This Crisis New?
In the past, repayment terms for car loans were 36 to 48 months and most owners kept their cars longer than the life of their loan. One driving force for this was the high rates on car loans, which peaked at 17.8% in the early 1980s and made people want short loans to minimize total interest payments. According to Comerica Bank, a company that tracks car prices in relation to median family income, cars were also less affordable so people had less incentive to buy cars often.
Today, with some rates on auto loans online falling to 5% or below, the cost of debt isn't as high. Buyers opt for long loans to get lower monthly payments or to buy more car than they can afford. The average auto loan term is over 5.3 years now, nearly half of loans are over six years, and the average size of car loans is forty percent higher than a decade ago.
In addition, car prices are lower compared to average income and people are replacing their cars more frequently than in the past.
Who Is To Blame?
The ease of shopping for auto loans online has given rise to a small community of disreputable lenders and brokers of the "take the money and run" variety. This has added to the problem but that doesn't mean that online car loans are dangerous. Many disreputable online and brick-and-mortar lenders are contributing to the crisis.
As with any internet or non-internet dealings, there are many reputable and honest lenders looking for your business. You have to be a smart shopper who takes the time to find an appropriate lender and who makes sure this loan makes good financial sense.
Nowadays, obtaining auto loans online has never been easier. Typically, you'll come across forms that are not only short, but simple too. If you're spending more than five or ten minutes filling in field after field, you're probably just wasting your time. Instead, it should take just a few minutes to submit the necessary information. Most lenders, especially the most qualified, will contact you within a matter of days, sometimes hours, to discuss your auto loan options. The same lenders will also have bad credit car loan options as well. So, whether you are a prime or sub-prime candidate, it shouldn't be too difficult to find a lender that can help.
Car loans work like this: First, you trade in your car for an agreed amount. Next, you make a down payment. And the difference between the sum of those and the price of your new automobile is the amount you will need to borrow for your car loan. Here's the oversimplified mathematical formula:
[(Total Price of Car) ? (Down Payment + Trade-in Value)] = Auto Loan Amount
With car loans, the Annual Percentage Rate, or APR is very important. Your monthly payments are a function of the interest rate and the length of the car loan. APR is designed to help you understand the car loan's entire cost, create a level playing field for lenders, and prevent them from advertising low rates and then hiding fees. The better your credit is, the lower the APR on your car loan will be.
Many car loans offer 60- or 72-Month loan periods, for smaller payments each month. Though lower payments may seem easier to manage, the interest paid over the financed period means you pay more, increasing the total cost of your car loan.
To better prepare for the car loan process, use an auto loan calculator ? you'll find them on major lending websites ? to estimate your payments based on a car's price, length of the car loan and interest rate. By testing different auto loan scenarios, you'll better understand what you are capable of handling.
If you're financing a used car loan, lenders may only approve it for a model up to 5 years old. The used car loans process is more restricted because much older cars are harder to resell. Some banks charge at least 2% higher APR on used car loans, than they do for new car loans. Though, many online auto loan providers today, offer better rates.
Whether it's a new or used car, however, applying for a bad credit car loan can be intimidating. But there are car loans for people with bad credit. Believe it or not, you can control interest rates by understanding your finances, your credit report, and all related costs. If a bad credit car loan is what you are looking for, request your credit report. This way you'll not only understand where you stand financially, but you can also fix blemishes to improve your rating and APR.
While the amount borrowed and interest rate are important parts of auto loans, look at other factors too. Your auto loan term and the fees you pay for credit checks are crucial. Fees and interest shouldn't exceed the total cost of the car.
If, in the end, you're not comfortable with the terms of any auto loan, consider leasing. This is a great alternative to auto loans, especially if you're battling with bad credit.
To increase your chances of being approved for an auto loan, do the following:
?Fix your credit report ? Correct mistakes and "charge offs" ?Pay attention to your credit score ? Know what APR you deserve ?Close old accounts ? Credit scores can suffer with them ?Understand the process of car loans ? Be prepared ?Utilize an auto loan calculator ? Test different APR scenarios
How Applications for Auto Loans Are Approved
Applications for auto loans are approved (or disapproved) through a standardized process that involves a lender closely reviewing a list of an individual's financial statistics to gauge their eligibility.
The following are those key factors. So before you apply for an auto loan, have a look at what lenders look at.
Income Your gross monthly income should be about $2000 per month or more.
Debt-to-Income Ratio It must be less than 50%. Calculate this ratio by dividing the sum of your total debt (e.g. car payments, credit card balances and unsecured loans; exclude mortgage or property debt) by the sum of your total income.
Credit Reports A credit report must exist in your name and all information on the auto loan application must match it. Remember to complete all fields on the auto loan application accurately ? with proper format and no typos. Most applications for auto loans are approved or declined automatically based on entered data.
FICO You must have a FICO credit score (Fair Isaac) of 540 or greater (sub prime), 600+ (near prime), and 680+ (prime lender). If you don't know your credit score, you should get a copy of your credit report.
Loan Amount A new or used auto loan is typically between $5,000 and $50,000, depending on the length of the auto loan period. If you need a car loan for less than $5000, it's wise to get a credit card, instead of approaching a lender.
Employment History Steady employment is preferable for an auto loan. If you're self-employed, proof of two years minimum employment history must be provided with tax returns.
Collateral Any vehicle that is offered is generally no more than seven model years old (as of January 1st of that year).
Vehicle Type The lending process is compounded if the automobile is a sports car, motorcycle, collector vehicle, hot rod, or similar type car. Some lenders are also particular with other vehicles such as SUVs and trucks.
State-by-State Some states have auto loan restrictions. As a result, some lenders do not offer all services therein.
Other Considerations ?Complete all fields on the loan application accurately with proper format and no typos. ?Be sure you work with the most trusted car loan lenders. Do your research by reading thorough reviews of only the most qualified companies. ?Apply for a car loan online. It is secure and fast.
The right loan can mean the difference between wasting money and saving money. Once you get started, you'll be one step closer to your new car!
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Both Christine Harrell & Colin Ayres are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.