Now that you’ve purchased a new set of wheels, it’s time for you to consider how to manage an existing used car loan. Remember—the car isn’t yours until you pay off the 36 to 72-month used car loan. That’s because, unlike unsecured credit cards and personal loans, your car loan is actually secured by the vehicle.
If you default on the loan, the lender can repossess it. That’s an agonizing and completely avoidable experience! In this post, we consider how Houston car buyers pay used car loans, how to refinance or change a loan before it’s paid in full, or what you should do if something goes awry before the loan is paid off.
Pay on Time Each Month
The good news is that, if you responsibly handle your used car loan, it’s a rather painless process:
- Do your homework before the purchase to calculate a manageable monthly payment.
- Put down at least 20 percent to lower the costs of the loan.
- Buy “cheap” if you traded in a vehicle with an outstanding loan balance. Get the least expensed used replacement that meets your essential needs.
- Agree to the shortest number of loan payments and accept the highest monthly payment.
- (After repayment,) have enough equity in the vehicle to put down a substantial amount on an attractive new or used vehicle.
- Don’t finance fees and taxes on the vehicle.
- Know your lender.
Make your monthly used car loan payment on time, or before it’s due, each month, and you’ll be a successful borrower and car owner. After you pay the car loan in full, you can sell the vehicle, trade it, or maintain the car for years of car loan-free driving.
Realize that paying your used car loan on time is an opportunity to build solid credit scores.
Start Budgeting
Managing your existing used car loan is easiest when you make a budget.
If you haven’t purchased a vehicle yet, use a loan calculator to estimate how much car you can afford. Consumer Reports recommends aiming for a monthly payment that’s about eight percent of monthly gross income.
Write down monthly expenses, such as food, mortgage or rent payments, clothing, or entertainment expenses. Add your monthly used car loan payment to the budget.
Don’t “Stretch” to Repay Your Used Car Loan
If you’ve selected the right car loan, your payment represents an amount that’s comfortable for you. Don’t “stretch” to make monthly car loan payments.
Your budget should include car maintenance expenses:
- Consumer Reports estimates the cost of vehicle ownership is approximately 150 percent of the cost of the loan.
- Add the cost of car insurance, regular maintenance (e.g. new tires and oil changes), and fuel to your budget.
- According to CNN Money, the average consumer spends approximately 11 percent of monthly gross income on car loan payments. If you’re maintaining an older car, maintenance expenses may be higher.
Purchase Gap Insurance
Many lenders offer “gap insurance” to used car buyers. Gap insurance allows the buyer to make up the difference between the vehicle’s loan payoff balance and insured value when it’s stolen or totaled. Gap insurance could save you money in the long run.
Select a Convenient Payment Method to Manage a Used Car Loan
Consider your method of payment to repay your used car loan. An automatic payment plan can greatly simplify paying your used car loan. By arranging an automatic payment plan, the finance company automatically withdraws a certain amount from your bank each month.
Keep sufficient cash in the account, and the automatic payment plan completely avoids late fees or damage to your credit if you forget to pay the used car loan on time.
Pay off Your Used Car Loan within 48 Months
Edmunds reports that the average U.S. consumer car loan is longer than six and one-half years. Car loan terms have increased from a little more than five years in 2002 to an average of more than 60 months by 2014.
Today, about 20 percent of car loans are structured for 73 – 84 months.
Consider a less expensive vehicle if a 48-month loan looks too expensive for your budget.
Ideally, you made a substantial down payment to lower the total amount of the loan. However, even if you didn’t, it’s possible for you to accelerate the term of your loan as long as your lender’s contract doesn’t include penalties for making extra payments or early settlement.
Put any extra windfalls towards your car loan to accelerate your free and clear vehicle title. You’ll save money.
When to Refinance Your Used Car Loan
There are many reasons to consider refinancing your used car loan:
- Perhaps your credit scores have improved since you took out the original loan from the dealer.
- Alternatively, interest rates have declined since you took out the loan.
Either way, refinancing your used car loan may be a wise financial decision. Consider the following:
- Check the value of your vehicle in the Kelley Blue Book.
- Compare the value of the vehicle to the balance of your used car loan.
If the vehicle is valued at less than what’s owed, you’re “upside down.” This means the vehicle is depreciating at a faster rate than your loan payoff. In that case, pay down the loan as fast as possible. Keep the car until when and if the loan value is less than the market value.
If the loan is less than the vehicle’s market value, you’re “right-side up:”
- Shop for more attractive loan terms, e.g. a credit union or bank lender, if a dealer financed the original loan.
- According to the Wall Street Journal, credit unions are likely to offer the most favorable auto loan rates.
Alternatively, you could use a home equity loan to refinance your used car loan. You’ll get a more attractive interest rate—and your loan expenses may be deductible.
Don’t submit too many auto refinance loan applications. Limit your applications to three or fewer financial institutions to avoid damaging your credit scores.
Don’t Extend Your Loan Term
If you decide to refinance a used auto loan, don’t ask for a new term. Ask the new lender to match the term of the original used car loan.
Extending your loan will add to the costs of your loan.
It’s never a smart financial decision to extend your loan term longer than you intend to keep the vehicle.
Consolidate Your Used Car Loan
Most consumers with a used car loan have additional debts, e.g. credit card or mortgage payments.
Ask your lender for a debt consolidation loan to pay off your debts and, if you do it right, you will save some money each month.
A debt consolidation loan streamlines your debt. It lowers the number of bills and simplifies the monthly budget. For example, if you carry high-APR credit cards, it can make sense to lock in a lower debt consolidation loan at a lower rate.
Avoid Car Loan Default
Don’t default on your used car loan payments. Your lender may move to immediately repossess the car in that case.
Unfortunately, your vehicle may be seized by the lender without prior notice, at your expense. You may forfeit personal belongings left in the repossessed vehicle as well.
It may be possible to get back the repossessed vehicle if you can repay the loan balance plus storage and tow fees. If not, the lender will probably sell the vehicle at auction.
You may still owe a deficiency to the lender.
In addition to the financial pain, your credit rating will be damaged. It may take at least seven years for the repossession to drop from your credit profiles and, during this time, you may find it difficult to get a new car loan.
Electronic disabling devices
When a lender is concerned about your default risk, it may install an electronic disabler in the vehicle’s ignition. The device will set off lights and buzzers on the dashboard when your used car loan payment date is approaching.
Most borrowers want to manage their used car loan without an electronic disabling device. However, if default is looming, do your best to sort things out with the lender:
- Ask the lender to renegotiate the used car loan. Many will work out an agreement to avoid the cost of repossessing and/or reselling the vehicle.
- Call the creditor to request an alternate payment plan.
- Don’t wait for the car to be repossessed. It’s too late to renegotiate at that point.
Sell the car yourself
Considering selling the car yourself:
- Contact the lender about how to arrange the sale of your used car. (You aren’t the owner.) The lender may require a direct payment from your buyer before releasing the title to him or her.
- Use the proceeds to pay off the loan.
- If you’re upside-down on the loan, you may need to add extra cash to settle the used car loan in full.
- Alternatively, drive the vehicle to the lender and surrender it in a voluntary repossession. You still owe the loan balance and your credit will be damaged, but you won’t need to bear professional repossession fees.
Monitor Your Used Car Loan
Like any financial account, keep close watch on whether your payments are received by the lender on time. Don’t default on the used car loan when you’re doing everything possible to pay your loan as agreed and on time.
It’s essential to plan your loan repayment and budget before assuming a used car loan. Use a car loan calculator to estimate your payments before agreeing to a loan. This helps you to manage your existing used car loan with your repayment capacity in mind.
If you're ready to apply for a used car loan, Shabana Motors believes every buyer deserves a second chance. It's easy - call us today!
