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As you’re shopping for a car loan, there are a number of factors to consider, including your down payment, the car loan’s interest rate, and the length of your loan, also known as your term, in car loan terminology. When you finance a car, your payments—including principal, interest and fee—are spread out over the months of your term using a process called amortization.
For many years, most people chose car loans with terms of three to five years. In recent years, however, that has been changing. Consider one survey from the Consumer Financial Protection Bureau that shows that in 2009, only 26% of car loans had terms of six years or more, while that percentage leaped to 42% in 2017. Since then, this upward trend has mostly held into the second quarter of 2021, according to the latest data from the Experian State of Automotive Finance Market report. Here’s a closer look at average terms for new and used auto loans and how to determine what term might be right for you.
Related: What does an extended warranty cover on a car?
How Long Is a Typical Car Loan?
The average length of a new car loan in the second quarter of 2021 was about 71 months, just under six years. That’s down slightly year over year. For used vehicles, the average term for an auto loan is about 64 months, a little over five years. Used auto loan terms appear to be on the rise year over year. The move toward longer loans may reflect a consumer desire for more manageable monthly payments.
Typically, the longer a loan’s term, the lower the amount the borrower pays each month. However, they may end up paying quite a bit more in interest over the life of the loan, compared with what they would have paid with more traditional four or five-year terms. Loan terms vary widely by risk rate, ranging from deep subprime loans to super-prime loans. Subprime loans are offered to borrowers who have poor credit, while super-prime loans go to borrowers with exemplary credit. For new and used vehicles, borrowers with the best credit tend to have loans with shorter terms. Here’s a detailed look at the breakdown between new and used cars.
New Cars
On average, new auto loan terms have been decreasing slightly for all but the riskiest loans over the past year, according to the credit bureau Experian. Terms have decreased the most for super-prime loans, for borrowers with the best credit. These borrowers also tend to have the shortest loan terms, with an average of 63.85 months. At 73.94 months, near-prime borrowers have the longest average loan terms.
Used Cars
In contrast to the average new car loan, used car terms have risen over the past year across all risk types. Deep subprime loans saw the greatest increase, while super-prime loans saw the smallest. Interestingly, deep subprime loans also carry the shortest average loan term at 60.38 months. Prime loans have the longest average terms at 67.04 months.
Determining the Right Car Loan Length for You
The length of your term can have a big impact on how much you end up paying each month and over the life of your auto loan. Generally speaking, the longer the loan term, the smaller your monthly payments will be. This can make them more manageable for people who don’t have a lot of extra cash flow.
However, there’s a catch: Longer loan terms may lead to higher interest rates, and at the very least, it means you’ll be making interest payments for a longer period. So, for lenders, the advantage of longer terms is that they’ll be able to collect more interest from you. That puts you at a disadvantage, and you may end up owing thousands of dollars more on top of the price of your vehicle. If you have a very high-interest rate, your interest payments can add up to a lot of money quickly.
Once you factor in the increased cost of interest over the life of your loan, you may decide that a longer term is too expensive for you. If this is the case, consider saving longer to increase the size of your down payment. Typically, the more money you put down, the lower your monthly payment and interest rate will be, which can help make your payments smaller.
You might also try to improve your credit score by correcting any errors on your credit report and paying off debts. The higher your credit score, the more likely lenders are to offer you loans with favorable interest rates, which can also save you money.
There are certain circumstances in which a longer auto loan may be beneficial to your overall financial plan despite involving more interest payments. For example, if a more manageable monthly payment helps you pay down debt with a much higher interest rate, such as credit card debt, at the same time, you may actually save money overall in the long run.
How Refinancing Can Change the Length of a Car Loan
If at any point your auto loan becomes unmanageable, you want to pay off your loan early, or you want to save money with a lower interest rate, refinancing your auto loan is a possibility. When you’re refinancing your loan, you essentially take out a new loan to pay off your old one. Your new loan might allow you to secure better terms or a better interest rate.
For example, you could lengthen the term of your loan when you refinance to lower your monthly payments. Also, ideally, you would be able to find a new loan with a lower interest rate, which could save you money in the long run.
Consider refinancing if your income, credit score, or debt-to-income ratio improves. These are metrics lenders use when deciding whether to extend a loan. If interest rates drop in general, or if you find a better deal than the one you initially signed up for, it may also be worth considering refinancing. Refinancing could also help you pay off your car loan faster if you decide to shorten your term.
If you have bad credit, refinancing can be more difficult, but it’s often still possible to find lenders willing to offer you a better loan.
The Takeaway
In recent years, new auto loan terms have been higher than they’ve historically been. However, before you sign on for a loan with a long term, be aware of some serious financial considerations. While a longer term can make your auto payments more manageable in the short-term, you’ll end up paying more in interest over the life of the loan. If your term is long enough, your loan could end up upside down, meaning you owe your lender more than your car is actually worth. So before you buy, carefully consider how a longer term might fit into your overall financial plan and whether there are other ways for you to make your auto loan more manageable.
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This article originally appeared on LanternCredit.com and was syndicated by MediaFeed.org.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website on credit (https://www.consumer.ftc.gov/topics/credit-and-loans)The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Lantern by SoFi:
This Lantern website is owned by SoFi Lending Corp., a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license number 6054612; NMLS number 1121636. (www.nmlsconsumeraccess.org)
All rates, fees, and terms are presented without guarantee and are subject to change pursuant to each provider’s discretion. There is no guarantee you will be approved or qualify for the advertised rates, fees, or terms presented. The actual terms you may receive depends on the things like benefits requested, your credit score, usage, history and other factors.
*Check your rate: To check the rates and terms you qualify for, Lantern conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender(s) you choose will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
All loan terms, including interest rate, and Annual Percentage Rate (APR), and monthly payments shown on this website are from lenders and are estimates based upon the limited information you provided and are for information purposes only. Estimated APR includes all applicable fees as required under the Truth in Lending Act. The actual loan terms you receive, including APR, will depend on the lender you select, their underwriting criteria, and your personal financial factors. The loan terms and rates presented are provided by the lenders and not by SoFi Lending Corp. or Lantern. Please review each lender’s Terms and Conditions for additional details.
Personal Loan:
SoFi Lending Corp. (“SoFi”) operates this Personal Loan product in cooperation with Even Financial Corp. (“Even”). If you submit a loan inquiry, SoFi will deliver your information to Even, and Even will deliver to its network of lenders/partners to review to determine if you are eligible for pre-qualified or pre-approved offers. The lenders/partners receiving your information will also obtain your credit information from a credit reporting agency. If you meet one or more lender’s and/or partner’s conditions for eligibility, pre-qualified and pre-approved offers from one or more lenders/partners will be presented to you here on the Lantern website. More information about Even, the process, and its lenders/partners is described on the loan inquiry form you will reach by visiting our Personal Loans page as well as our Student Loan Refinance page. Click to learn more about Even’s Licenses and Disclosures, Terms of Service, and Privacy Policy.
Student Loan Refinance:
SoFi Lending Corp. (“SoFi”) operates this Student Loan Refinance product in cooperation with Even Financial Corp. (“Even”). If you submit a loan inquiry, SoFi will deliver your information to Even, and Even will deliver to its network of lenders/partners to review to determine if you are eligible for pre-qualified or pre-approved offers. The lender’s receiving your information will also obtain your credit information from a credit reporting agency. If you meet one or more lender’s and/or partner’s conditions for eligibility, pre-qualified and pre-approved offers from one or more lenders/partners will be presented to you here on the Lantern website. More information about Even, the process, and its lenders/partners is described on the loan inquiry form you will reach by visiting our Personal Loans page as well as our Student Loan Refinance page. Click to learn more about Even’s Licenses and Disclosures, Terms of Service, and Privacy Policy.
Student loan refinance loans offered through Lantern are private loans and do not have the debt forgiveness or repayment options that the federal loan program offers, or that may become available, including Income Based Repayment or Income Contingent Repayment or Pay as you Earn (PAYE).
Notice: Recent legislative changes have suspended all federal student loan payments and waived interest charges on federally held loans until 01/31/22. Please carefully consider these changes before refinancing federally held loans, as in doing so you will no longer qualify for these changes or other future benefits applicable to federally held loans.
Auto Loan Refinance:
Automobile refinancing loan information presented on this Lantern website is from Caribou. Auto loan refinance information presented on this Lantern site is indicative and subject to you fulfilling the lender’s requirements, including: you must meet the lender’s credit standards, the loan amount must be at least $10,000, and the vehicle is no more than 10 years old with odometer reading of no more than 125,000 miles. Loan rates and terms as presented on this Lantern site are subject to change when you reach the lender and may depend on your creditworthiness. Additional terms and conditions may apply and all terms may vary by your state of residence.
Secured Lending Disclosure:
Terms, conditions, state restrictions, and minimum loan amounts apply. Before you apply for a secured loan, we encourage you to carefully consider whether this loan type is the right choice for you. If you can’t make your payments on a secured personal loan, you could end up losing the assets you provided for collateral. Not all applicants will qualify for larger loan amounts or most favorable loan terms. Loan approval and actual loan terms depend on the ability to meet underwriting requirements (including, but not limited to, a responsible credit history, sufficient income after monthly expenses, and availability of collateral) that will vary by lender.
Life Insurance:
Information about insurance is provided on Lantern by SoFi Life Insurance Agency, LLC. Click here to view our licenses.
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How to refinance an auto loan
In times of lower interest rates, you may start to wonder about whether you should refinance your auto loan. And why not? According to 2020 data from RateGenius, money saved with a new auto loan is at an all-time high. Auto loan refinancing deals saved borrowers $989.72, on average, in 2020.
With that much cash up for grabs, it’s no wonder that auto refinancing loans are in big demand. Key strategies for auto owners who want a good refinance loan experience include being prepared and making sure to understand all the details. Read on for information that may help.
phototechno/ istockphoto
When you refinance an auto loan, you’re essentially securing a new auto loan. You use the new loan to pay down the balance of the original car loan. That all takes time, effort and money (for loan applications and servicing fees). That’s why you should be sure you have a good reason before you go to the trouble of taking out an auto refinancing loan.
So when should you refinance your auto loan? The fact is that vehicle owners refinance their auto loans for a variety of reasons that can all be worthwhile, depending on the situation. Most often, car owners refinance their loans to achieve the following personal financial goals, such as:
- To Lower Monthly Auto Loan Payments: Getting a new auto loan at a reduced interest rate can cut monthly payments down, leaving more cash in the till for other household expenses.
- To Get a Lower Interest Rate: Depending on the loan, a car owner may also be able to save money over the lifetime of the loan by getting a reduced interest rate. Take a vehicle for which the original loan was $25,000 and the refinance loan is $21,000. For a 60-month loan where the interest rate is cut from 7% to 5%, for example, the refinancing could save approximately $6,000 over the life of the loan.
- To Shorten the Loan Term: Car owners who are cash flush may shorten their loan terms to pay off the car faster, thus saving significant cash with lower interest rate payments.
- To Extend the Loan Term: Car owners who need some financial breathing room after a job loss, an injury or illness, or a divorce or other issue can extend the term of the loan to reduce monthly (but not overall) loan costs.
- To Get Some Extra Cash: If you have enough equity in your car, you might be able to take out a refinance loan that’s more than what you owe. That way you could get cash in hand, too. This is called a cash out car refinance. But realize that if you opt for this kind of refinancing, you will still have to pay back both the car loan and the extra money.
Also recommended: If you’re new to the world of auto finance, learning some auto loan terminology may help.
istockphoto/demaerre
Where does a borrower start with the auto loan refinancing process? Ideally, with a good grip on what a refinancing deal has to offer. Auto loan consumers are best off when they fully understand the entire refinancing. It can help to make sure you have answers to these questions:
- Do you meet the lender’s financial requirements? While each bank or lender has its own rules and regulations on auto refinancing, many banks have similar lending limits. For example, your auto usually must be less than 10 years old and have less than 125,000 miles on it. While the exact figures may vary from lender to lender, know possible vehicle restrictions heading into any refinancing deal.
- Are there any prepayment penalties? It’s usually a good idea to pay off an auto loan as soon as possible. Doing so clears the debt and puts more money in your pocket. However, some financial institutions may stick you with a prepayment penalty if you pay off the loan early. Be sure to examine your existing loan contract for any prepayment penalties and factor them into your costs.
- Do you know the total cost? Before green-lighting an auto loan refinancing deal, you need to know the full cost of refinancing the car. Make sure you know how much you’ll save per month and, even more importantly, over the life of the loan. When you refinance, you may be saving money on a monthly basis but adding more dollars to the overall cost of the vehicle. You’ll want to be sure you’re factoring any fees or penalties, too. A good auto loan refi calculator can be highly useful here.
- What’s your credit score? Most lenders will expect a minimum credit score from potential borrowers. Typically, a FICO credit score of 700 or more will get you the lowest loan rates on an auto refinancing loan. That said, a FICO score of 660 should ensure that you qualify for a standard auto loan refinancing deal.
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With that prep work complete, now it’s time to figure out the best path to a good auto refinance loan. Get the job done right with these action steps.
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Start the auto loan refinancing process with some data-gathering. To file a loan application, you’ll typically need these documents:
- Your original auto loan: Lending institutions will require the original loan paperwork to process a new loan. The original loan paperwork should include the loan amount, the monthly payment, the interest rate, the payoff number and the up-to-date loan balance
- Your vehicle information: Auto loan providers will also ask for your current vehicle information (think a Carfax for your own vehicle.) This document should include the vehicle’s make, model, year, mileage and vehicle identification number.
- Your auto insurance paperwork: Make sure you have your car insurance records, including type of insurance and the amount of the insurance included in the policy. Auto lenders won’t make a loan to an uninsured or significantly underinsured vehicle owner. That’s because the lender has a stake in the vehicle as well. If the car is damaged or totaled, your lender will want to know it was properly insured.
- Your employment records: Your auto loan refinancing lender may also ask for proof of income and employment, to ensure you have the means to repay the loan.
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Kick off your auto loan refinancing deal by listing what you want from the loan, such as a lower interest rate, no or low fees, a streamlined application process, and solid customer service. Having a candid conversation with your current financial institution is also a good step to take since it may give you an idea of what kinds of loans you could qualify for. And as you look for refinancing loans, remember that you may also want to explore online auto loan refinancing options since they tend to have fewer fees and competitive rates.
gpointstudio / istockphoto
When you’ve found the loan you want, follow the instructions to apply. A typical auto refinancing loan application likely includes the following:
- Name
- Date of birth
- Email address and phone number
- Address
- Social Security number
- Driver’s license number
- Work status
- Your bank’s name, address, routing number and checking account number (so the lender can deposit your loan amount, assuming it is not your bank)
- Your vehicle information
- Your auto insurance information
Once you complete the application, review it thoroughly to confirm that the information is accurate and up to date. Any discrepancies or missing information may lead to a loan rejection. And know that the lender will likely perform a credit check.
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Once your application is approved, your new auto loan provider will pay off your old auto loan or give you the funds to do so, and become your auto loan manager. Future payments will go to the lender who handles your refinanced loan. It is, however, a good idea to confirm with your original lender that the auto loan was paid off and you don’t owe any more payments. After that, be sure you pay the new loan on time and start enjoying the savings from your refinanced auto loan.
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Whether you simply want to get an auto loan with more favorable terms or you’re looking to adjust your car loan repayment period, refinancing your auto loan allows you to take advantage of lower rates, put more cash in your pocket, and get a loan that meets your unique personal financial needs. Handled correctly, refinanced auto loans can be a big win-win for vehicle owners, who can gain an auto loan with better terms and potentially save money in the process.
Learn more:
This article originally appeared on LanternCredit.comand was syndicated by MediaFeed.org.
Lantern by SoFi:
This Lantern website is owned by SoFi Lending Corp., a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license number 6054612; NMLS number 1121636. (www.nmlsconsumeraccess.org)
All rates, fees, and terms are presented without guarantee and are subject to change pursuant to each provider’s discretion. There is no guarantee you will be approved or qualify for the advertised rates, fees, or terms presented. The actual terms you may receive depends on the things like benefits requested, your credit score, usage, history and other factors.
*Check your rate: To check the rates and terms you qualify for, Lantern conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender(s) you choose will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
All loan terms, including interest rate, and Annual Percentage Rate (APR), and monthly payments shown on this website are from lenders and are estimates based upon the limited information you provided and are for information purposes only. Estimated APR includes all applicable fees as required under the Truth in Lending Act. The actual loan terms you receive, including APR, will depend on the lender you select, their underwriting criteria, and your personal financial factors. The loan terms and rates presented are provided by the lenders and not by SoFi Lending Corp. or Lantern. Please review each lender’s Terms and Conditions for additional details.
Personal Loan:
SoFi Lending Corp. (“SoFi”) operates this Personal Loan product in cooperation with Even Financial Corp. (“Even”). If you submit a loan inquiry, SoFi will deliver your information to Even, and Even will deliver to its network of lenders/partners to review to determine if you are eligible for pre-qualified or pre-approved offers. The lenders/partners receiving your information will also obtain your credit information from a credit reporting agency. If you meet one or more lender’s and/or partner’s conditions for eligibility, pre-qualified and pre-approved offers from one or more lenders/partners will be presented to you here on the Lantern website.
More information about Even, the process, and its lenders/partners is described on the loan inquiry form you will reach by visiting our Personal Loans page as well as our Student Loan Refinance page. Click to learn more about Even’s Licenses and Disclosures, Terms of Service, and Privacy Policy.
Student Loan Refinance:
SoFi Lending Corp. (“SoFi”) operates this Student Loan Refinance product in cooperation with Even Financial Corp. (“Even”). If you submit a loan inquiry, SoFi will deliver your information to Even, and Even will deliver to its network of lenders/partners to review to determine if you are eligible for pre-qualified or pre-approved offers. The lender’s receiving your information will also obtain your credit information from a credit reporting agency. If you meet one or more lender’s and/or partner’s conditions for eligibility, pre-qualified and pre-approved offers from one or more lenders/partners will be presented to you here on the Lantern website.
More information about Even, the process, and its lenders/partners is described on the loan inquiry form you will reach by visiting our Personal Loans page as well as our Student Loan Refinance page. Click to learn more about Even’s Licenses and Disclosures, Terms of Service, and Privacy Policy.
Student loan refinance loans offered through Lantern are private loans and do not have the debt forgiveness or repayment options that the federal loan program offers, or that may become available, including Income Based Repayment or Income Contingent Repayment or Pay as you Earn (PAYE).
Notice: Recent legislative changes have suspended all federal student loan payments and waived interest charges on federally held loans until 09/30/21. Please carefully consider these changes before refinancing federally held loans, as in doing so you will no longer qualify for these changes or other future benefits applicable to federally held loans.
Auto Loan Refinance:
Automobile refinancing loan information presented on this Lantern website is from MotoRefi. Auto loan refinance information presented on this Lantern site is indicative and subject to you fulfilling the lender’s requirements, including: you must meet the lender’s credit standards, the loan amount must be at least $10,000, and the vehicle is no more than 10 years old with odometer reading of no more than 125,000 miles. Loan rates and terms as presented on this Lantern site are subject to change when you reach the lender and may depend on your creditworthiness. Additional terms and conditions may apply and all terms may vary by your state of residence.
Secured Lending Disclosure:
Terms, conditions, state restrictions, and minimum loan amounts apply. Before you apply for a secured loan, we encourage you to carefully consider whether this loan type is the right choice for you. If you can’t make your payments on a secured personal loan, you could end up losing the assets you provided for collateral. Not all applicants will qualify for larger loan amounts or most favorable loan terms. Loan approval and actual loan terms depend on the ability to meet underwriting requirements (including, but not limited to, a responsible credit history, sufficient income after monthly expenses, and availability of collateral) that will vary by lender.
Life Insurance:
Information about insurance is provided on Lantern by SoFi Life Insurance Agency, LLC.
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