Should You Refinance Your Student Loans?

Due to financial consequences of COVID-19 — and the broader impact on our economy — now is an excellent time to consider refinancing most loans you have. This can include mortgage debt you have that may be converted to a new loan with a lower interest rate, as well as auto loans, personal loans, and more.

Refinancing student loans can also make sense if you’re willing to transition student loans you currently have into a new loan with a private lender. Make sure to take time to compare rates to see how you could save money on interest, potentially pay down student loans faster, or even both if you took the steps to refinance.

Get Started and Compare Rates Now

Still, it’s important to keep a close eye on policies and changes from the federal government that have already taken place, as well as changes that might come to fruition in the next weeks or months. Currently, all federal student loans are locked in at a 0% APR and payments are suspended during that time. This change started on March 13, 2020 and lasts for 60 days, so borrowers with federal loans can skip payments and avoid interest charges until the middle of May 2020.

It’s hard to say what will happen after that, but it’s smart to start figuring out your next steps and determining if student loan refinancing makes sense for your situation. Note that, in addition to lower interest rates than you can get with federal student loans, many private student lenders offer signup bonuses as well. With the help of a lower rate and an initial bonus, you could end up far “ahead” by refinancing in a financial sense.

Still, there are definitely some negatives to consider when it comes to refinancing your student loans, and we’ll go over those disadvantages below.

Should You Refinance Now?

Do you have student loan debt at a higher APR than you want to pay?

  • If no: You shouldn’t refinance.
  • If yes: Go to next question.

Do you have good credit or a cosigner? 

  • If no: You shouldn’t refinance.
  • If yes:  Go to next question.

Do you have federal student loans?

  • If no: You can consider refinancing
  • If yes: Go to next question

Are you willing to give up federal protections like deferment, forbearance, and income-driven repayment plans?

  • If no: You shouldn’t refinance
  • If yes: Consider refinancing your loans.

Reasons to Refinance

There are many reasons student borrowers ultimately refinance their student loans, although they can vary from person to person. Here are the main situations where it can make sense to refinance along with the benefits you can expect to receive:

  • Secure a lower monthly payment on your student loans.
    You may want to consider refinancing your student loans if your ultimate goal is reducing your monthly payment so it fits in better with your budget and your goals. A lower interest rate could help you lower your payment each month, but so could extending your repayment timeline.
  • Save money on interest over the long haul.
    If you plan to refinance your loans into a similar repayment timeline with a lower APR, you will definitely save money on interest over the life of your loan.
  • Change up your repayment timeline.
    Most private lenders let you refinance your student loans into a new loan product that lasts 5 to 20 years. If you want to expedite your loan repayment or extend your repayment timeline, private lenders offer that option.
  • Pay down debt faster.
    Also, keep in mind that reducing your interest rate or repayment timeline can help you get out of student loan debt considerably faster. If you’re someone who wants to get out of debt as soon as you can, this is one of the best reasons to refinance with a private lender.

Why You Might Not Want to Refinance Right Now

While the reasons to refinance above are good ones, there are plenty of reasons you may want to pause on your refinancing plans. Here are the most common:

  • You want to wait and see if the federal government will offer 0% APR or forbearance beyond May 2020 due to COVID-19.
    The federal government has only extended forbearance through the middle of May right now, but they might lengthen the timeline of this benefit if you wait it out. Since this perk only applies to federal student loans, you would likely want to keep those loans at 0% APR for as long as the federal government allows.
  • You may want to take advantage of income-driven repayment plans.
    Income-driven repayment plans like Pay As You Earn (PAYE) and Income-Based Repayment let you pay a percentage of your discretionary income each month then have your loans forgiven after 20 to 25 years. These plans only apply to federal student loans, so you shouldn’t refinance with a private lender if you are hoping to sign up.
  • You’re worried you won’t be able to keep up with your student loan payments due to your job or economic conditions.
    Federal student loans come with deferment and forbearance that can buy you time if you’re struggling to make the payments on your student loans. With that in mind, you may not want to give up these protections if you’re unsure about your future and how your finances might be.
  • Your credit score is low and you don’t have a cosigner.
    Finally, you should probably stick with federal student loans if your credit score is poor and you don’t have a cosigner. Federal student loans come with fairly low rates and most don’t require a credit check, so they’re a great deal if your credit is imperfect.

Important Things to Note

Before you move forward with student loan refinancing, there are some details you should know and understand. Here are our top tips and some important factors to keep in mind.

Compare Rates and Loan Terms

Because student loan refinancing is such a competitive industry, shopping around for loans based on their rates and terms can help you find out which lenders are offering the most lucrative refinancing options for someone with your credit profile and income.

We suggest using Credible to shop for student loan refinancing since this loan platform lets you compare offers from multiple lenders in one place. You can even get prequalified for student loan refinancing and “check your rate” without a hard inquiry on your credit score.

Check for Signup Bonuses

Some student loan refinancing companies let you score a bonus of $100 to $750 just for clicking through a specific link to start the process. This money is free money if you’re able to take advantage, and you can still qualify for low rates and fair loan terms that can help you get ahead.

We definitely suggest checking with lenders that offer bonuses provided you can also score the most competitive rates and terms.

Consider Your Personal Eligibility

Also keep your personal eligibility in mind, including factors beyond your credit score. Most applicants who are turned down for student loan refinancing are turned away based on their debt-to-income ratio and not their credit score. Generally speaking, this means they owe too much money on all their debts when you compare their liabilities to their income.

Credible also notes that adding a creditworthy cosigner can improve your chances of prequalifying for a loan. They also state that “many lenders offer cosigner release once borrowers have made a minimum number of on-time payments and can demonstrate they are ready to assume full responsibility for repayment of the loan on their own.”

It’s Not “All or Nothing”

Also, remember that you don’t have to refinance all of your student loans. You can just refinance the loans at the highest interest rates, or any particular loans you believe could benefit from a different repayment term.

4 Steps to Refinance Your Student Loans

Once you’re ready to pull the trigger, there are four simple steps involved in refinancing your student loans.

Step 1: Gather all your loan information.

Before you start the refinancing process, it helps to have all your loan information, including your student loan pay stubs, in one place. This can help you determine the total amount you want to refinance as well as the interest rates and payments you currently have on your loans.

Step 2: Compare lenders and the rates they offer.

From there, take the time to compare lenders in terms of the rates they can offer. You can use this tool to get the process started.

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Step 3: Choose the best loan offer you can qualify for.

Once you’ve filled out basic information, you can choose among multiple loan offers. Make sure to check for signup bonus offers as well as interest rates, loan repayment terms, and interest rates you can qualify for.

Step 4: Complete your loan application.

Once you decide on a lender that offers the best rates and terms, you can move forward with your full student loan refinancing application. Your student loan company will ask for more personal information and details on your existing student loans, which they will combine into your new loan with a new repayment term and monthly payment.

The Bottom Line

Whether it makes sense to refinance your student loans is a huge question that only you can answer after careful thought and consideration. Make sure you weigh all the pros and cons, including what you may be giving up if you’re refinancing federal loans with a private lender.

Refinancing your student loans can make sense if you have a plan to pay them off, but this strategy works best if you create a debt repayment plan you can stick with for the long-term.

The post Should You Refinance Your Student Loans? appeared first on Good Financial Cents®.

Source: goodfinancialcents.com

Fed: Credit card balances dipped by $3 billion in December

Credit card balances edged down in December, even as consumers engaged in holiday shopping, as uncertainty about a second round of stimulus checks extended to the latter part of the month.

Consumer revolving debt – which is mostly based on credit card balances – was down $3 billion on a seasonally adjusted basis in December to $975.9 billion, according to the Fed’s G. 19 consumer credit report released Feb. 5.

In December, credit card balances were off 3.6% on an annualized basis, following November’s revised 0.8% dip and October’s 6.7% drop, which came on the heels of September’s 3.2% annualized gain.

The Fed also reported that student loan debt outstanding for the fourth quarter rose to $1.707 trillion, from the third quarter’s $1.704 trillion. And auto loan debt outstanding gained to $1.228 trillion, from the third quarter’s $1.219 trillion.

Total consumer debt outstanding – which includes student loans and auto loans, as well as revolving debt – continued to grow and rose $9.7 billion to $4.184 trillion in December, a 2.8% annualized gain.

For the entire year, credit card balances were down 11.2%.

Card balances had been growing before the coronavirus impacted consumer spending and bank lending in 2020. They dipped below the $1 trillion mark last May, for the first time since September 2017.

See related: 51% of consumers accrued more debt during the pandemic

ABA sees brighter days ahead for credit availability

The American Bankers Association reports, based on input provided by chief economists of large North American banks to its credit conditions index for the first quarter of 2021, that credit conditions (both credit quality and availability) have rebounded from their lows of last summer.

However, all three components of the index (the headline credit index, the consumer credit index and the business credit index) remain below 50, which is not a robust index reading. It indicates that while bank economists expect credit conditions to remain “soft” in the coming six months, they are less pessimistic than they were in September 2020 when the ABA  conducted its last credit conditions survey.

The consumer credit index component of the survey gained to 45.3, its highest level since mid-2019. Economists are optimistic about both the availability and quality of consumer credit compared to September. They expect credit to be more available to consumers in the coming six months, although a small majority expects credit quality to decline.

“Although credit quality is still expected to worsen over the first half of the year for both consumers and businesses, the overall outlook for credit markets has improved significantly since the summer and fall,” said Rob Strand, ABA senior economist. “As widespread inoculations against the virus and new fiscal stimulus measures help heal the economy, banks will continue to work closely with policymakers, consumers and businesses to ensure that affordable credit remains available and recovery strengthens.”

Fed reports easing of credit card lending standards in fourth quarter

According to the Fed’s senior loan officer opinion survey on bank lending practices for January 2021 (which is based on input related to the fourth quarter of 2020), a “moderate net share of banks” reported that they had eased up on credit card loans.

As a result, a “modest net share of banks” also hiked up their credit limits on credit card accounts. And a “moderate net share of banks” reported that there was higher demand for credit card loans during the fourth quarter.

As for the outlook, a “significant net share of banks” is expected to ease up on their standards for credit card loans. They are doing so in anticipation of an improvement in their loan portfolios’ credit quality, as well as a hike in their tolerance for risk.

Also, the New York Fed’s survey of consumer expectations for December 2020 finds that consumers are less concerned about the possibility of missing a minimum debt payment in the coming three months. The average perceived probability of this occurrence dipped to 10.5% for December, from November’s 10.9%.

See related: What happens when you miss a credit card payment?

Jobs edge up in January

The New York Fed survey also finds that on average fewer consumers expect the unemployment rate to be higher a year from now, with this probability declining to 38.9%, from November’s 40.1%.

While the average perceived probability of losing a job in the coming 12 months rose up a bit to 15% (mainly on account of those without a college degree), respondents were also more likely to leave their job voluntarily. However, they were less optimistic about landing a new job if they lost their current ones.

The U.S employment situation was about stable in January, with the economy adding 49,000 jobs, the government reported Feb. 5. “The labor market continued to reflect the impact of the coronavirus pandemic and efforts to contain it,” according to the Department of Labor’s employment report media release. The unemployment rate dipped 0.4 percentage points to 6.3% and average hourly earnings were up $0.06 to $29.96. Also, the job numbers for both November and December were revised down, with November down 77,000 jobs (to 264,000) and December losing an additional 87,000 jobs (to minus 227,000).

In his daily email commentary, Ian Shepherdson, chief economist at Pantheon Macroeconomics, noted, “Coupled with the -159K net revision, this is a significantly softer report than expected, at least in terms of payrolls. Bulls will cite the large and unexpected drop in the unemployment rate, but two-third(s) of the decline was due to a 405K drop in the size of the labor force – a sign of discouragement – while household employment rose 201K.”

He added that “the labor market was frozen at the start of the year, and is completely dependent on the pace of reopening, which in turn is contingent on the speed and sustainability of the fall in hospitalizations.”

Source: creditcards.com

What Is “Accessible Income” on a Credit Card Application?

If you’re applying for a credit card, you might stumble upon this term “accessible income.” In fact, that’s the only situation in which you will come across the term: on a credit card application. So, you need to know what it is.

Accessible income is not just income you earn from your regular job. Rather, it includes much more than that. It includes income from a wide variety of sources, like retirement savings accounts, social security payments, trust funds, just to name a few.

Accessible income can work in your favor because not only you can list income from your job, but also all types of other money you receive in a given year. This in turn will increase your chance of getting approved for the credit card, simply because you can list a higher income.

It also can get you approved for a higher credit limit, which in turn can help your credit score and allow you more spending freedom. In this article, I will explain what accessible income is and the types of income you need to include in your credit card application. Before you start applying for too many credit cards, consult with a financial advisor who can help you develop a plan.

What is accessible income?

Accessible income means all of the money that you have accessed to if you are 21 years old or older. According to the Credit Card Accountability Responsibility and Disclosure Act, lenders are required to offer you credit if you are able to pay your bill. If you do not make enough money and do not receive enough income from other sources and cannot make payments, they can reject your application. That is why they ask for your accessible income.

If you are between the age of 18 and 20, your accessible income is limited to income for your job, scholarships, grants and money from your parents or other people.

However, if you are 21 and older, your accessible income involves way more than that. It includes income from the following sources:

  • Income paychecks
  • Tips
  • Bank checking accounts
  • Savings accounts
  • Income of a spouse
  • Grants, scholarships, and other forms of financial aid
  • Investments income
  • Retirement funds
  • Trust funds
  • Passive income
  • Checks from child support and spousal maintenance
  • Allowances from your parents or grandparents
  • Social security payments or SSI Disability payments

To report that accessible income, just add them all up to arrive at a total and submit it. The credit card companies will not ask you to provide the specific source of each income

What does not count as accessible income

Loans including personal loans, mortgage, auto loans do not count as accessible income simply because they are borrowed money. So, do not list them when submitting your credit card application.

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Accessible income on the credit card application

Accessible income is only associated with credit card applications. In other words, you’re only asked that when you’re applying for credit cards. When applying for a credit card, you should take advantage of all sources of income and not just the income from your job.

So, you should make sure to gather all of the money you have accessed to that year. Not doing so means that you’re leaving other income that is just as important. As mentioned above, you should not include loans or any borrowed money.

When reporting your accessible income, be as accurate and truthful as possible. While some credit card companies may take your word for it, others may ask you to verify your income. In that case, you will need to provide hard proof like pay stubs, bank statements, statement from your investments accounts, etc…

Why providing accessible income important?

Your credit score is the most important factor credit card companies rely on to decide whether to offer you a credit card. However, your income is also important. The higher your income, the better.

A high income means that you’re able to cover debt that you may accumulate on your credit card. And the higher your chance is that they will approve you. The opposite is true. If you have a low income, some credit card companies may not approve you even if you have a good credit score. So, in order to increase your chance, you should take advantage of accessible income.

The bottom line

The only situation where you will find “accessible income” is on a credit card application. Accessible income is all income you have access to in any given year. That includes much more than your paychecks from your regular jobs.

But it also includes all types of money including checks from child support or alimony, allowances from your parents or grandparents, money in your retirement and investment accounts, etc. So, you should take advantage of it when applying for a credit card.

Speak with the Right Financial Advisor

You can talk to a financial advisor who can review your finances and help you reach your goals (whether it is making more money, paying off debt, investing, buying a house, planning for retirement, saving, etc). Find one who meets your needs with SmartAsset’s free financial advisor matching service. You answer a few questions and they match you with up to three financial advisors in your area. So, if you want help developing a plan to reach your financial goals, get started now.

The post What Is “Accessible Income” on a Credit Card Application? appeared first on GrowthRapidly.

Source: growthrapidly.com

I Was Denied an Auto Loan. Now What?

Bright sunshine shines in the windshield of a car as a person with a backwards baseball cap drives with one hand on the steering wheel.

You’re in the market for a new car but you’ve been denied an auto loan. Now what? Here’s what you need to know about why you may have been denied and what to do to make sure it doesn’t happen again.

Why Do I Keep Getting Denied for Auto Loans?

Unfortunately, there are many reasons a bank might reject your application for a car loan. If your loan application has recently been denied or you keep getting denied, it might be due to one of these common reasons:

  • Application errors. Sometimes, the application could be rejected because of an error you made when filling it out. A missed section, some incorrect information, a missing form or another mistake can mean your loan is ultimately denied.
  • Bad credit. Bad credit is a common reason for auto loan denial. A score below 670 is usually considered a bad credit score, and this damages lenders’ trust in your ability to pay off a loan.
  • Too much debt. A high debt-to-income ratio can make lenders leery. If you have a number of loans or credit cards with large amounts of debt, this raises your DTI and may lower your chance of getting approved for future loans, car loans included.
  • No credit. Lenders look for proof of consistency in paying off past loans when reviewing your application. If you have no credit history, lenders may feel they don’t have enough information about your ability to pay off a future loan.

What Can I Do If My Loan Application Is Denied?

You have a few options when you’ve been denied an auto loan, depending on the reason you were rejected.

Application Error

If you were rejected because of an application error on your part, you should contact the bank as soon as you can. Hopefully, the mix-up can be resolved and your request will be approved. If not, the lender will tell you when you can reapply.

Poor Credit

If you were rejected because of poor credit, check your credit report so you can determine what is negatively impacting your score. Depending on what your report says, look into ways to improve your credit so you can be approved next time. Pay your bills on time, and use your credit cards to make and then repay smaller purchases. Keep in mind that building or rebuilding your credit can take a while. Don’t be disappointed if it takes months or even a year or two to really get your score where you want it.

If you need a loan sooner, consider adding a cosigner to your application that can be your backup if you fail to pay the loan. Lenders feel more comfortable with this method, and it’s a good way to prove dependability.

Debt

If you were rejected because you already have too much debt, it’s important to reduce that amount in steady increments. Set a budget and stick to it, tackling the largest debts first. Avoid adding any debt to what you already have. Examine your credit card usage for any unnecessary expenses and cut back on those in the future.

No Credit

If you don’t have a credit history, now’s the time to start. There are a lot of ways to start building your credit: you might be able to become an authorized user on someone else’s credit card or find a co-signer for your loan, for example. You also might want to apply for a secured credit card or credit card for no credit.

Find the right credit card for your needs. Learn more.

Does Getting Denied a Loan Hurt My Credit?

Getting denied for an auto loan doesn’t in itself hurt your credit score. The lender didn’t extend anything, so there’s nothing that can hurt your score. However, multiple denied applications at once could hurt your score.

A bank conducts a “hard inquiry” when you apply for a loan. This can cause a drop in your credit score slightly—about five to ten points—whether you’re accepted or not. If you apply for too many loans, numerous hard inquiries on your credit can cause a larger drop.

What Are My Other Options?

If you don’t have time to build or rebuild your credit, can’t get a co-signer, and need a car fast, there are two options to be considered as a last resort.

“Buy Here Pay Here” Dealers

Stop by your neighborhood “Buy Here Pay Here” (BHPH) auto dealer, and one way or another, it will probably get you into a car. It won’t be a new car, and it will probably have lots of miles on it, but at least you’ll get a car you desperately need to get you to and fro.

The BHPH dealer won’t want to talk to you about interest rates. Your local BHPH will focus on your expected monthly payment and ask for a really big down payment. They mostly care about whether or not you have a current, steady income. Based on that, they’ll determine how much they are willing to lend and which car options are available to you. It’s not a great way to buy a car, but for millions of Americans, it is the only way they can make this significant a purchase.

Unfortunately, purchasing a car at a BHPH dealer isn’t a credit boost at all. They usually don’t report anything positive to credit reporting agencies, but they will report negative actions like a missed payment or repossession. Always ask about their late payment policies before making a decision.

Alternative Credit Bureaus

If your credit score is low or your credit history is light based on traditional credit trade lines (credit cards and loans), but you have a solid history of paying your everyday bills, you may be able to take advantage of alternative credit scoring methods. If you can prove your creditworthiness by having your everyday bills verified, some companies will work with alternative credit scoring methods to offer credit. Alternative credit generally doesn’t carry the same weight as traditional credit lines, so interest rates likely will not be as competitive.

At this point, you can go to any dealer and buy the car you really want instead of being limited to the inventory on a BHPH lot. If you can afford the payments, you can buy a new car that’s under warranty and has no mileage on the odometer. If you can continue to work on your credit and improve your credit score, refinancing may even be available down the road.

However, many lenders still do not use alternative credit and don’t view it as proof of reliability. Most of these alternative credit companies also don’t report your findings to the major credit bureaus. So, while these alternative creditors may be a short-term option, building credit through traditional methods should be a priority.

Why Would I Get Rejected for a Car Refinance?

If you were denied for refinancing, it’s probably because of a poor credit score or a high DTI. Usually, these are the same as the reasons you might be denied an auto loan. Your score may have been satisfactory when you purchased the vehicle but taken a few hits since its purchase.

How to Get Approved Next Time

Before you reapply for an auto loan, make sure all your information is in order. Gather your records and make sure everything is ironed out and correct before you go to a lender. For a better shot at loan approval, your credit score should be in a comfortable range, and you shouldn’t have any large outstanding debts. Always check your credit score before you apply. If it’s not high enough for loan approval, work to improve your credit first. Then, make sure you’ve determined what type of payments and interest you can afford.

If you do get denied, don’t worry! By making sure you meet all of the income, credit and debt requirements for an auto loan, you can increase your chance of getting accepted the next time you apply.

The post I Was Denied an Auto Loan. Now What? appeared first on Credit.com.

Source: credit.com

How Much Does a Cosigner Help with Getting Auto Loans or Better Loan Terms?

A woman in a bright yellow dress drives a silver car.

Imagine you’re shopping for a new car and finally find a reasonably priced set of wheels that you like. But when the dealer pulls your credit, that seemingly affordable monthly payment is no longer available to you. Instead, you’re offered a subprime car loan at 10% or even 20% interest because your credit isn’t strong enough to get a better rate.

How much does a cosigner help on auto loans when you’re facing this type of situation? Get more information below to help you decide whether seeking a cosigner is the right option for you.

How Does a Cosigner on a Loan Work?

A cosigner is basically someone who backs the loan. They sign agreeing that if you don’t make the payments as promised, they will step in to pay them.

If you don’t have much of a credit history or your credit is bad or poor, lenders are typically hesitant to give you an auto loan. They perceive you as risky. Will you pay as agreed? There’s not enough data or credit history for them to make that call.

However, a cosigner with a long history of good credit is different. The lender is more likely to believe that this person willpay as agreed. So, if you can get a cosigner to back you, you might have a better chance of getting a loan or getting better terms.

How Much Does a Cosigner Help With an Auto Loan?

How much can you save? Imagine you finance $37,851, the average price for a new light vehicle in the United States as of February 2020.

The average interest rate as of the end of 2019 for new car loans was 5.76%. If you’re able to get that interest rate and a loan term of 72 months—that’s 6 years—you would pay a total of $44,742. That’s $6,891 in interest and a monthly payment of around $621.

If you financed at 10% without a cosigner for the same terms, you’d pay a total of $50,488 for the vehicle. That’s $12,637 in interest and around $701 in monthly payments.

This is obviously just an example, but you can see that a cosigner can save you a lot. In this case, it’s $80 a month and more than $5,700 total.

Cosigner Versus Co-Applicant

It’s important to note that having a cosigner for a car loan is not the same thing as having a co-applicant. A co-applicant buys the vehicle with you. Their credit history and income are used alongside yours to determine if you, together, can afford the vehicle. The co-applicant also has an equal share of ownership in the vehicle purchased with the loan.

A cosigner, on the other hand, doesn’t have an ownership share in the vehicle. Their income may also not be a factor in the approval. Typically, they’re along only to provide a boost in the overall credit outlook.

What Are Some Downsides of Having a Cosigner?

Most of the risks or disadvantages are held by the cosigner. If you don’t pay the loan, they could become responsible for it. They could also suffer from a lower credit score if you’re late with car payments because it might get reported to their credit too.

As a borrower, you might experience a few disadvantages in using a cosigner. First, you have to get someone to agree to this, and you typically want it to be someone with good credit. Trusted family members are the most common cosigners, but that could mean that they might want to have a say in what type of vehicle you get.

And if something happens and you can’t pay the vehicle loan for any reason, you run a personal risk. You could damage your relationship with the cosigner if they do end up having to pay off the loan or face damage to their credit.

So, Should You Get a Cosigner for an Auto Loan?

The decision is personal. Before you do anything, check your credit and understand where you are financially. That helps you know what your chances for getting approved for a loan are on your own and how much loan you might be able to afford.

Then, check out some potential auto loans and consider whether you should apply for them on your own. If you know your credit is too poor or you try to apply for a loan and don’t get favorable terms, talk to a potential cosigner. Be honest about your situation and have a plan to pay the loan on time each month so they feel more confident supporting you as you make this purchase.

Apply for an auto loan today!

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Source: credit.com

Should I Buy or Lease My Next Car?

Gas can make summer road trips expensive, but the right credit card can earn some of that spending back.

One of the most common questions I am asked as a financial planner is “should I lease or buy my car?” Leasing commercials on the radio make it sound like leasing a car is the only cheap, intelligent choice. However, it really depends on how you define “cheap.” If it means a lower monthly payment, then leasing is usually cheaper. If it means what you pay long term, though, leasing is usually not the best option.

What’s the Process of Buying a Car?

Buying a car is a relatively straightforward process. Essentially, you negotiate the price of the car at the dealership and you secure financing. After providing a down payment, you’d finance the entire remaining value of the car, usually through a loan from a bank or credit union. You would then make payments that include both principal and interest for a specified period of time. Once your contract is complete, and the loan or other financing is paid off, you’d own the car outright.

At that point, you could decide to keep it or sell it. If you sold it, you’d have to negotiate the sale to get the price you want. One disadvantage of owning the car is that thanks to regular wear and tear and other factors, you have no guarantee of what the car will be worth at the end of the financing period.

How is Leasing Different from Buying?

Leasing is a bit more complicated, but it’s basically just another method of financing a car. The difference is you aren’t financing the entire car—just the use of the car during the first few years of the car’s life. The payments you make would still consist of principal and interest, but only for the portion of the car’s life you’d be using up.

The biggest difference is that unlike buying a car, you don’t own anything once a lease is complete—and if you still needed a vehicle, you’d have to acquire another one. Typically, you can purchase the car for a pre-set price (known as the residual value) once the lease term is over, or you can give the car back to the leasing company and decide to either purchase or lease another vehicle.

Do You Have to Pay Extra Fees to Lease a Car?

Many advertised leases also require a down payment. If you’re short on cash, you can skip the down payment, but your monthly payment would be higher because you’d be financing more of the car. Also, keep in mind that you’re still responsible for the condition and mileage of the cars you lease. When you turn the car back in, if it isn’t in good condition or if you’ve driven more miles than your lease allows (around 12,000 miles per year), then you’ll have to pay extra.

When Is It Better to Lease Rather Than Buy?

Before you decide to lease or buy, you’ll also need to determine how many miles you drive per year and how long you like to keep your cars. If you are a high mileage driver (say, more than 15,000 miles per year) or you like to keep your cars for three years or more, you are most likely better off purchasing the car. If you don’t drive much and you prefer driving new cars, then leasing may be a better option for you.

Regardless of whether you lease or buy, you’ll need good credit to qualify for a low interest rate. So before you shop for a car, see where you stand: check your credit score for free at Credit.com.

Image: monkeybusinessimages 

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Source: credit.com