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Archive for February, 2014

Believe It or Not, Auto Loans are a Bargain Now

Car loans are cheap these days.

A new study by personal finance site WalletHub.com, showed that popular car brands offer financing at very low average APRs. Honda, Acura, Kia and Mazda have APRs averaging below 1 percent. Buick and Audi offer rates below 2 percent. Chevrolet, Lexus and BMW all came in under 3 percent. Ford and Fiat have the most expensive rates but still stay below 5 percent.

Moreover, you can tell through a historical viewpoint that today’s auto loan rates are indeed ultra-low.

Auto loans for new cars normally have lower interest rates than loans for used cars. But the gap is remarkably wider now. You’ll pay, for example, about 15 percent less interest on a new car loan than on a used car loan if you take out one today, says WalletHub.com.

car loans

However, the personal finance site only looked at 36-month auto loans when buyers these days look at 60-month or longer auto loans for more viable repayments.

The interest rates were also the ones people with excellent credit would get. People with low credit scores are still likely to get higher interest rates—even a double-digit, Bankrate chief financial analyst Greg McBride told Time.com.

According to Bankrate, the average APRs for auto loans are just below 5 percent as of February 20, 2014. But you would see most banks today financing vehicles at their lowest rates of under 3 percent—new or used.

WalletHub.com says credit unions offer new auto loan rates and used auto loan rates that are 40 percent and 44 percent lower, respectively, than banks. The average auto loan APR in credit unions is 2.24 percent for new cars and 2.54 percent for used cars for, again, a 36-month repayment period.

One reason why auto loan rates are super low these days is the growing competition among lenders. If you look at it closely, banks didn’t have to be this competitive because they have credit card and mortgage portfolios which are also lucrative. But auto loans are one of the few brightest spots in the lending business today. They just couldn’t ignore that.




 


 

Why Auto Loan Refinancing Does Not Always Make Sense

Lower monthly payments are often enticing especially if you are antsy to get rid of your car loan. But taking that offer along with a long loan term may not really make financial sense. More people are taking car loans that are 86- or 96-month long. It has become the norm after the Great Recession. There have also been more inquiries this year about auto loan refinancing according to LendingTree.com.

Auto loan refinancing is often seen the best way to get out of a high-interest car loan faster and save more money in the process. In other words, it is the smartest move to make for many heavy-laden borrowers. But is it? Consider these.

Lower Interest Rate But Bigger Total Amount Paid

Refinancing your car loan is supposed to allow you to repay your loan with a lower interest rate. That means you shouldn’t proceed with the idea unless you are sure you will get a lower APR or annual percentage rate in the new loan. Lenders are competitive when it comes to their auto loan refinancing rates. Check them out and make some comparisons before applying for refinancing.

In addition, it is not wise to refinance if you would repay the new loan in a longer term. You will be paying more over time if you choose to extend your repayment period. Lower monthly payments do not justify the idea of spending more months repaying a loan.

Depreciating Asset

Unlike real estate, your car loses value over time. This is one reason why opting for long loan terms may not be a wise decision. Think about this: You are just on the fourth year of your seven-year loan and your car’s value has significantly dropped already. Now your balance is greater than your car’s value. This is called being underwater, and it’s a terrible situation to be.

Debt advisers suggest avoiding auto loan refinance if you only have two years left until the agreed payoff time. In that case, it is better to finish your loan than take out a new one where you might extend your repayment time.

Savings

Another purpose of refinancing an auto loan is saving more money. Before you actually refinance, find out whether you will be able to save. Believe it or not, a lot of borrowers had already completed their loans before they realized they weren’t able to keep some money at all from refinancing.

One of the biggest hindrances is the prepayment penalty which some lenders charge for paying off the loan sooner than the agreed schedule. The fee could be very expensive that dealing with it and proceeding with refinancing is pointless.

Online auto loan calculators like the ones available in Bankrate.com can help you estimate the savings you can keep from refinancing your car loan. Do some math first before you bank on the idea of auto loan refinance.

Are You Eligible?

Among the factors to consider before refinancing an auto loan is whether you are eligible. Lenders have their own eligibility requirements. Most of this restrictions concern the age of your vehicle, your outstanding balance with your current lender, the current loan term, and the types of vehicles that can be refinanced. When you shop for the best refinance rate, do not forget to ask about the requirements.

 


 

Things to Do Before Visiting the Showroom

Low auto loan rates mean good deals for most consumers today. Unfortunately, a lower interest rate does not necessarily mean you will be able to save money from the deal. These days, real savings require cracking dealership secrets, decoding prices and fees, and reading beyond the obvious ad messages.

A few months back, we’ve seen consumer advocates, regulators and government agencies work together to protect consumers from abusive practices in the auto lending industry. To avoid getting taken for a ride this 2014, remind yourself of the following tips before walking into any dealership.

1. Do it yourself.

The Consumer Financial Protection Bureau is scrutinizing lenders and has called on them to make sure dealers in their network do not practice discriminatory lending against minority borrowers. In December last year, Ally Financial and Ally Bank paid a total of $98 million to compensate over 235,000 minority borrowers who were allegedly charged unfair auto loan interest rates. According to the CFPB, the results of their examination on the lender show that they had not done enough to curb discriminatory lending practices among its dealership partners. Ally denied the allegations, but the bureau was able to teach consumers a lesson.

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Consumers should shop for auto loans and arrange one themselves before walking into any dealership. Getting preapproved allows them to see what kind of interest they will most likely get with their credit. It will also help them avoid undisclosed dealer markups which are tacked onto the interest rate and serve as compensation for the dealer’s service of arranging loans for buyers. So instead of letting the dealership do it for you at a fee, do it yourself.

2. Crack the ad.

Not literally, though. But be able to determine whether what the ad is saying is true or deceptive. The Federal Trade Commission last month came up with “Operation Steer Clear” which curbs deceptive dealership advertising.

There is a Michigan dealership reported recently which sent out mailers that led customers to believe they have won a sweepstakes prize. Two customers who received a mailer filed complaints after approaching the dealership to claim the prize only to find out they did not really win.

If the car ad seems too good to be true, investigate before jumping into the deal. But in any case, always read the fine print or give the dealership a call for more details.

3. Break down the total cost.

The price in the window sticker is not the whole story. Ask for a detailed breakdown of all the fees included in the deal. Aside from just knowing the specific items you are paying for, another important purpose of asking about the fees is to negotiate any item you think is unnecessary or unreasonably priced. You have every right to ask the dealership for explanations and insist on deleting some items you don’t really need to pay for.

Examples of the fees are delivery charge, preparation fee, documentation fee, advertising fee and sales tax. Some dealerships automatically charge their buyers for extra services like paint protection and VIN window etching, which are actually optional. Some dealers do not disclose these charges right away.

 


 

Lower Delinquency Rate Hints Easier Auto Loans This Year

Auto delinquencies dropped and should remain low in 2014 according to the American Bankers Association.

Auto loan delinquencies of more than 30 days dropped from 2.08 percent to 1.64 percent in the third quarter of 2013.

Keith Leggett, American Bankers Association’s senior economist, said that a low auto delinquency rate is a good indication that lenders will make their loans more available in 2014. He also said auto delinquencies will soon begin increasing but perhaps not any time this year.

compare-auto-loans

Meanwhile, auto auction giant Manheim reported recently that used-car prices are expected to stay strong even if they experienced a decline in the last quarter of 2013. Tom Webb, Manheim chief economist, told Automotive News that restrained new-vehicle incentives and certified pre-owned sales growth help strengthen used-vehicle prices.

Strong used-car prices reduce auto loan delinquencies as some borrowers who are behind their payments sell their cars to pay off their loans and avoid defaulting.

On the other hand, the increasing number of subprime borrowers and relaxed credit standards will cause auto delinquencies to rise, said Leggett.

In the meantime, longer loan terms make higher loan amounts more viable for consumers.

The average term for new-car loans in the third quarter of 2013 went up from 64 to 65 months according to Experian Automotive. The average amount financed for new cars increased by $750 to $26,719. The monthly payment averaged at $458, up by $6 from the same period in 2012.

 


 

You can Get a Better Loan from Car Dealers—If You’re White

A recent research showed that white car buyers are more likely to get a better auto loan deal from a car dealership than minorities, even if they did not spend time and energy haggling for the best rate.

The survey, which is conducted for consumer group Center for Responsible Lending, revealed that minority borrowers received higher interest rates even if they negotiated.

It also showed that white borrowers, even without having to negotiate, paid only an average of 4.5 percent APR on their loans, while African-Americans and Latinos paid 6.2 percent and 6.9 percent, respectively.

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About 32 percent of black borrowers and 39 percent of Latino borrowers negotiated their interest rates. Only 22 percent of white borrowers did the same.

However, CRL Senior Vice President Chris Kukla said that negotiation is not really an effective strategy to get a lower rate. The consumer group is advocating the ban of dealer markups which are charged on top of the auto loan interest rate. They serve as compensation for dealers that set up auto loans for consumers.

The survey, conducted in October 2012, is seen to fuel the ongoing debate about the alleged discriminatory lending practices against minorities in the auto industry.

But auto lenders and dealers still insist that the allegations lack evidence.

The survey was responded by 946 consumers who purchased a car in the past six years. They were asked to indicate their loan term, interest rate and whether they negotiated for a better rate.

The chief lobbyist of National Automobile Dealers Association, Bailey Wood, told the Wall Street Journal that the number of respondents is too small to draw any meaningful conclusion and that the survey did not ask for the respondents’ credit scores.

In compliance with the regulators’ investigation, NADA has proposed a set of voluntary guidelines for auto dealerships.

The American Financial Services Association, which represents auto lenders, has the same opinion about the survey and added that more than 15 million new vehicles were sold in 2013.

 


 

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