How Much Will a Car Repossession Hurt My Credit Score?

In most parts of the country, having a car isn’t optional. Without your own vehicle, it can be extremely difficult to get to work or provide for your family, but at the same time, car ownership can be a challenge.

If you find yourself having trouble making your car payments, you could end up losing your vehicle. That can cause all sorts of other problems, which a Credit.com reader recently asked about:

“How much does a repossession affect your credit?” —kc

Having your car repossessed can certainly cause credit problems, but the actual repossession is only one of them. Car repossessions are reported to the major credit bureaus, and as a result, will impact your credit scores.

“A car repossession is considered a negative payment event by the FICO Score,” Can Arkali, principal scientist at credit scoring company FICO, said in an email. “All else held equal, the impact of a car repossession is comparable to the impact of a collection account.”

Jeff Richardson, a spokesman for credit scoring company VantageScore Solutions, said how much a repossession affects your credit really depends on the scoring model you’re talking about, as well as other factors in an individual’s credit history. In general, a repossession is considered a derogatory event, like collection accounts, civil judgments and tax liens.

Credit Problems Leading Up to Repossession

Of course, repossessions generally don’t happen in a vacuum. Someone’s car is usually repossessed because they haven’t made their auto loan or lease payments on time, which likely would have already hurt their credit.

“Avoid it,” Richardson said, adding that people should avoid any derogatory events “at all costs.” According to VantageScore, it will take longer to recover from a derogatory event like a car repossession than it will to recover from a series of delinquencies. So even if you’re behind on payments, bringing that account to current status and avoiding a repossession may also help you spare your credit from further damage.

The Aftermath of Repossession

A repossession can remain on your credit report for 7 years from the date you initially fell behind on the loan. The loan status will change to “repossession” (it would have previously said how many days delinquent the payments were), and it will have a seriously negative impact on your credit, though that impact will lesson over time.

Rod Griffin, director of public education at Experian, said there’s no specific amount of points your credit score will drop after a repossession. Given that a series of delinquencies tends to precede repossession, someone whose car is taken back likely already has a poor score.

“Typically it’s not a unique element of the history,” Griffin said. There are probably other negative things happening, and that repossession is going to dig them in deeper.”

That’s often not the end of it either. Losing your main mode of transportation could seriously compromise your ability to get to work and make money to pay your other bills. The potential domino effect of a repossession is just one of many reasons to try to avoid it.

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A voluntary repossession — giving the car back rather than having someone come and take it — will hurt your credit score just as much as a forceful repossession, Griffin said, though it could help you in the future to maintain as good a relationship as possible with an auto lender or dealer. But as far as credit goes, it won’t help.

Finally, after the lender repossesses your car, they will sell it in an attempt to recoup their losses. If the sale doesn’t cover the entire balance of the loan, you can expect to get a 1099-C for that tax year. The Internal Revenue Service treats canceled debt as income, and you may need to pay taxes on it, which can further strain your finances.

If you do go through a repossession, Griffin recommends focusing on what you can do to improve your credit while you wait for the repossession to age off your reports. That includes actions like paying down your revolving credit balances (credit card debt) and bringing current any other delinquent accounts you may have, because payment history and debt use have the greatest impact on credit scores. You can see how your score changes as a result of a repossession and your efforts to improve it by getting a free credit score every month on Credit.com.

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Source: credit.com

What to Do When You Owe More on Your Car Than It’s Worth

A negative equity car loan — also referred to as being “upside down” or “underwater” on a loan — means you owe more on a vehicle than it’s worth, and it’s a more common scenario than you might think.

Nearly one-third (31.4%) of car owners currently have a negative equity car loan, according to a J.D. Power Automotive forum on March 22. And USA Today reported something even more concerning: “The percentage of car owners facing negative equity is expected to hit a 10-year high in 2016.”

How do people get into a negative equity situation with cars? For one, brand new cars lose an average of 11% of their value the minute they’re driven off the lot. So say you take out a loan for $25,000 on a new car valued for the same amount. Just a few minutes after you drive off the lot, your car may only be worth $20,000, meaning you now owe $5,000 more than the car is worth.

Having negative equity isn’t always terrible, but it can mean added expense if you’re looking to sell or trade in your vehicle, and it can cause you a lot of grief in the event of a wreck or a theft. Let’s explore what you can do if you find yourself with a negative equity car loan, and things that may help you get out from underwater.

What a Negative Equity Car Loan Means for You

Barring extenuating financial circumstances (like missed payments), having a negative equity car loan usually just means you’ve purchased a car that’s value depreciated faster than you’ve made payments and you need time to catch up. Cars — especially new ones — depreciate a lot (20-30%) in the first few years, and then depreciation tends to level off, according to Edmunds. If you have no plans to sell or trade in your vehicle, your situation is tenable.

But, if you’re trying to purchase a new car with a new loan and want to trade in or sell your current car, a negative equity loan will be a complication (read: added expense). You’ll either have to roll over the negative equity into your new loan or pay it off (and if you could do that, you probably wouldn’t be underwater in the first place). Purchasing a new car while underwater on your current one is a choice, of course, and individual buyers will have to weigh their options to decide if they want to take on the added financial burden.

Some situations you may find yourself in while underwater on a loan can be quite expensive. Getting into a car wreck that results in a total loss, or having your car stolen, can mean that not only will you not be compensated for vehicle replacement, you might actually owe your lender money.

Using our previous example of the $25,000 car: if you’ve only paid off $2,000 of the vehicle (through either down payment or loan payments), and the vehicle is determined to be worth just $20,000 at the time of a total loss, you’ll owe your lender $3,000. Not a fun situation to find yourself in, to be sure, but this is a time where guaranteed auto protection (GAP) insurance can be helpful.

Ways to Get Out From Underwater

  • Make larger monthly car payments (as your budget allows).
  • Keep the car you’ve got until you’re above water (until the car is worth more than you owe).
  • Roll the negative balance into your new car loan — this costs you nothing out of pocket, but be aware that you’ll likely be making higher monthly payments and you’ll still have to pay off the negative balance.

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If you’re really underwater on a bad loan (the interest payments are quite high) or you’ve missed payments, and your monthly bill is high, but you still won’t pay off the loan for a long time, selling the car and taking the financial hit might be something to consider. Be sure to carefully calculate expenses and get help from a financial advisor if you can. Refinancing your loan is another option, but be sure to use a reputable lender.

Be Wary of Certain Types of Loans

One of the best ways to help you avoid a negative equity auto loan in the first place is to make a large enough down payment. This is why it may be helpful to determine an appropriate down payment before going car shopping and make sure you’re buying a car you can actually afford. (To give you an idea of whether you might qualify for the best rates on your car purchase, take a look at your free credit report summary on Credit.com.)

Be wary of loans with little to no down payment and extended loan lengths (like those reaching 84 months), Michael Harley, chief analyst at Auto Web, explained. If loans like these are all you qualify for, or all you can afford, you may want to consider less expensive options.

Some loan advice to consider:

  • Try to keep car payments less than 20% of your take-home pay.
  • Aim to finance cars for no more than five years.
  • Try to put 20% down.
  • If you’re getting a used car, it may be better to finance it for three years with about 10% down.
  • More financing tips — for both new and used cars — can be found here.

GAP Insurance: How it Can Help

If you have negative equity, for whatever reason, GAP insurance might be a good choice. GAP insurance may be a good option if you’re paying less than 20% down on a new car or rolling over a negative equity loan. This way, if you experience a total loss or a stolen car while you have negative equity on your loan, you’ll have coverage.

Keep in mind: GAP insurance doesn’t cover negative equity in the event that you want to replace your current vehicle with a different one — if you’re underwater in that case, you’ll have to make up the difference with either cash or an even bigger new car loan.

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The bottom line: If you have negative equity on a car loan and you can afford the payments and have an end in sight, the best thing to do may simply be to ride it out: keep making payments and put off trading in or upgrading your car until you’re in a more secure financial position.

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Is There Trouble Brewing in the Car Loan Market?

Roughly 26% of car buyers feel that they overpaid for their vehicle, according to a 2014 survey from TrueCar, Inc. That same survey admittedly also found consumers believe car dealers make about five times more profit on the sale of a new car than they actually do — but whether you truly paid too much for your now-old ride or you simply think you did, there are ways to save the next time you hit up a car dealership. For starters, the rates on auto loans are largely driven by your credit, so simply bolstering your credit score can potentially save you thousands of dollars over the life of your loan. Plus, it never hurts to comparison shop and negotiate when it comes to auto loans and the actual vehicle itself — you may be missing out on savings by doing one and not the other.

But First… How Much Car Can You Afford?

According to Credit.com contributor and car insurance comparison company TheZebra, automotive experts generally suggest auto loans not exceed 10% (if it’s just the loan) to 20% (if it’s the loan and related expenses like car insurance) of your gross monthly income. Of course, that’s a broad rule and every potential car owner is going to have to take a long, hard long at their finances and current debt levels to decide what they can, in fact, afford. Following these three simple cost-cutting steps can help you save big on your auto loan and next car purchase.

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1. Do a Credit Check

Not checking your credit before you start shopping for a car is a huge mistake. Because your auto loan rates are directly tied to your credit scores, even a small inaccuracy on your credit report could cost you. Before you start shopping for your dream car, take an hour to check all three of your credit reports and credit scores online. You need to check with all three major credit reporting agencies — Equifax, Experian and TransUnion — because you don’t know which one a lender will use for your application. If you have a credit score above 750, you can probably qualify for the best rates available and negotiate an excellent deal on your car. If your credit score is lower, see if you can give it a boost before you apply for a loan.

You can view two of your credit scores, along with your free credit report snapshot on Credit.com. The snapshot will pinpoint what your specific area of opportunities are and what steps you can take to improve. However, as a general rule of thumb, you can raise your credit score by disputing errors on your credit report, paying down high credit card debts and limiting new credit applications.

2. Shop Online

Unless you have a credit score in the 800s and can qualify for a 0% auto loan offer, you are probably not going to get the best deal on a loan from the dealership. Auto loan rates and fees offered by online auto lenders are usually a lot lower than the rates offered by dealership financing programs. Plus, you can shop and compare rates online without causing damaging inquiries to your credit report (provided you’re not formally applying for every offer you see). Most online lenders have calculators or rate guides that show you what rate you could receive based upon your credit score. (Note: Be sure to vet any lender, whether online or within a dealership, before taking them up on an offer.)

With many online loans, you fill out the application and receive an approval by email within a few hours. Then the lender mails you a check that is ready to be made out to the person or business selling the car. If you end up not buying a car or not using the loan, you toss the check (shredding it first, of course). Plus, the check from the lender usually specifies a certain price range (for example, $9,000-$10,000). This leaves you with some room for negotiating a lower price with the seller even after you have received your loan approval. Speaking of which …

3. Negotiate the Price

Many people may wind up overpaying for a car simply to avoid negotiating the price of a car with a salesperson. Luckily, the Internet makes negotiating with car dealers a whole lot easier. Before you start shopping, look up the listed price, invoice and MSRP of the car you want through an unbiased site like Kelley Blue Book and request free price quotes online. Armed with these facts, you’ll have an advantage over the salesperson when you start the negotiations. You should be able to save a couple hundred dollars, if not a few thousands, by negotiating with the car salesperson before you decide to buy.

Proving It

You may be thinking: This is all fine and dandy, but does it really add up to $3,000 in savings? Let’s crunch the numbers using this auto loan calculator.

According to data from Experian, the average interest rate on a new car loan for prime customers as of the last quarter of 2015 was 3.55%. The average rates on a new car for non-prime customers and subprime customers during that timeframe were 6.24% and 10.36%, respectively.

So, let’s say you wanted to buy a $16,000 car and had $1,000 saved for a down payment. If you chose a loan repayment period of 60 months, had a non-prime credit score (think just below 700), and got a loan through a dealership, you could receive about a 6.3% annual percentage rate (APR).

  • Dealership option: $292 a month – $17,525 total costs

However, if you checked your credit reports and scores before you applied and found a way to boost your score to prime (think around 750), your interest rate from the dealership could drop to about 3.5%.

  • Improved score: $273 a month – $16,373 total costs

You would have already saved $1,152 dollars, just by checking your credit reports! That’s a pretty good return on your investment. Next, you might be able to reduce your rate even more by shopping for a loan online with your new credit score of 750. Let’s suppose, for argument sake, you qualify for a 2.7% APR (the average interest rate for super-prime customers during the last quarter of 2015, according to Experian).

  • Online loan: $268 a month – $16,052 total costs

You would have saved almost $1,473 by working on your loan options using Step 1 and 2. Finally, if you went to negotiate with the salesperson you could probably make a deal with the seller to reduce the price of the car down to $14,000. In this case, you would only have to borrow $13,000 with your 2.7% APR loan from an online lender.

  • Negotiated deal: $232 a month – $13,912 total costs

Your total savings from following these three simple steps would equal $3,613 over the life of your auto loan!

Source: credit.com

Why This Could Be a Great Year to Buy a Used Car

America’s new love affair with auto leasing offers some unexpected good news to drivers looking for used car bargains. A coming glut of end-of-lease cars will dump millions of used cars on the market in the next year or two, almost certainly lowering prices on relatively low-mileage, late-model cars with most modern amenities.

Leasing exploded in popularity during the early part of this decade, hitting an all-time record in 2014 (since repeatedly eclipsed: You can read the full story here). Two and three-year leases signed then will begin to come on the market this year, adding an estimated 800,000 extra used cars into the market, according to a report by the National Automotive Dealers Association. It conservatively estimates that used car prices will actually fall an average of 2.5% each year for the next three years.

Why Drivers Should Care

“The expanding pool of used vehicle supply, spearheaded by off-lease growth, will gradually compress used vehicle prices as time passes,” the report says. “Under this assumption, prices would be at their lowest point since 2010.”

That’s good news for all drivers, as prices for both new and used cars have risen steadily in recent years, fueled by record auto sales across the board. During the recession, drivers held on to cars longer, reducing the supply of used cars, helping push prices up 18% from 2007 to 2014, the report says.

Edmunds.com found that average used car prices set a record last year, reaching $18,600.

Pushed largely by the influx of millions of end-of-lease cars, dealers have aggressively expanded their so-called certified pre-owned sales efforts. Consumers are drawn to CPO sales because these used cars come with new-car-like warranties and benefits. CPO sales also hit a record last year, Edmunds said, and have climbed 55% in the past five years.

“The key factor driving all of the trends in used car sales today is the popularity of leasing, which is bringing younger and higher quality used cars back to the market,” Jessica Caldwell, Edmunds.com Director of Industry Analysis, said in a press release. “We’re truly in the midst of a Golden Age for CPO and near-new used cars. And with a record number of lease terminations expected in 2016, for the foreseeable future there certainly will be no shortage of supply to meet the growing demand for used cars.”

An eye-popping 54% of used vehicles sold last year were three years old or younger, Edmunds says, and the average age of used vehicles sold edged down to 4.4 years in 2015 from 4.6 years in 2014.

All those new-ish end-of-lease vehicles becoming available will eventually become a “big problem” for car dealers, Caldwell recently told AutomotiveNews.com. But a problem for dealers could be a boon for you. So what should you do?

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Used-Car Shopping 101

If shopping for a new car, investigate certified, pre-owned offers, too. Dealers know they have a big pile of leases ending within the next 12-24 months, so they will be willing to bargain.

Also, in a bit of a reversal, don’t be afraid to shop for a used car during the busy months. While it’s generally easier to get a deal during winter when sales are slow, end-of-lease cars will pile up during spring and summer, when sales picked up two and three years ago. You could benefit from showing up during a busy week of lease returns.

Finally, not all used car categories will be impacted the same, so if you are looking for a deal, pick the right car.

“The supply effect on used prices will be most pronounced on subcompact cars, compact cars, compact utilities and midsize utilities—both non-luxury and luxury. Utility and truck prices will be cushioned somewhat from supply’s blow by low gas prices and stronger consumer demand, while car segments will enjoy no such buffer,” the NADA report says.

Remember, getting a good deal on an auto loan often hinges on your credit score — generally, the higher the score, the lower the interest rate. You can see where you currently stand by viewing your credit scores for free each month on Credit.com. And, if your credit is in rough shape, you can improve your score by disputing any errors on your credit report, identifying your credit score killers and creating a game plan to address them.

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Some White Borrowers May Get Refunds in a Racial Discrimination Settlement. Here’s Why.

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Auto Loan Debt Tops $1 Trillion

This Article was Updated July 5, 2018

When you are looking to buy a vehicle, the first thing you should do is apply for a preapproved loan. The loan process can seem daunting, but it’s easier than you think and getting preapproval prior to going to the car dealer may help alleviate a lot of frustration along the way.

Here are five steps for getting a car loan.

  1. Check Your Credit
  2. Know Your Budget
  3. Determine How Much You Can Afford
  4. Get Preapproved
  5. Go Shopping

1. Check Your Credit

Before you shop for a loan, check your credit report. The better your credit, the cheaper it is to borrow money and secure auto financing. With a higher credit score and a better credit history, you may be entitled to lower loan interest rates, and you may also qualify for lower auto insurance premiums.

Review your credit report to look for unusual activity. Dispute errors such as incorrect balances or late payments on your credit report. If you have a lower credit score and would like to give it a bit of a boost before car shopping, pay off credit card balances or smaller loans.

If your credit score is low, don’t fret. A lower score won’t prevent you from getting a loan. But depending on your score, you may end up paying a higher interest rate. If you have a low credit score and want to shoot for lower interest rates, take some time to improve your credit score before you apply for loans or attempt to secure any other auto financing.

2. Know Your Budget

Having a budget and knowing how much of a car payment you can afford is essential. You want to be sure your car payment fits in line with your other financial goals. Yes, you may be able to cover $400 a month, but that amount may take away from your monthly savings goal.

If you don’t already have a budget, start with your monthly income after taxes and subtract your usual monthly expenses and how much you plan to put in savings each month. For bills that don’t come every month, such as Amazon Prime or Xbox Live, take the yearly charge and divide it by 12. Then add the result to your monthly budget. If you’re worried, you spend too much each month, find simple ways to whittle your budget down.

You’ll also want to plan ahead for new car costs, such as vehicle registration and auto insurance, and regular car maintenance, such as oil changes and basic repairs. By knowing your budget and what to expect, you can easily see how much room you have for a car payment.

3. Determine How Much You Can Afford

Once you understand where you are financially, you can decide on a reasonable monthly car payment. For many, a good rule of thumb is to not spend more than 10% of your take-home income on a vehicle. In other words, if you make $60,000 after taxes a year, you shouldn’t spend more than $500 per month on car payments. But depending on your budget, you may be better off with a lower payment.

With a payment in mind, you can use an auto loan calculator to figure out the largest loan you can afford. Simply enter in the monthly payment you’d like, the interest rate, and the loan period. And remember that making a larger down payment can reduce your monthly payment. You can also use an auto loan calculator to break down a total loan amount into monthly payments.

You’ll also want to think about how long you’d like to pay off your loan. Car loan terms are normally three, four, five, or six years long. With a longer loan period, you’ll have lower monthly payments. But beware—a lengthy car loan term can have a negative effect on your finances. First, you’ll spend more on the total price of the vehicle by paying more interest. Second, you may be upside down on the loan for a larger chunk of time, meaning you owe more than the car is actually worth.

4. Get Preapproved

Before you ever set foot on a car lot, you’ll want to be preapproved for a car loan. Research potential loans and then compare the terms, lengths of time, and interest rates to find the best deal. A great place to shop for a car loan is at your local bank or credit union. But don’t stop there—look online too. The loan with the best terms, interest rate, and loan amount will be the one you want to get preapproved for. Just know that preapproved loans only last for a certain amount of time, so it’s best to get preapproved when you’re nearly ready to shop for a car.

However, when you apply, the lender will run a credit check—which will lower your credit score slightly—so you’ll want to keep all your loan applications within a 14-day period. That way, the many credit checks will only show as one inquiry instead of multiple ones.

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When you’re preapproved, the lender decides if you’re eligible and how much you’re eligible for. They’ll also tell you what interest rate you qualify for, so you’ll know what you have to work with before you even walk into a dealership. But keep in mind that preapproved loans aren’t the same as final auto loans. Depending on the car you buy, your final loan could be less than what you were preapproved for.

In most cases, if you secure a pre-approved loan, you shouldn’t have any problems getting a final loan. But being preapproved doesn’t mean you’ll automatically receive a loan when the time comes. Factors such as the info you provided or whether or not the lender agrees on the value of the car can affect the final loan approval. It’s never a deal until it’s a done deal.

If you can’t get preapproved, don’t abandon all hope. You could also try making a larger down payment to reduce the amount you are borrowing, or you could ask someone to cosign on the loan. If you ask someone to cosign, take it seriously. By doing so, you are asking them to put their credit on the line for you and repay the loan if you can’t.

When co-signing a car loan, they do not acquire any rights to the vehicle. They are simply stating that they have agreed to become obligated to repay the total amount of the loan if you were to default or found that you were unable to pay.

Co-signing a car loan is more like an additional form of insurance (or reassurance) for the lender that the debt will be paid no matter what.

Usually, a person with bad credit or less-than-perfect credit may require the assistance of a co-signer for their auto financing and loan.

5. Go Shopping

Now you’re ready to look for a new ride. Put in a little time for research and find cars that are known to be reliable and fit into your budget. You’ll also want to consider size, color, gas mileage, and extra features. Use resources like Consumer Reports to read reviews and get an idea of which cars may be best for you.

Once you have narrowed down the car you are interested in, investigate how much it’s worth, so you aren’t accidentally duped. Sites such as Kelley Blue Book or Edmunds can help you figure out the going rate for your ideal car. After you’re armed with this information, compare prices at different car dealerships in your area. And don’t forget to check dealer incentives and rebates to get the best possible price.

By following these steps, you’ll be ready to make the best financial decision when getting a car loan. Even if you aren’t ready to buy a car right now, it doesn’t hurt to be prepared. Start by acquiring a free copy of your credit summary.

It is always a good idea to pull your credit reports each year, so you can make sure they are as accurate as they should be. If you find any mistakes, be sure to dispute them with the proper credit bureau. Remember, each credit report may differ, so it is best to acquire all three.
If you want to know what your credit is before purchasing a car, you can check your three credit reports for free once a year. To track your credit more regularly, Credit.com’s free Credit Report Card is an easy-to-understand breakdown of your credit report information that uses letter grades—plus you get a free credit score updated every 14 days.

You can also carry on the conversation on our social media platforms. Like and follow us on Facebook and leave us a tweet on Twitter.

Image: istock

Source: credit.com

My New Car Is a Piece of Junk. Can I Return It to the Dealer?

November 15, 2017 &• 6 min read by Gerri Detweiler Comments 0 Comments

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Once upon a time, you loved your car. You loved it so much that you agreed to the payment terms and drove it home from the dealer or, dare we say, a private seller. But now, that love has grown cold and you wish you’d never laid eyes on it. And to make matters worse, you’re bound to its existence and monetary depreciation—thanks to that sweet-little-pain-in-the-butt payment book. Or at least, that’s what you’re afraid of.

If you’re wondering if you can return your unwanted car without any more financial obligation, read on. We’ll discuss whether it’s possible and what you can expect.

Can I Return My Car?

Readers have asked us if they can just “give the keys back” and get a car that is reliable and without unanticipated problems—specifically, a vehicle they can confidently drive with their family, friends, or pets in tow. The short answer is yes, but there’s a variety of potential repercussions and unseen problems.

Before you do anything, find out the following:

  1. If you purchased your car through a private seller, does your state have a “lemon law”?
  2. If you purchased your car through a dealership, does the dealer have a return policy?

If you can answer “yes” to either of these questions, look into these options further to see if your circumstances apply and what you’re entitled to.

However, if you have no recourse under your state’s lemon law and your situation doesn’t qualify for a dealership’s return policy, returning the car is going to be a little tricky and could have credit implications—which you’ll want to consider, especially if you plan to lease or purchase another car once you give the other one back.

Returning the Car to the Dealer

Despite how liberating and freeing a car return may feel, giving the vehicle back to the dealer won’t erase your debt. In fact, the consequences could be just as frustrating as the junk car itself.

“Technically, if you give the car back, it is the same as a repossession,” Matt Briggs, co-founder and CEO of RentTrack, explains. “Keep in mind you have a legal obligation to pay the terms of the loan and the car dealer is typically not the finance company who holds the loan (unless they are ‘buy here pay here’). Either way you cannot simply ‘give back’ the vehicle to a dealer and walk away.”

So look at it this way: to simply give the car back is to consent to automobile repossession—meaning the car would be sold at auction, and you would be responsible for the difference in what the car brought at auction and the amount you still owe on the car.

Plus, you’d be on the hook for expenses involved in this process, such as repossession, towing, title and sale, and storage. So if you leave the car at the dealership, you still owe the debt—which could total to more than the dang clunker is worth—and you’re out a working vehicle.

Concerned about what could happen to your credit score? According to Experian, a car repossession stays on your credit report for seven years—even after the original account goes delinquent. You can see how your debt has affected you by getting a free credit report summary on Credit.com, which will explain what factors influence your credit score.

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Car Debt and Bankruptcy

There is a way, however, to force a dealer to “eat steel,” says Eugene Melchionnne, a Connecticut bankruptcy attorney. To do so, you can surrender the car and discharge the debt in bankruptcy—but then you’d have to apply for bankruptcy. “There is also a process for ‘cramming down’ the debt to the value of the car in bankruptcy, and in a Chapter 13 case, you can spread the balance owed over an extended period of time,” he says.

“For example, if the car loan is for $20,000, but the car is worth $10,000, the loan can be reduced to $10,000, and if there are, say, four years left to pay at $500 per month, the payments can be spread out to a maximum of five years on the lowered balance, resulting in $330 or more a month savings,” Melchionne explains.

Selling or Trading the Car Instead

With all that said, it might be simpler and cheaper to sell the vehicle yourself or trade it in for something else, which is what Matt Briggs suggests you do.

“[At] most repossession auctions, the cars sell for a much lower price than the retail value, so you may end up owing more than you would if you sold it [as a] private party (using a website like AutoTrader, eBay, or Cars.com) or if you traded it in on a different vehicle.”

The Bottom Line

For most of us, simply driving the car back to the dealership and handing over the keys, however tempting, is not a workable strategy. So after you dig yourself out of this mess, do as much due diligence as possible before you buy next time.

“Bottom line,” Briggs said, “you have a legal obligation to pay the car loan in full, so make sure you are getting a good deal before you sign on the dotted line.”

Image: hemera


Source: credit.com

4 Questions to Ask Yourself Before Leasing or Buying a Car

According to Kelley Blue Book, the average price for a light vehicle in the United States was almost $38,000 in March 2020. Of course, the sticker price will depend on whether you want a small economy car, a luxury midsize sedan, an SUV or something in between. But the total you pay for a vehicle also depends on a number of other factors if you’re taking out a car loan.

Get the 4-1-1 on financing a car so you can make the best decision for your next vehicle purchase.

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Decide Whether to Finance a Car

Whether or not you should finance your next vehicle purchase is a personal decision. Most people finance because they don’t have an extra $20,000 to $50,000 they want to part with. But if you have the cash, paying for the car outright is the most economical way to purchase it.

For most people, deciding whether to finance a car comes down to a few considerations:

  • Do you need the vehicle enough to warrant making a monthly payment on it for several years?
  • Does the monthly payment work within your personal budget?
  • Is the deal, including the interest rate, appropriate?

Factors to Consider When Financing a Car

Obviously, the first thing to consider is whether you can afford the vehicle. But to understand that, you need to consider a few factors.

  • Total purchase price. Total purchase price is the biggest impact on how much you’ll pay for the car. It includes the price of the car plus any add-ons that you’re financing. Depending on the state and your own preferences, that might include extra options on the vehicle, taxes and other fees and warranty coverage.
  • Interest rate, or APR. The interest rate is typically the second biggest factor in how much you’ll pay overall for a car you finance. APR sounds complex, but the most important thing is that the higher it is, the more you pay over time. Consider a $30,000 car loan for five years with an interest rate of 6%—you pay a total of $34,799 for the vehicle. That same loan with a rate of 9% means you pay $37,365 for the car.
  • The terms. A loan term refers to the length of time you have to pay off the loan. The longer you extend terms, the less your monthly payment is. But the faster you pay off the loan, the less interest you pay overall. Edmunds notes that the current average for car loans is 72 months, or six years, but it recommends no more than five years for those who can make the payments work.

It’s important to consider the practical side of your vehicle purchase. If you take out a car loan for eight years, is your car going to still be in good working order by the time you get to the last few years? If you’re not careful, you could be making a large monthly payment while you’re also paying for car repairs on an older car.

Buying a Car with No Credit

You can buy a car anytime if you have the cash for the purchase. If you have no credit or bad credit, your options for financing a car might be limited. But that doesn’t mean it’s impossible to get a car loan without credit.

Many banks and lenders are willing to work with people with limited credit histories. Your interest rate will likely be higher than someone with excellent credit can command, though. And you might be limited on how much you can borrow, so you probably shouldn’t start looking at luxury SUVs. One tip for increasing your chances is to put as much cash down as you can when you buy the car.

If you can’t get a car loan on your own, you might consider a cosigner. There are pros and cons to asking someone else to sign on your loan, but it can get you into the credit game when the door is otherwise barred.

Personal Loans v. Car Loans: Which One Is Better?

Many people wonder if they should use a personal loan to buy a car or if there is really any difference between these types of financing. While technically a car loan is a loan you take out personally, it’s not the same thing as a personal loan.

Personal loans are usually unsecured loans offered over relatively short-term periods. The funds you get from a personal loan can typically be used for a variety of purposes and, in some cases, that might include buying a car. There are some great reasons to use a personal loan to buy a car:

  • If you’re buying a car from a private seller, a personal loan can hasten the process.
  • Traditional auto loans typically require full coverage insurance for the vehicle. A personal loan and liability insurance may be less expensive.
  • Lenders typically aren’t interested in financing cars that aren’t in driving shape, so if you’re buying a project car to work on in your garage during your downtime, a personal loan may be the better option.

But personal loans aren’t necessarily tied to the car like an auto loan is. That means the lender doesn’t necessarily have the ability to repossess the car if you stop paying the loan. Since that increases the risk for the lender, they may charge a higher interest rate on the loan than you’d find with a traditional auto loan. Personal loans typically have shorter terms and lower limits than auto loans as well, potentially making it more difficult for you to afford a car using a personal loan.

Steps You Should Follow When Financing a Car

Before you jump in and apply for that car loan, review these six steps you should take first.

1. Check your credit to understand whether you are likely to be approved for a loan. Your credit also plays a huge role in your interest rate. If your credit is too low and your interest rate would be prohibitively high, it might be better to wait until you can build or repair your credit before you get an auto loan. Sign up for ExtraCredit to see 28 of your FICO scores from all three credit bureaus.

2. Research auto loan options to find the ones that are right for you. Avoid applying too many times, as these hard inquiries can drag your credit score down with hard inquiries. The average auto loan interest rate is 27% on 60-month loans (as of April 13, 2020).

3. Get your trade-in appraised. The dealership might give you money toward your trade-in. That reduces the price of the car you purchase, which reduces how much you need to borrow. A few thousand dollars can mean a more affordable loan or even the difference between being approved or not.

4. Get prequalified for a loan online. While most dealers will help you apply for a loan, you’re in a better buying position if you walk into the dealership with funding ready to go. Plus, if you’re prequalified, you have a good idea what you can get approved for, so there are fewer surprises.

5. Buy from a trusted dealer. Unfortunately, there are dealerships and other sellers that prey on people who need a car badly. They may charge high interest or sell you a car that’s not worth the money you pay. No matter your financial situation, always try to work with a dealership that you can trust.

6. Talk to your car insurance company. Different cars will carry different car insurance premiums. Make a call to your insurance company prior to the sale to discuss potential rate changes so you’re not surprised by a higher premium after the fact.

Next to buying a home, buying a car is one of the biggest financial decisions you’ll make in your life, and you’ll likely do it more than once. Make sure you understand the ins and outs of financing a car before you start the process.

Source: credit.com

Looking for Auto Insurance? Here Are 6 Things You Need to Know

September 17, 2017 &• 5 min read by Neil Richardson Comments 0 Comments

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Let’s get one thing out there: no one is especially psyched to get car insurance. You get it because it’s a financial safeguard against damage to your car or injury to you or others (and maybe because it also happens to be legally required in some form nearly everywhere in the US). Car insurance is complicated, and drivers often don’t know what to expect from the process.

Let us break down the basics so you’re better able to find the right coverage for you. Here are six things you need to know.

1. What Car Insurance Is 

As a licensed insurance agent, I find that many people I talk to don’t quite understand what insurance is or why they need it. I get it. After all, insurance is rather abstract—it’s not a physical object you buy at a store. Further, if all goes well for you, you won’t ever have to use the coverage you paid for. So it’s often hard for people to see the value.

In the simplest terms, insurance is a promise from an insurance company to support you financially in the event that something unfortunate occurs and causes you financial loss or other damage. You pay an insurance company money (your premium) for a policy that details your coverage (who/what is protected and to what dollar amount), and the insurance company is responsible for paying if something happens and you incur a loss (damage to your car, a broken leg, etc.). Insurance companies do this by pooling risk among all the people they insure, collecting premiums from everyone and using those funds to pay claims for those who need it.

Of course, there are many other details that go into the whole system, but we’re keeping it simple.

2. What Different Insurance Types Cover

The type and amount of coverage each person needs varies, but these are the coverage basics you should know.

Liability coverage is legally required for drivers in almost every state. It covers the other driver in a crash you cause, and it includes injury and property damage. If you see numbers like 25/50/10 or 30/60/25, that shows the liability coverage limits for (1) bodily injury per person, (2) bodily injury per accident, and (3) property damage—each in thousands of dollars. For example, 25/50/10 means your coverage will extend up to $25,000 per individual injured in an accident, $50,000 for all persons injured in an accident, and $10,000 for property damage.

In no-fault states, you are required to carry coverage (normally personal injury protection or PIP) for your injuries regardless of who caused the accident.

Collision coverage, which covers damage caused in a crash, and comprehensive coverage, which covers damage from other events including weather (fire, flooding, etc.) as well as theft, are often collectively called full coverage.

Other coverages include uninsured motorist coverage, which protects you and your vehicle from damage caused by people who don’t have insurance, and medical payments coverage, which covers select costs for injuries you and your passengers sustain in a collision.

3. How to Get Car Insurance

You can easily go online, call a company or two, or even walk into a local insurance agent’s office to talk to them about getting coverage. But how do you know which company to contact?

Insurance companies spend billions of dollars every year on advertising, so you could probably rattle off a few big car insurance brands you’re familiar with. But it’s important for consumers to know that not all insurance companies are the same—in fact, they all have different ways of pricing policies, and many look for certain types of customers with certain risk profiles to do business with.

This is why it’s more important than ever to compare car insurance quotes from as many companies as possible. Getting multiple opinions and understanding the market will help you find the best rate around.

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4. Why You Pay What You Do

Insurance companies determine what you pay for insurance based on dozens of “rating factors”—all having to do with who you are, where you live, what you drive, and other details of your history, both on and off the road. Everything is about statistics, and insurance companies assign certain levels of risk to each of these factors to gauge the likelihood that you will file a claim.

For example, teens are considered high-risk drivers because they have so little experience behind the wheel and are statistically likelier to be in an accident—and thus file more claims—than older drivers, so they often pay much more for their premiums.

Other risk indicators include some obvious ones (like your driving record) and some less-obvious ones (like your ZIP code). There are also certain factors, like your credit score, which only some states allow to be used in determining your rate (it’s prohibited in California, Hawaii, and Massachusetts).

5. How to Lower Your Risk and Your Rates in the Future

You can’t change certain insurance rating factors, like your age, but you can make a few changes to reduce your risk in other areas. Here are a few tips:

  • Drive safely and maintain a clean driving record.
  • Consider sharing a policy with someone you live with.
  • Bundle your renters or homeowners policy if you can.
  • Pay your premium in full at the start of your policy or sign up for auto-pay.
  • Maintain insurance coverage with no lapse between policies (even for a day).

6. When to Get Insurance 

The obvious time to get car insurance is when you’re getting a car, but it’s critical that you don’t have a lapse in coverage between insurance policy terms. I highly recommend shopping around for car insurance before you begin the car-buying process. Shopping early also allows you to account for your premium in your car-related expense budget.

Other times to switch insurance could be if you get married, move, or have another big event in your life; if your rates increase for no apparent reason; or if you need to add a new teen driver to your policy.

Additionally, it’s important to compare rates every six months to make sure you’re staying up to date on any changes that might occur if you move, get a speeding ticket, or even have a birthday.

Once you’re ready to start your insurance search, you can use Credit.com’s comparison tool to get a car insurance quote and compare rates.

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Source: credit.com