July 2, 2019
You can spend a lot of time wondering whether you can afford the car you really want. If you’ve already bought it, you might be worrying about how you’ll pay it off. Either can be a tough question, but at the heart of both are your loan lender’s terms and conditions.
If you’re thinking that you might need to refinance your car or that you’re ready to buy a new one, La Capitol wants to be sure that you know how to get the most out of your auto loan. In order for you to truly enjoy your new purchase, this loan has to work for you, not against you.
So here are a few tips you can use to make sure that yours will:
1. Dealership financing may not be your best option.
And it definitely doesn’t have to be your only option! Nearly every car dealership offers auto loan financing, with an F&I officer devoted to finance and insurance. However, dealerships don’t do the actual financing or insuring themselves. They act as brokers, matching buyers to their preferred lending institutions while tacking on a few percentage points for themselves.
Shop around for a financial institution that offers auto loans with better rates than your dealership’s preferred option. Setting up financing directly with your own lender can result in a more favorable interest rate and lower payments — and maybe even a bit of negotiation leverage, too.
2. A car’s value should correspond to the loan's balance throughout the term.
During negotiations, sales and lending strategies typically shift focus from the price of the car to how much you want your monthly payment to be. Salespeople will adjust monthly payment amounts while downplaying the fact that they’re extending the loan’s term to six or even seven years from the typical three to five.
Meanwhile, cars depreciate. If you decide you want to sell or trade your car, it might not be worth the amount you still owe. Ideally, a loan’s outstanding balance should match the car’s current value. If yours doesn’t, you might want to refinance your car loan to a shorter term, save hundreds in interest and apply more of your monthly payment to the principal.
3. A higher credit score can mean better loan terms.
Your credit score is a prime determinant in a lender’s offered terms and conditions. For example, a borrower with a nonprime score—between 601 and 660—may have to pay 7.52 percent interest on a new car loan or 10.34 percent on used while a borrower with a super prime score—between 781 and 850—may pay an average 3.68 percent interest on new car loans and 4.34 on used. On a $30,000 new car and a term of 60 months, the difference is a monthly payment of about $601 with $6,085 in total interest versus $548 with $2,890 in total interest—less than half the interest over the life of the loan.
If your current loan terms don’t match your new, improved credit score, you may want to get a better deal by refinancing.
4. Shopping around for the best deal is worth it.
You want the best interest rate you can get. Financial institutions are usually eager to quote their current rates. Just because you have a certain credit score, have a certain debt-to-income ratio or are borrowing a certain amount doesn’t mean that you’ll get the same offer from all of the lending institutions that you approach.
Researchers at MIT found that 54 percent of auto loan borrowers had more favorable terms available but didn’t know it. In short, not shopping around will almost always cost you more.
Make Your Loan Work for You
Our advice? Visit your local credit union, and see what they offer. Credit union rates are typically lower than what banks offer because they don’t function on a for-profit model — meaning better financial options and less fees for you.
Here at La Capitol, we finance both new and used car loans, and we do it better than the banks. Let us show you how we measure up to our own advice. Before you take out an auto loan to refinance your car or buy a new one, come see what La Cap can do for you.
We make loans to qualified creditworthy members.