Auto Loan Debt Settlement Services
Auto loans are nothing short of huge business in the United States. At the end of 2016, the aggregate amount of auto loans in the U.S. approached $1.2 trillion, with the average new car loan exceeding $30,000 and offering a duration of five to seven years. Given that auto sales comprise approximately 20% of all U.S. consumer spending, it follows that auto loans have become a significant driver of a record U.S. household debt level that now exceeds $12.7 trillion.
Auto Loans Debt Relief
Auto debt relief may include a debt consolidation or debt management program. Debt consolidation may reduce your payments on your auto debt. Instead of paying the auto debt separately, it would be included with the rest of your loan payments. A debt management plan may help you organize your debts and plan out the payback, including that of your auto debt.
Auto Loans Debt Help
Two Main Types of Auto Loans
Most auto loans charge a simple (as opposed to compound) interest rate based on the outstanding balance that is repaid on a monthly basis and offer the option to be repaid in excess of the standard monthly payment. The advantages here are twofold – as simple interest expense is always less than compound interest expense, and having the option of paying beyond the standard monthly amount represents an opportunity to reduce interest expense over the life of the loan.
Meantime, a pre-computed car loan is one in which total interest expense for the life of the loan is added to the principal borrowed and divided by the number of months of the loan to arrive at a regular monthly payment amount. Pre-computed car loans do not offer the borrower the advantage of paying back in excess of this monthly payment amount and are therefore almost always more expensive than simple auto loans.
Where to Go for an Auto Loan
The most common outlets for securing an auto loan are banks, credit unions and auto dealerships themselves. Working with a bank is often the best solution for getting the most favorable terms and lowest interest rate, though the process will likely take longer than working directly with an auto dealership. However, the convenience of working directly with an auto dealer comes with a price – as dealers are in the financing business to turn a significant profit – and the interest rate a car dealer charges will often be higher than that charged at a bank or credit union. If you are a member of a local credit union, that could represent a happy medium, as securing an auto loan there could prove both reasonably convenient and a good value.
Credit Requirements for Auto Loans
Though many lenders don’t have specific down payment requirements, depending upon your credit score, it can help significantly to make a down payment exceeding 10% of the automobile purchase price. Given that the value of a new car typically depreciates by over 10% as soon as an owner drives it home for the first time, making such a down payment reduces the lender’s risk and the probability that a borrower will owe more than the car is worth shortly following purchase.
If you are unable to make a significant down payment, you may want to consider an auto lease. Leasing does offer the appeal of a lower down payment and lower monthly payments, but comes with the major drawback that monthly payments won’t actually result in eventually owning the car, as is the case in monthly loan payments. Interest rates for auto loans are calculated inversely with credit scores, so those with excellent credit scores in the 700s can anticipate securing an interest rate at or below 4%. In fact, those with pristine credit scores above 750 should pursue zero-percent and low interest rate loans directly from dealerships.
A Few More Things to Know
However, if your score hovers in the mid-600s and below, you probably should avoid dealerships and work with a bank or credit union to secure a mid-single digit interest rate or even higher – possibly exceeding ten percent depending on the severity of the credit score weakness.
Auto loans are a form of secured debt, meaning that the vehicle will serve as collateral and can be repossessed in the event of non-repayment. Additionally, if you’re finding it difficult to secure a reasonable interest rate, try pursuing a short-term loan of 48 months or less, and be sure to avail yourself of all dealer incentives and rebates that can help reduce the overall cost of purchase. Finally, even if the interest rate on your car loan is high, look for opportunities to re-finance your auto debt following two years of making consistent monthly payments and any improvement in your credit score.
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Auto Debt FAQ
How to calculate debt to income ratio for auto loan?
A good debt to income ratio for an auto loan is 40% or less, meaning that if an individual earns $5,000 per month, debt payments should not exceed $2,000. Debt includes installment loans, credit card debt, student loans, and housing payments.
What kind of debt is an auto loan?
An auto loan is a form of secured debt, because the borrowing is collaterally backed by the automobile. It is also considered a form of installment debt, as payments are typically made monthly.
Are you responsible for debt after auto repossession?
When a vehicle is repossessed, the balance due on the loan remains, along with repossession costs that are often added to it. Even after your car has been repossessed, the auto lender can seek collection and sue for a deficiency judgment. Even if your vehicle is sold at auction, the amount raised may not be enough to cover the deficiency owed, leaving you owing the remainder.
Can auto repossessions be included on a debt relief program?
When a vehicle is repossessed and sold, it is often the case that the money raised is not enough to cover the debt owed, and a deficiency results. In the case of a deficiency, many lenders are willing to set up a reasonable payment plan to pay the deficiency off over time, or may agree to a lump sum settlement when proof of financial hardship is established.
How to get an auto loan after debt consolidation?
Getting an auto loan approved following debt consolidation is not especially problematic. In general, even when a credit report includes negatives related to debt settlement or debt consolidation, other existing positives on the report from other accounts will at least partially offset the negatives. Generally, one year is sufficient time to establish some positives on a credit report following debt consolidation, and making timely repayment on a car loan goes a long way toward rebuilding a credit profile.
Can a car loan be included in debt consolidation?
Debt consolidation traditionally involves combining and paying off multiple unsecured debts, such as credit card debt, personal installment loans, medical debt and some student loans, from the proceeds of one single loan, typically resulting in a lower blended interest rate and monthly payment. Secured debts, such as auto loans and home mortgages, are backed by collateral that can ultimately be seized in the event of default and are therefore not eligible for traditional debt consolidation. However, many lenders do provide car loan consolidation, which combines multiple auto loans with varying payment cycles, interest rates, and minimum payments, and therefore functions in essentially the same manner as traditional debt consolidation – providing the dual benefits of streamlining the repayment process while simultaneously lowering interest expense and the total amount repaid over time
How to get a car loan with bad credit?
Individuals pursuing a car loan who have bad credit need to go about things a bit differently than those with strong credit. A weak credit history will usually limit the car loan amount, and it will also come with a higher interest rate attached – sometimes twice as high as the rate granted to someone with stronger credit. However, getting a car loan with bad credit is possible when you take the necessary time to prepare your credit report, pursue pre-approval before approaching auto dealerships, and avoid potentially crucial mistakes by verifying all documents prior to signing.
How does auto loan refinancing work?
Auto loan refinancing involves replacing a current auto loan with a new auto loan from a different lender, usually at a lower interest rate and/or with more favorable terms, such as a lower monthly payment or change in duration. In general – and especially when an individual’s FICO credit score has improved since the initial auto loan was taken out – it makes good sense for borrowers possessing a good repayment history to look for opportunities to refinance a car loan. In fact, some of the best auto loan refinancing opportunities emerge within two years of an individual making consistent monthly payments on an original auto loan, during which time a credit score often improves. Refinancing an auto loan frequently results in considerable interest expense savings over the life of the auto loan.
How to get out of auto debt?
In general, an effective way to get out of auto debt is through auto loan refinancing, which involves replacing a current auto loan with a new auto loan from a different lender, usually at a lower interest rate and at more favorable terms – such as a lower monthly payment or change in duration. In general – and especially when an individual’s FICO credit score has improved since the original auto loan was first granted – it makes sense for borrowers who possess a solid repayment history to investigate opportunities to refinance car debt. Refinancing a car loan frequently results in considerable interest expense savings over the life of the loan and helps make it easier to get out of auto debt faster.
When to refinance a car?
There are a number of instances when it can make sense to refinance a car loan. At the top of the list is when timely payments have been made for up to two years on the initial auto loan, resulting in credit score improvement and access to more favorable terms and a lower interest rate. Or, when the macroeconomic climate changes and interest rates decrease from those attached to the initial auto loan, refinancing will often lower your rate and aid in paying off the auto loan in less time while saving on interest expense. Remember – even if interest rates were low when you took out your initial auto loan, interest rates can fluctuate as a result of increased competition within the auto refinancing space as well as from changes in the regulatory environment. In other instances, when an auto loan was initially borrowed through the lending department of an auto dealership, the dealership will sometimes mark up the interest rate, as the lending arm of a dealership can be a significant profit center – especially when a potential borrower appears visibly excited about a new car purchase and fails to shop around sufficiently. Auto loan refinancing can help remedy that mistake.