Types of Loans Available

 

 

 

 

Simple Interest Loans

Is the best kind of auto loan you can get because it works like a credit card (only you can’t charge anything on it). 

  • If you decide to pay more than your regular monthly payment, you will see the difference going to your principal balance and not the interest.

  • The more money (even an extra 10 dollars a month) you pay monthly and the faster you pay your principal balance (even paying early can save you a lot of money in interest down the road. 

  • If you decide to refinance, you only refinance the principal balance not the interest.

Fixed Interest Loans  

Expect almost your whole monthly payment go towards paying off the interest first which means forget about refinancing or trading in your vehicle anytime soon. 

  • On a six-year car note, expect to pay at least 2-3 years before getting into a situation that you won’t be “upside down on your vehicle”.  In other words, you owe more on the car than what it is worth according to the Kelley Blue Book.    

Lease Buyout

It's a great idea if you only expect to keep the car for a couple of years and don’t plan driving around USA. 

  • You get a low monthly payment and if you planning to purchase that same vehicle would probably double your monthly payment.  Unless, it is a company paid vehicle then who cares or you own your own company which then you are to write it off on your taxes at the end of year.  

  • You do not own the vehicle and therefore you are required to purchase the highest insurance coverage available, which is 300/100/300.  Your monthly car insurance would probably double. 

  • Depending on the Lease Agreement you sign, the average amount of miles allowed per year is about 12,000 to 15,000 and anything over that amount if you decide to return your lease at the end of the agreement is very costly. 

  • Choosing a lease means keeping that vehicle for the full term of the agreement.  You are not able to refinance or what is called a lease buy out until the lease agreement expires.  At that time, if you decide to purchase the vehicle, you must find a bank to purchase the vehicle that requires certain stipulations to include good credit.  Returning the lease early requires, in most cases, a large penalty fee that can average a couple thousand dollars if you want to keep your credit in good standing.

Refinance

Why do people refinance their car loan?  If you want to lower your monthly payment or lower your interest rate and does not cost anything, it's a great idea for almost anyone. 

Typically, when you refinance, what you do is pay off the existing balance and then sign a new loan with new terms.  Before you even apply for auto refinancing, you can do the homework to see if it will work for you.  First, call your lender for a 10-day payoff on your vehicle.  Since interest accrues on a daily basis, the amount to pay off your vehicle also increases until you make your next payment.  The reason for getting a 10-day payoff is typically the lender who will be paying off the loan has time to cut the check and mail it to the lien holder.  If the lien holder receives the check before the 10-day grace period, there will be an overage check cut which then should be mailed to the person on the loan. 

Once you have the payoff amount, you now need to figure out the value of your vehicle.  The value of a vehicle can be found by consulting an auto industry-pricing guide such as NADA or Kelley Blue Book or by calling any bank or finance company that offer auto loans .  They will ask you what year, make, model, miles and an additional options on your vehicle.  Additional options can include:

  • AC

  • Tilt

  • Cruise Control

  • Power Windows

  • Power Door Locks

  • Tinted Windows

  • Premium AM/FM Stereo

  • Cassette

  • CD/6-CD disc changer 

  • Alloy/Premium Wheels 

  • Leather Seats

This is called the loan-to-value ratio or LTV a comparison of the loan amount to the value of the vehicle. For example, one bank may refinance up to 150% LTV and another may only do 125% LTV. You calculate this buy taking your payoff amount and dividing it by the wholesale bluebook value. Now, depending on the bank or finance company, their guidelines can differ.

For example:

Your lender gave you a 10-day pay off amount of $11,537.23 and the wholesale bluebook on your vehicle is $9,637.50. By dividing these 2 numbers, you will know the LTV which in this case I came up with 1.197..... which is 119% LTV.

Now, typically the lender will look at the year and miles of the vehicle to determine the term of your loan  they are willing to extend out to and the interest rate will obviously be determined by how you paid your existing car loan and your other bills that report to the credit bureau.

If you choose to refinance to get a lower interest rate, find out how many months you have left on your existing loan/  This will determine the term for you new loan unless you are struggling making your regular monthly payment and would like to lower your monthly payment.  However, it may end up doing more harm than good.  For example, if the total term of your loan was 48 months and you made  24 payments.  By refinancing, the bank may be able to give you the same term as your existing loan which is 48 months.  This will give you a much lower payment but in the long run even with a lower interest rate, you will end up paying a lot more.  Basically extending the term of the loan for 2 more years is also adding 2 more years of interest you will also be paying on.  Not only that, but your vehicle may start have mechanical problems as you are adding more miles on it.  

No, there is no certain required waiting period when it comes to refinancing. You may even refinance more than once in a matter of months.  However, typically with a customer that has bad credit is paying a much higher interest rate on a car loan might find that he won't be able to refinance for a couple years or more because he owes too much money on his current loan.  It is also the case if you try to trade your  vehicle into the dealership.  Since the dealership has to pay off your existing loan, they are at a loss unless they can sell you a vehicle that they purchased far below wholesale bluebook.  Then in turn will cover the difference of the LTV of your existing vehicle.  Since banks or lenders will only lend up to 110% LTV plus Tax, Title, License and Warranty.  Gap Insurance, Disability and Life Insurance can also be added however this is totally optional to you and may consider depending the kind of work you do.  You do need to consider how much your payment will increase by adding these as well.