Consumers often have many questions regarding auto loans, especially when applying for a first loan. Buying a car is a big investment and a big expense, yet many buyers don’t take the time to fully calculate the costs before signing on the dotted line. The auto loan lenders at Choice One Community Credit Union have put together a few frequently asked questions that may be of help if you’re considering a car loan.
Will a car loan help my credit rating?
The answer to this question is basically up to the individual borrower and how focused they are on making all payments on time. Making all payments on time can help while failing to make car payments on time can really hurt. When you first apply for a car loan, your credit report will have a hard inquiry, which may temporarily lower your score. The new debt added to your credit report may also initially cause a drop in your score. This is because there is no payment history attached to this new loan. On the positive side, once you start making those on-time auto loan payments, your credit score will increase.
It’s always important to remember that there are five different variables that determine your credit score. They include the following.
- Payment history – Do you make your payments on time all the time?
- Total debt – Your debt to credit ratio or how much you owe in proportion to your overall credit.
- Length of credit history
- Credit mix – What types of accounts do you have? Credit cards, installment loans, mortgages, etc. They all make up your credit mix.
- New credit – Have you recently applied for credit?
An auto loan will add to your credit history, so again, if you pay your loan on time every month, it will have a positive effect. In addition, adding an auto loan to the mix may improve your score even more, especially if you have no other installment loans. If you’re responsible with your auto loan, it should be positive for your credit score, it may just take a little time. Paying down other debt in advance of taking out a car loan will help you to lower your total debt. This can also help your score.
Can an auto loan be refinanced and if so, when is the right time to refinance?
Yes. When considering it, you just want to be sure refinancing advantageous to your financial situation. Here are a few scenarios in which it is smart to refinance your car loan. Interest rates dropped and you believe you can get a lower rate. You’re looking for a good opportunity to lower your monthly payment and save on your total interest paid. Your credit score dramatically improved and you feel you would be eligible for a better interest rate. They are all good reasons to refinance; you would just need to calculate the savings to see if the loan is really worth refinancing. Be sure to factor in any prepayment penalty for paying off your loan early. Saving money is usually the primary reason for refinancing, so you want to be sure you’re actually saving.
Perhaps your budget is in trouble and you need to lower that monthly payment. You can always refinance your loan for a longer term. It’s important to remember that although you’ll pay less each month, you will pay more over the life of the loan. If your current loan is almost paid off, refinancing may not be the best idea. When you’re considering refinancing, you’ll want to check your vehicle’s value to be sure you’re not upside down with a new loan. This simply means that you don’t owe more on the vehicle than what it’s worth. Cars depreciate quickly, so it’s something to watch out for. For more about refinancing an auto loan, read our blog “Four Reasons to Refinance Your Car Loan.”
Where’s the best place to get a car loan?
You can get an auto loan from many different sources, including banks, online lenders, dealerships, and of course, your local credit union. It’s always best to do a little research to look for the best rates and terms to best fit your needs. There are many pros to getting a car loan from a local credit union, such as Choice One Community Credit Union. We are a not for profit that exists for the benefit of our members. This includes providing lower interest rates on loans, lower fees than banks and also a focus on serving underserved communities. It’s always a good idea to include a credit union in your search for the best auto loan. It’s also smart to get pre-approved for a car loan before visiting a dealership. When borrowing through a dealer, the interest rate may be higher due to a markup for an increased profit. Pre-approval will also help you gain a bit more bargaining power when shopping for a vehicle. Be sure to check your credit score beforehand, so you’ll have an idea of the interest rate to expect. Remember, the better your score the better the rate you’ll be eligible for. You will also want to have an idea of what you could comfortably afford in the way of a monthly payment. Auto loan pre-approval can help determine this. Finally, when meeting with a lender ask if there are any prepayment penalties. Although this may not seem like a big deal, it is if you eventually decide you want to refinance your car. Ask about other fees as well, such as an origination fee.
If you’re in the market for a new vehicle can read more tips about purchasing a car on our blog on “Getting the Best Deal on that New Car.” Follow Choice One Community Credit Union on Facebook, Instagram, and Twitter to see more Q & A’s like this and other helpful information each week.