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Not all car loans are created equal. Some are better than others.
If you’ve been paying off your car loan for a while, you might be wondering whether you really got the best deal or not. There are actually a lot of signs that can help tell you whether you already have a good car loan, or if it’s better to refinance your car loan. Here’s what to look for.
One of the single biggest factors that determines whether you have a good car loan or not is your interest rate. The difference between a good rate and a bad rate might not appear that big. But since you’ll be paying that rate over the course of several years, it can actually tack on hundreds or thousands of extra dollars to your loan cost if you get a bad rate.
The average interest rate on a 60-month car loan was 4.80% during the last quarter of 2020, according to the Federal Reserve. Generally, the better your credit, the better the rate you can qualify for. The opposite is also true: You’ll usually get a higher interest rate if your credit score isn’t the best.
If your interest rate isn’t the greatest, don’t panic — there are ways to fix that, which we’ll share later in this piece.
Many experts recommend sticking to a five-year car loan or less, if you can afford it. That’s not what most borrowers are doing these days, however.
Over the years, people are increasingly switching to six-year, seven-year, or even longer loans. According to the most recent Experian Finance Market Report, almost 65% of used car loans are now for over five years in length.
Lenders offer these long-term loans so you can get a nicer car, a lower monthly payment, or both. But that costs a lot more money, and since repayment takes longer, you’re more at risk than with a shorter loan term. People with longer-term car loans are twice as likely to default on their loan, according to the Consumer Financial Protection Bureau.
There’s no single right or wrong number for how much your monthly payment should be. It’s entirely dependent on your own financial situation.
But in general, you should be able to easily afford your monthly car payment without stressing out or running out of money before your next paycheck. You should also be able to afford the following things in addition to your car payment:
If you’re not able to make ends meet and creating a budget doesn’t help, your monthly car payment might be too high. You may need to make some financial decisions, whether that’s refinancing to increase the length of the loan (which brings your payment down), cutting back your expenses, or increasing your income.
Have you ever heard of being “upside down” or having “negative equity” on your loan? It’s when you owe more on your car loan than what your car is actually worth. It can happen if you get into a car accident and damage your car, for example, or if your car is depreciating faster than you’re paying off the loan.
To find out the total amount you owe on your loan, you’ll need to check your most recent lender statement. To find out how much your car is worth, you can check tools like the NADAguides, Edmunds, or Kelley Blue Book. Divide your car loan balance by your car’s value, multiply by 100, and you get your loan-to-value ratio, or LTV. It’s basically how much of your car’s value you’ve already paid off.
If your LTV is over 100%, it means you owe more on the loan than your car is worth. That’s not unusual to be over 100%, but you may want to consider getting a GAP waiver or insurance to help cover the loan balance beyond your car’s value in the event your vehicle is totaled.
Most car dealers have an in-house financing department where they match you up with lenders who can finance your loan. That’s a different thing entirely from so-called “buy-here-pay-here lenders,” who are the ones who directly finance your loan.
Buy-here-pay-here lenders generally charge extremely high interest rates, which is a form of predatory lending. Their business model works differently: They almost count on people not paying the loans so that they can repossess the vehicle and re-sell it to another person, and repeat the process over ad infinitum with the same car.
Here are some signs that you actually have a bar car loan from a buy-here-pay-here dealership:
Buying a car is tough, and it’s understandable if you took the first offer of financing that came your way. But chances are, if you didn’t do any shopping around of your own, you’re probably overpaying.
There are hundreds or thousands of auto loan lenders out there. Each one has their own requirements and sets their own rates. It’s impossible to check them all, but if you check around with local lenders (especially credit unions) or use marketplaces like RateGenius, you’ll quickly be able to narrow down the best option for you within a short amount of time.
While you were shopping around, another good way to get the best deal is to get preapproved for a loan. This helps you in several ways. It can help you stay within budget when you go to shop for the actual car.
You can also use it as a negotiation tool with the car dealership. Sometimes, you may even be able to get a 0% car loan for a certain number of months this way which can save you a lot of money in the long run.
If your credit has gone up since you took out your car loan, there’s a good chance that you’re paying more than you need to. That’s because lenders often reward you with better rates when your credit score is higher.
According to Experian’s Finance Market Report Q4 2020, here’s the average rate that lenders are charging on loans for new cars according to their customer’s credit scores:
| Credit Score | Avg. Car Loan Rate |
| 781+ | 2.65% |
| 661 – 780 | 3.69% |
| 601 – 660 | 6.64% |
| 501 – 600 | 10.58% |
| 300 – 500 | 14.20% |
Not everyone has good credit, and that’s OK. But it does mean that certain things will be harder, like getting a good rate on your car loan. If you have bad credit, it’s important to know that there are things you can do to help improve your credit history. Here are some steps to take:
A lot of people wonder if it’s better to refinance your car loan. If you can save money, then the answer is usually an emphatic yes.
Even better is if you can save money while getting a shorter loan term too. Then you’ll get the best of both worlds: You’ll be out of debt faster, and you’ll save money that you can use for other things.
To recap, you might be able to get a lower interest rate by refinancing if:
Refinancing isn’t as tough as it sounds. All you need to do is shop around for rates.
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