How To Lower Apr On Car Loan

How To Refinance A Car Loan

Are you interested in finding ways to reduce your monthly car payments and save on interest? Elgin Toyota has details about auto refinance and how this can be your best financial path. Learn how to refinance a car loan and more car buying tips in the Chicagoland area from our financial experts.

What Is The Average Apr For A Car Loan

When you search “average APR for car loan” you’ll be met with some statistics, but they mean nothing without an understanding of your own financial situation and how car loans work.

When you search “average APR for car loan” you’ll be met with some statistics, but they mean nothing without an understanding of your own financial situation and how car loans work. The average APR for a car loan for a new car for someone with excellent credit is 4.96 percent. The average APR for a car loan for a new car for someone with bad credit is 18.21 percent. So, there’s certainly a wide range of APR for car loans and it’s important to know where you’ll fit before starting the car buying process.

Shorten Your Repayment Term

You should try to take on the shortest repayment term you can afford with your budget because you’ll likely receive a lower interest rate. You’ll pay less per month with a longer repayment term, which may seem appealing, but keep in mind that you’ll cough up more in total interest because you’re spreading your payments over an extended period.

The best way to get a low interest rate on an auto loan is by doing your research and understanding what terms make the most sense given your budget and credit history.

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Some Background: Heres Why Your Car Loan Payment Is Too High To Begin With

If youre like most Americans, you were excited to buy a new car, to breathe in the new car smell . You asked your friends about how they liked their cars, you did 15 hours of online research, researching reliability and gas mileage and so on. You checked around with a number of car dealerships to see who had the right color and who would give you the best price.

Heres the problem: you probably didnt shop for a car loan. Over 70% of us get our car loans when were signing the paperwork in the back office of the car dealership. While this is convenient, it is a terrible idea. Why? Because the car dealer probably does not have your best interest in mind when arranging a loan for you.

The problem is getting worse. Car dealership profitability has shifted dramatically over the past 10 years. Car dealers used to make most of their money the way you would expect. They buy a car from the Ford or Toyota factory, and sell that car to you for a higher price. Simple and old fashioned. But over the last 10 years, the internet has created much greater price competition among dealers for your business. The result is that we as consumers do much better and car dealers earn less when they sell you a car. Thats good for you.

Why Refinance Your Car Loan

Most borrowers choose to refinance their car loan in order to pay less interest on a monthly basis. When you refinance an auto loan to a lower interest rate, you can save hundreds or even thousands in total interest over the life of the loan.

You may end up with a lower monthly payment, which will free up money you can use to pay off other loans. A lower payment will also reduce your debt-to-income ratio, which reflects your monthly debt payments divided by your monthly gross income. If youre planning to apply for a mortgage at some point, a low DTI could also help you qualify for a better interest rate.

Conversely, some borrowers choose to refinance their car loan to a shorter term so they can repay the loan faster. You can also refinance a car loan to a longer term, which can provide some wiggle room in your budget. Another reason to refinance could be if you first got the car loan with a co-signer and want to remove them from the loan.

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Come Up With More Money Down To Reduce Amount Borrowed

It’s not rocket science folks, the more money you borrow, the more interest you’ll pay. Always look for ways to put down more money on your car so you don’t have to borrow as much and you your monthly payments will be lower. Sell some expensive collectibles, comics, artwork or electronics. Whatever is lying around your house or in the attic or garage might have value. If you’re not using it, sell it and use the cash for your down payment.

We have always warned consumers to put down at least 20% on a new car to avoid being upside down on the car loan. We advise the minimum amount to put down on a car should be 20%. If you don’t have that amount to put down, then don’t buy the car until you do have the 20% to put down.

Trade In Your Car For A Lower

If you have positive equity in your vehicle, meaning your loan balance is less than the car is worth, you may be able to lower your monthly payment by trading it in for a less-expensive car.

Say you owe $5,000 on your auto loan and your vehicle is currently worth $8,000. Youd have $3,000 of equity that you could use as a down payment toward another car. A down payment reduces how much you need to borrow, and if you choose a more budget-friendly vehicle, you may be able to lower your monthly payments even more.

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Are You Unhappy With Your Current Auto Loan Maybe Its Time To Consider Refinancing

The principle behind auto loan refinancing is simple: You take on a new loan to pay off the balance on your existing auto loan. If youre struggling with a high interest rate or an unaffordable monthly payment, refinancing could be the key to finding better, more favorable terms.

Refinancing your auto loan could help lower your monthly payments by lengthening the term of your repayment. Or it could help you save money through a lower interest rate.

Your expected monthly payment would go down to $364, and youd pay a total of $1,830 in interest.

In this case, refinancing your auto loan would save you $23 per month and a whopping $1,366 over the remaining life of the loan.

The Bottom Line: An Auto Loans Apr Is More Important Than Its Interest Rate

Theres nothing wrong with knowing as much about your car loan as is humanly possible. Your bank balance will reflect how well-informed you are about any purchase you make, and buying a new or used car certainly isnt the time to skimp on details.

When comparing different loan offers from banks, lenders, and dealers, pay special attention to the APR of each. Though it helps to glance at the interest rate, too, the APR reigns supreme when it comes to choosing a loan that will make the most financially-viable decision for you and keep more of your hard-earned money in your pocket.

Ready to refinance your car loan?

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What To Know Before Applying For An Auto Loan

When looking for a car loan, it’s best to shop around with a few lenders before making your decision. Each lender has its own methodology when approving you for a loan and setting your interest rate and terms.

Generally, your credit score will make the biggest impact in the rates offered. The higher your credit score, the lower APR you’ll receive. Having a higher credit score may also allow you to take out a larger loan or access a broader selection of repayment terms. Choosing a longer repayment term will lower your monthly payments, although you’ll also pay more in interest overall.

If you’ve found a few lenders that you like, see if they offer preapproval going through this process will let you see which rates you qualify for without impacting your credit score.

How A Lower Monthly Payment Can Cost You More

One of the most important things to understand about how auto loans work is the relationship between the loan term and the interest you pay. A longer loan term can dramatically lower your monthly payment, but it also means you pay more in interest.

Consider a $25,000 car loan at a 3.00% APR and a 48-month term. Over 4 years of payments, youll pay $1,561 in total interest on the loan. If you extend that same loan to a 60-month term , youll lower your monthly payment by $104but youll increase the total interest you’ll pay from $1,561 to $1,953.

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How To Get Lower Interest On Car Finance

For those of you looking to purchase a car, there can be a variety of avenues you can go down to achieve that. One such way is through car finance and it is the most popular option available. It is easier than buying outright and more permanent than leasing a car. However, the APR on a finance package can put many would-be car owners off.

There are different ways of lowering the annual percentage rate on your finance package. These options include considering which lender you use, the type of car you wish to buy, how long you wish your term-length to be and what your credit rating is.

How And When Do I Pay Car Loan Interest

Lets say you take out a car loan for $12,000 to be paid back over five years at an interest rate of 10%. Your monthly payments for this loan would be $254.96. You can calculate the payment yourself using the following equation:

It is a common belief that over the 60 months of such a loan that the borrower would pay down the loan principal evenly as the graph below shows.

The above graph incorrectly depicts the loan being paid down by $200 per month until the balance reaches $0. This graph would imply that for each payment $54.96 goes towards paying interest, because $254.96 minus $200 is $54.96. Car loan interest does not work this way.

The correct payoff graph actually looks like the following.

Notice how the payoff curve is bowed so that it is less steep at the beginning of the loan than at the end. The reason that car loans behave this way is that monthly payments at the beginning of a car loan include more interest charge than the payments at the end of a car loan. Lets look more closely at why car loans work this way.

For the second months payment, you will pay a slightly smaller interest charge, because the first months payment will have paid down the principal by $154.96. So, the second payment will include $98.71 of interest charge , and will pay down the principal by $156.26 .

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How Does A Low Apr Save Me Money

A shorter loan term with a low APR is the best option for a financially beneficial car loan. The less time is spent paying off the loan, the less time there is for interest to accrue so a two to five year loan is ideal. Lenders also offer lower APR with shorter terms because the borrowers will take less time to repay the loan. A high APR paid even over a short loan term will quickly add up. Longer loans can provide lower monthly payments, but cost most in the long run.

A five-year loan at $28,800 with a 4.96 percent APR will accrue $3778 over the life of the loan. The same loan amount and term with an 11.93 percent APR will accrue $9577. For borrowers in the deep subprime credit ranking, that same loan amount and term with an APR of 23.81 percent will cost them $20,721 in interest over the life of the loan. Therefore, a low APR can save over $15,000 throughout the term of a car loan.

Surplus Payments And Part Payments

Redirecting any surplus amounts towards the repayment of your car loan will bring down the loan tenure, and consequently the interest, drastically. Periodically making a part prepayment of the car loan works very well in this regard. With Maruti Suzuki Smart Finance, you will get a clear understanding of foreclosure charges associated with each loan offer, so you can factor the same in your calculations and make an informed choice.

Find the most suitable financing for your car with Maruti Suzuki Smart Finances customised car loan solutions. Maruti Suzuki Smart Finance is the first-of-its-kind online end-to-end car financing solution by an Indian OEM. It is a smart online facilitator that enables quick and convenient car loan approvals. The easy-to-use interface ensures that you are able to find the right loan provider, calculate your EMI, look through customised loan options, avail exclusive offers, upload your documents, get them validated, and get the loan disbursed in a hassle-free and seamless process.

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Choose A Longer Loan Term

Opting for a longer loan term of 72 months or 84 months could help you reduce your monthly payments but youll end up paying more total interest. And when you stretch out your loan term, you may be charged higher rates, too.

Choosing a longer loan term also puts you at risk of becoming upside down on your loan. Your car could depreciate more quickly than you pay off your loan, and youd end up owing more than the car is worth.

How Can I Reduce My Interest Charges On My Auto Loan

Since your interest charge every month is based on how much you still owe on your loan, you can reduce your interest charges by making unscheduled payments that bring down your loan balance. When you make unscheduled payments, you are engaging in an accelerated car loan payoff which will reduce the total amount of interest charges you pay over the course of your loan and may help you pay back your loan faster than originally planned.

Paying a debt like a car loan early is generally a good thing, because you end up paying less interest charges. However, you should always consider your entire financial situation before choosing to make unscheduled payments. Obviously, you need to have the extra cash to make such a payment, but even if you do, you have to ask yourself if you have better uses for that extra money. For example, if you owe money on a credit card, then you are probably better off paying down that credit cards balance before making an unscheduled car loan payment. Ultimately, you should consider carefully if an accelerated payoff makes sense for you.

If you cannot afford to pay extra each month for your car loan, but would still like to pay less for your car in the long run and/or reduce your monthly payments, you may want to consider refinancing your car. If you refinance to a lower interest rate, you may pay significantly less for your car loan in the long-run and reduce your monthly payments.

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What Is Apr On A Car Loan

Unless youre paying cash for your new automobile, a car loan will likely be necessary. But a loan comes with a cost, as lenders charge interest on money borrowed. A loans APR reflects the interest charged by a lender, but it also takes into account certain fees associated with the loan. These fees are called prepaid finance charges and may vary widely between lenders, so watch for them.

One good example of a prepaid finance charge is an origination fee which some lenders may charge to cover costs associated with underwriting their loans, and/or to simply increase their fee income. This fee could be a lot or a little or may not be charged at all. Such fees are factored into the APR so you can compare the true, total cost of borrowing between different lenders.

Know Exactly What You Can Afford

While it’s important to take your time to find the best deals available, it’s crucial that you make sure your new car payment works for your budget.

To determine how much car you can afford, factor in all of the costs that come with buying and owning a car, including:

• Loan payments: This includes both the principal amount of the loan and its interest charges. Your loan amount will include your vehicle’s sales price as well as taxes, fees and add-ons like service contracts. What you’ll pay every month depends on your loan amount, loan term and interest rate.
• Auto insurance: A lot of factors go into deciding your insurance premiums, including the make, model, age and condition of your vehicle. Get a quote from an insurer to find out what to expect. In many states, your credit score is another factor that determines what you’ll pay for insurance.
• Maintenance and repairs: Every car requires maintenance and repairs over time, but the older the vehicle, the likelier it is that you’ll have these expenses on the regular. Buying an older car may save you upfront costs but you’ll have to plan for when things may go wrong.
• Fuel: Depending on how much time you spend behind the wheel and the fuel economy of your vehicle, run some numbers to determine how much you’ll be paying in gas.

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