What credit score do I need to refinance my auto loan?

It’s one of the most common questions among car owners who are thinking of refinancing. What credit score do I need to refinance my auto loan these days? In truth, there is no single cutoff point for credit scores. It will depend on the lender you’re using, the amount you currently owe on the auto loan, and other factors.

With that being said, a higher credit score will help you in two ways. First, it will help you get approved for an auto refinance loan. Secondly, it will help you get a good interest rate on the new loan — and this is the key to refinancing success. If you can get a lower rate without changing the other terms of the loan, you’ll lower your monthly payments. Depending on your current rate, you might save $100 per month, or more. That’s why it’s so important to have a good credit score when you refinance your auto loan.

Credit Score Requirements for Refinancing a Car Loan

It’s just not possible for me to throw out some arbitrary number and say, “This is the credit score you need if you want to refinance your car.” There are too many variables. Lenders have different standards when it comes to approving loans, and also when it comes to assigning the interest rate. But here’s some food for thought:

• The credit score you need to refinance your auto loan will vary, based on several factors. Getting approved is only one side of the whole picture. You also need to get a low enough interest rate to make refinancing worthwhile.
• You can quotes online these days, which is a quick and easy way to comparison shop. It’s also the only true way to find out if your credit score is good enough for a refi. In other words, you should go straight to the source to find out where you stand.
• You might want to use a credit union when refinancing. Generally speaking, they offer better interest rates and more flexible terms than a traditional “bank” lender. You might have a better chance of getting approved, as well.
• According to Kathleen Pender, business writer for the San Francisco Chronicle, you’ll need a higher credit score to do a cash-out refi (where the lender gives you more money than the car is worth). In September 2010, the average FICO score for cash-out auto refinance loans was 697. (”Car-loan refinance can save money,” October 24, 2010)
• It’s easier to refinance an auto loan than a home mortgage loan. The credit requirements are lower as well. So keep this in mind when you continue your research. If you see an article that talks about the credit score needed to refinance a mortgage, it doesn’t really apply to your situation. They’re apples and oranges.

You’ll Pay a Higher Interest Rate

Scenario A: Here’s a real-world scenario based on data reported by Informa Research Services. Let’s say that I take out a 3-year / 36-month car loan for $20,000. I have a FICO credit score of 740, so the financing company gives me a pretty good rate on the loan. They assign an interest rate of 5.19 percent. Based on this, my monthly payments would be about $600 a month.

Scenario B: Now let’s assume I got the same car loan, but with a lower credit score of 595. This time around, the lender assigns a higher interest rate of 18.13 percent. My monthly payment would now be $724 per month. The loan amount hasn’t changed — but the higher rate has increased my payment by $124 a month. These are realistic numbers, by the way.

This article was born from a reader’s question: “What credit score do I need to refinance my auto loan in the current economy?” Please note that this article contains general information for educational purposes only. We cannot tell you whether or not you’re qualified for a refi loan. You’ll need to speak to a lender about that. They all have different standards and limits.

Should I Buy a New Car or a Used Car?

So you’re in the market to buy a car, and you’re wondering whether you should buy a new car or used car. There are pros and cons to both sides of this decision, and that’s what we are going to talk about today. After reading this article, you’ll have an easier time deciding whether to buy new or used.

There are many sides to this argument. But in order to keep things simple, we are going to focus on the most significant pros and cons. Let’s start by talking about the advantages of buying a new car.

Advantages of Buying a New Car

On the surface, there are plenty of benefits of buying a new car instead of a used one. You know that the car will probably be in better shape, it will be shinier, etc. But we’re going to focus on more practical matters. Here are some of the key advantages to purchasing a new car instead of a used one:

Better Safety Features

When you compare a new car to a comparable older model, you will almost always find better safety features on the newer model. The reasons for this are somewhat obvious. Safety features evolve over time. Modern cars are much safer than the vehicles we drove 20 years ago. So this is one of the obvious advantages of buying a new car instead of use one. A newer vehicle will have a number of safety features that may not be installed on an older one. These features may include airbags, integrated child seats, structural reinforcements within the body of the car, etc.

Technological Advancements And Performance

As with safety features, the overall technology and performance of the vehicle will improve over time. So a new car will generally have better technology and performance than a comparable older model. New cars are typically equipped with more responsive steering, better suspension, improved fuel consumption and other important features. In short, a new car will generally run better and last longer than a comparable order model. The new car may require less maintenance as well.

Warranty Protection

Almost every new car comes with some form of warranty protection. The period of coverage varies, but it’s usually around three years. This gives you the peace of mind of knowing you won’t have to pay out-of-pocket for factory defects and malfunctions. In fact, if you buy a new car direct from a dealer, you can rest assured that almost everything is covered from one bumper to the other.

Some used cars come with limited warranties, but they’re rarely as extensive as the warranty on a new car. This is why many people choose to lease cars instead of buying them. They enjoy the comfort of knowing that the vehicle is always protected by warranty. If you enjoy this kind of warranty protection, it might be better to buy a new car than a used one.

Advantages of Buying a Used Vehicle

If you only read the first part of this article, you might think there are no advantages to buying a used car. But that is simply not the case. There are certain benefits to buying a used vehicle, and that’s what were going to talk about next:

Used Cars Are Generally a Better Value

The average price of a used car is several thousand dollars less than the average cost of a new car. Depreciation is the most obvious reason for this difference. Even if the used car is only a couple of years old, you will pay a lot less for it than you will a comparable model that is brand-new.

Lower Ownership and Operating Cost

I once read a statistic on the Consumer Federation of America website that said buying a used car can reduce your ownership and operating expenses by approximately 50%. There are many reasons for this. The fees you pay for licensing and registration are generally higher for new cars than they are for used cars. The same goes for insurance premiums. Additionally, the used car does not come with all of those “dealer prep” charges and shipping fees.

And then there’s the depreciation factor. When you buy a new car, it could appreciate by as much as 30% as soon as you drive it off the lot. While a used car depreciates as well, it does so at a much slower rate (the initial “hit” of depreciation has already happened on a used car).

These are some of the factors to consider when deciding whether to buy a new or used car. These are not the only considerations you should make, but they are some of the most important ones. Elsewhere on this website, you can find more information to help you answer that all-important question: Should I buy a used car or a new one?

How Much Does Car Insurance Cost on Average?

How much does car insurance costs and what can I do to lower the cost of my policy? This is a common question among insurance shoppers, and it’s the topic of today’s blog post.

According to the National Association Of Insurance Commissioners, the average cost of car insurance in the United States is about $880 per year. This is mostly for the premium, however. When you factor in the deductibles, the cost of insurance is much greater — and also harder to track. As you may know from previous lessons here on our website, the premium is the amount that you pay month after month regardless of any claims you may or may not file. So, from an average cost standpoint, the premium is the most important factor.

So that answers the question, how much does car insurance cost? Now let’s talk about some of the things that may affect the cost of your policy.

8 Factors that Determine the Cost of Car Insurance

First of all, it’s important to realize that every insurance company is different. As a result, they all have their own internal methods for determining the cost of a car insurance policy. With that being said, there are certain factors that are common across all companies, and those are the ones I’ve listed below.

1. Types of coverage — I’ve explained the different parts of an auto insurance policy in another article on this blog. Obviously, these have a big influence on the total cost of coverage. For example, one policy that includes uninsured motorist coverage will cost more than another policy that doesn’t include that component.
2. Type of vehicle — This is another one of the major factors that will influence the cost of your car insurance policy. A convertible sports car, for example, is going to cost you a lot more in monthly premiums than a four-door family sedan. The type of car says a lot about the person who drives it, and insurance companies have known this for a long time. So they will adjust the cost of your policy based on the type of vehicle you drive.
3. Driving habits — How often will you be driving your vehicle, and where will you drive on a regular basis? These are questions your insurance company will want to know, and the answers to these questions will partly determine the cost of your car insurance coverage. For example, if you drive on a daily basis through congested areas with a high rate of accidents, your coverage will cost more than somebody who works at home and only drives to the store and back.
4. Your age – It’s probably no surprise to you that drivers under the age of 20 have a higher rate of accidents than most other age groups. Because of this, the cost of insurance is higher for teenagers than it is for adults. Statistically speaking, we start as bad drivers, then we get better, and then we get worse again. Drivers between the age of 50 and 65 have a lower accident rate than most other age groups. But after 65, the accident rates start to go up again. The cost of insurance premiums rise and fall in relation to these accident rates.
5. Marital status — Accident statistics show that married drivers have fewer accidents than singles do. As a result most insurance companies will discount the cost of coverage for married people.
6. Your gender — Guess what guys? On average, we pay higher insurance premiums than women do. That’s because statistics show that women are safer drivers than men. This gender difference is reflected in the cost of your policy.
7. Credit score — In the past, this did not influence the overall cost of an insurance policy very much. But with each passing year, more and more insurance companies are using consumer credit scores to help determine the cost of an insurance policy. Personally, I don’t think the two things are related. But insurers don’t see it this way. Some states restrict this practice, preventing insurance companies from using credit scores as a pricing consideration. But these states are few and far between. Most states allow the practice, and an increasing number of insurers are using credit scores.
8. Driving record — This is probably something you’re most familiar with. Obviously, the way you drive your car will determine the cost of your insurance coverage. If you have a long and safe driving record behind you, you’ll get breaks on your monthly premiums. On the other hand, if you have a history of accidents and other negligent behavior, the insurance company is going to charge you more — if they cover you at all.

So these are some of the main factors that influence the costs of car insurance in the United States. As mentioned earlier, the average driver in this country can expect to pay somewhere around $880 per year for auto insurance coverage. But remember, this is only the premium cost — it doesn’t include the deductibles drivers pay in the event of an accident.

Related article: Car insurance for a 16-year-old driver

How Much Will My Insurance Policy Cost Me?

Everything I just told you is somewhat theoretical. These are the average costs of a car insurance policy, and the various factors that influence them. But there’s only one way to find out how much your policy is going to cost you — and that’s to get quotes from car insurance companies.

I hope you found this article helpful, and I wish you well in your shopping efforts.

The Different Types of Auto Insurance

In this lesson, I’d like to talk to you about the different types of auto insurance that are available to you, in the hopes of making your life easier. Auto insurance confuses a lot of people, because there are actually multiple components that are combined under a single auto insurance policy. Once you understand the concept of these different components being combined into one policy, the whole process begins to make more sense.

It’s also possible to customize each individual part of an auto insurance policy, which lets you tailor the coverage to your particular needs. So let’s talk about the different types of auto insurance that might make up a policy.

The Primary Types of Insurance

These are terms that you’ll encounter a lot when you’re shopping for coverage, so it’s important to understand how each one works and how it applies to you as the driver.

1. Liability Insurance

Liability coverage is the main part of any auto insurance policy. Basically, this coverage protects you in the event that you cause damage or injury to another person, or that person’s vehicle. For example, if you’re involved in an accident and found to be the one at fault, liability insurance would pay for any car damage or bodily injury to the other driver involved in the accident. This is a big deal, because people can actually sue you for your other assets if you cause them harm in an accident.

Liability insurance is actually a requirement in most states. There’s a good reason for this — it’s a way to protect innocent victims against the actions of another driver. The two components of liability are bodily injury and property damage. You can probably guess what these individual components cover, simply based on their names.

Most insurance companies will describe the level of liability protection as a series of three numbers. For example, you might have a policy with a 40,000/80,000/40,000 type of liability coverage. What does this mean? Well, the first number represents the bodily injury coverage that we talked about earlier. So if you cause an accident, and that accident results in the bodily injury of another person, the first number dictates how much coverage you’ll get toward that person’s injuries. So in this example, there would be $40,000 allotted to the bodily injuries of the other driver involved.

The second number refers to the amount of money the insurance company will pay toward all bodily injuries resulting from the accident you’ve caused. So if you crash into another car, and that accident results in injuries to drivers and passengers in the other car, as well as pedestrians nearby, the middle number tells you how much coverage you’ll have for those combined injuries.

The last number involved with liability coverage pertains to the amount of money your auto insurance company will pay toward property damage of the other driver. Typically, this means damage to the person’s car. But it could also include damage to someone’s house in the event of a driver crashing into a building. Hey, it happens!

2. Collision Coverage

And the next type of auto insurance you may have in your policy is something called collision coverage. This is what pays for damages to your own car in the event that you cause an accident. This component can also be one of the most expensive parts of your policy. In most cases, the maximum amount to be paid is limited to the actual value of the car — for obvious reasons.

3. Comprehensive Coverage

Comprehensive coverage is another piece of auto insurance that covers your car, but in this case it protects the vehicle against things other than an actual collision. For example, comprehensive can reimburse you for loss or damages caused by fire, vandalism, auto theft, natural disasters, and things of that sort.

4. Uninsured Motorist

The last type of auto insurance I want to cover in this article — but not the only type — is something called uninsured motorist protection. This type of coverage protects you and the passengers who are in your car against damages or injuries caused by an uninsured motorist. It usually protects against damages resulting from hit-and-run drivers as well.

So there you have them, the main types of auto insurance coverage that can be combined within a single policy. You can think of the policy itself as an umbrella, under which many different types of coverage can be placed. Once you understand this concept of how car insurance works — that is, the “umbrella” concept — the whole puzzle begins to fall into place.

There are other types of coverage we didn’t talk about in this article, such as medical payments and personal injury protection insurance (or PIP), but I will leave those for a future article. In this lesson, I wanted to cover the primary parts of an auto insurance policy, and that’s what we’ve talked about above.

Leasing Versus Buying a Car

A lot has been written about the pros and cons of leasing a car versus buying one, but I would like to revisit that topic today. This is one of the most important decisions you can make when shopping for your first car, and one that requires a lot of careful thought. So let’s talk about some of the benefits of leasing, as well as some of the disadvantages involved with the process.

When you lease a car, you are basically making monthly payments that account for the depreciation of the vehicle, and you also pay interest on it as well. It’s almost like paying money in order to borrow a car temporarily — that is, for a few years — from the dealer. This is obviously very different from buying a car, because you’ll never truly own a leased vehicle.

The Benefits of Leasing Versus Buying

I’ve been leasing cars for the last 10 years or so, and it works well for me. But it doesn’t work well for everyone. Understanding the benefits of leasing a car is the key to deciding whether or not it’s the right option for you. One of the biggest benefits, in my opinion, is the fact that you can always have a relatively new model and pay less for it on a monthly basis than you would if you bought the car.

You also have the peace of mind that comes from being under a permanent warranty. For example, if you leased a car and turned it in for a new one every three years, the car would always be covered by the manufacturer’s warranty. So you never have to worry about any major repair costs.

The trade-in process is another benefit of leasing a car versus buying one. If you actually purchase the vehicle, you have to trade it in or sell it at some point, and that can involve a lot of haggling over price, terms, etc. But at the end of the lease, you can literally drop the car off, sign a quick document and walk away. Or you could trade it in for another newer vehicle, and the process is just as easy. For obvious reasons, the dealer wants to make it really easy for you to continue leasing new vehicles from them. So they make the turn-in process simple for you.

The Disadvantages of Leasing

Now let’s talk about the opposite side of the coin. There are clearly some disadvantages to leasing a vehicle versus buying one, and here’s a short list of those.

1. Mileage Restrictions

Most car lease programs include mileage restrictions. This means you can only drive a certain number of miles per year, and therefore on a monthly basis as well. Typical mileage limits range from 10,000 – 15,000 miles per year. So it’s a wise idea to calculate the average number of miles you drive in a month, and then multiply that mileage times 12 to find out how much you drive in a year. This will help you decide whether or not leasing a car is the right option for you.

2. Damage Fees

Another disadvantage of leasing versus buying a car is the turn-in inspection you’ll have to go through (when you turn the vehicle back into the dealership). If you have excessive wear and tear on the car, you might have to pay additional fees.

When I traded my vehicle back into the dealership at the end of the lease term, they sent a guy out to my house to do a quick inspection. It was pretty straightforward, and he didn’t find anything that warranted extra fees. So in my experience, they are looking for serious wear and tear, or actual damages, to the vehicle during the suspension. But I’m sure it varies from one car dealership to the next, so you need to talk to them about this in advance and find out what their definition of “normal wear and tear” actually is.

3. No Equity

Another disadvantage to leasing a car is the fact that you do not acquire any equity in the vehicle. Equity, of course, is another way to say ownership. At the end of the lease term, you do not have any ownership in the car that can be applied to the next car. On the contrary, when you buy a car, you actually gain equity in it the longer you own it. So when you turn in a car that you’ve been financing as a straight purchase, you have equity or ownership that can be applied toward the price of the new car.

Should You Lease or Buy a Car

This entire lesson can be summed up in the following way. If you are the kind of person who likes to drive a new vehicle at all times, and you plan to get a new car every few years, then leasing might be a better option than buying. It doesn’t make sense to buy a car and suffer the depreciation that occurs when you drive it off the lot, only to turn the vehicle in two or three years later. So in this kind of scenario it may be better to lease than to buy a car.

Mileage is another big consideration, as we mentioned earlier. For example, if your job involves a lot of travel by car, then leasing may not work for you. Before you lease a vehicle you need to find out what the dealership’s mileage restrictions are, and compare those limits to how much you actually drive on a monthly and yearly basis. This alone might rule out the viability of a lease.

I hope this article helps you understand the various pros and cons of car leasing versus buying. It really boils down to a matter of preference and habits. If you prefer to drive a new vehicle, and you’re in the habit of changing vehicles often, than car leasing might be better than buying.

The Primary Parts of an Auto Loan

In today’s lesson, I would like to talk to you about the different parts of an auto loan and how they relate to each other. Understanding the different parts of auto financing is the first step to choosing the right car loan for yourself. In particular, I would like to talk about the annual percentage rate, or APR, and how it differs from the interest rate.

5 Parts of an Auto Loan

There are five important concepts you need to understand before you start shopping for a car loan. These ingredients are the annual percentage rate or APR, the down payment on the loan, the interest rate, the term or length of the loan, and the principal amount.

1. The Annual Percentage Rate

Let’s start by talking about the annual percentage rate or APR. This is one of the most important concepts to understand before you start shopping for car loans, because it helps you compare one loan offer to another. The APR is different from an interest rate. The interest rate is part of the APR, but the APR also includes different costs and fees, such as document preparation, filing fees, etc. What does this mean to somebody who is shopping for a car loan? It means the APR is more important than the interest rate, as far as the buyer is concerned. If you really want to understand how much you’re going to pay each month, it’s the APR and not the interest rate you need to consider.

2. The Down Payment

Now let’s talk about the down payment and how it relates to your auto loan. This is a simple concept, and it’s one that you’re probably already familiar with. The down payment is basically a chunk of the total cost of the vehicle. It’s something that you have to pay in cash at the time you sign a contract for the car. In some cases, you don’t actually have to make a down payment. But you’ll obviously pay more for the car if you don’t make a down payment. It’s also possible to get a lower APR by making a bigger down payment when you purchase the car. This is something you need to ask about when you start talking to dealers, and when you start getting quotes for auto loans.

Lastly, it’s important to understand the relationship between the down payment and the monthly payments for your auto loan. Obviously, the bigger the down payment, the smaller the size of your monthly payments because you’ll have to borrow less money. This is something you need to consider up front, before you start applying for loans. How much can you afford to put down, and how much can you afford to pay each month?

3. The Interest Rate

The interest rate is another ingredient of auto loans. But I’m not going to spend a lot of time talking about the interest rate, because we already discussed it when we were covering the APR. The most important thing to take away from this lesson is that the APR is more important to the car shopper. The interest rate is less important because it doesn’t truly reflect what you’re going to pay each month.

4. The Loan Term

So we’ve talked about the APR, the down payment, and the interest rate. The next part of the auto loan is the term. The term is simply the length of the loan. It’s usually expressed in the number of months it takes to pay off the loan. So a car loan that has a term of 48 months will be paid off after those 48 months are up.

As with mortgage loans, the longer the term, the smaller the monthly payment. But with a longer term you’ll end up paying more interest on the loan. So you need to balance these things out. When you start shopping for a car loan, and you start getting quotes from lenders, you need to look for a good combination of APR and loan term that fits your monthly budget but also keeps your interest payments as low as possible.

5. The Principal

The last ingredient of auto financing we’re going to talk about is the principal. This is simply the amount that you’re borrowing without any interest added onto it. Figuring out the principal amount of the loan is fairly simple. You would simply determine the vehicle’s sale price, add in whatever fees are associated with the loan, subtract the amount of money that you’re putting down, and subtract the value of your trade-in (if applicable).

So there you have them, the primary parts of an auto loan. I hope this article helps you understand auto financing in general, and how to shop for the best deal on a car loan. Good luck.