Jennifer Nelson – Intuit Credit Karma

The FHA down payment rules you should know

Jennifer Nelson — Tue, 25 Jan 2022 19:26:10 +0000

Saving up to make a down payment on a home can be intimidating.

But some mortgages have lower down payment requirements — including FHA home loans, which require a minimum down payment of 3.5%. Let’s take a closer look at FHA down payment requirements, as well as what sources you may be able to tap for that payment.

What are FHA down payment requirements?
When do I need to make the down payment?
FHA rules for down payment sources
Other FHA loan rules for down payments

What are FHA down payment requirements?

FHA loans are mortgages backed by the government. They’re typically designed for first-time homebuyers and homebuyers who don’t have great credit. The Federal Housing Administration doesn’t lend you the money for your mortgage, but it insures loans from FHA-approved lenders in the event you default on your mortgage.

The FHA requires that borrowers have credit scores of 580 or higher to qualify for a 3.5% down payment. And if your score falls between 500 to 579, your minimum down payment is 10%. But additional lender standards may apply. These “lender overlays” may require higher credit scores depending on the lender, the loan and other variables.

When do I need to make the down payment?

Typically, you won’t need to make your FHA down payment until your closing date. Your lender will direct you to either make a wire transfer or write a check payable to either the title company or attorney you’re working with at closing.

FHA rules for down payment sources

The FHA has strict rules about where the money for your down payment comes from. For instance, if you receive money as a gift from a relative to make your down payment, the FHA requires a letter stating the money is a gift, not a loan you’ll have to pay back. The FHA allows down payment funds from the following approved sources:

Cash and checking or saving accounts
Investment funds
Gifts
Cash from the sale of personal or real property
Loans and grants
Employer assistance

Additionally, you can’t make your down payment with financing like a payday loan, credit cards or a cash advance because the FHA doesn’t want homebuyers to get further into debt to make their down payment.

You also can’t obtain down payment assistance from charitable organizations that provide monetary gifts to pay off installment loans, credit cards, collections, judgments, liens or similar debts.

But you can get the money for your down payment from charitable organizations that provide homeownership assistance to low- and moderate-income buyers and first-time homebuyers.

Other FHA loan rules for down payments

Aside from the rules above, the FHA also prohibits you from using money from interested third parties (like your seller, real estate agent, builder or developer) toward your down payment. But these parties are permitted to contribute toward closing costs, up to 6% of the sale price. Money exceeding that amount is considered an inducement to purchase by the FHA and is prohibited.

Your lender will verify and document the amount and all sources of your funds for your down payment. So borrowers using their own money must show their ability or evidence to have saved that amount.

What’s next?

Many homebuyers are interested in FHA home loans because of the low minimum down payment and competitive credit score requirements.

If you think an FHA home loan may be a good idea for you, take a look at your preferred lender site for more information about the lender’s FHA standards.

For more information on FHA loans, check out our article about FHA loans to find out who qualifies for an FHA loan and more about the process so you can get started on your homebuying journey.

About the author: Jennifer Nelson is a freelance content marketing writer and ghostwriter who specializes in health, home and money. She writes for AARP, Costco Connection, NextAvenue.org, Realtor.com, WebMd and many others. Read more.

What is a canceled check and why would I need one?

Jennifer Nelson — Fri, 13 Aug 2021 18:10:07 +0000

Simply put, a canceled check is one that your bank has paid out.

As soon as the funds are drawn from your account, the bank cancels the check so it can’t be reused. The check then also serves as your receipt and proof that you’ve paid the amount drawn to the vendor or service provider who cashed the check.

You may be wondering when you’d need to use a check when so many retailers accept debit cards with a Visa or Mastercard logo. But on occasion — from putting a down payment on a car to paying your rent, or even just covering home repairs — you may find yourself needing to reach for a check if your vendor or seller isn’t set up to take debit or credit cards.

What happens if the check you write is cashed but the company can’t find a record of it or claims you didn’t pay? As proof of payment, you may need to request a canceled check from your bank. We’ll help you understand what a canceled check is, and how and when you may need to get one from your bank.

What is a canceled check?
Why would I need a copy of a canceled check?
Canceled check vs. stop payment order
How to search for canceled checks

What is a canceled check?

A canceled check is one that your bank has processed and paid out. Once it’s cleared, the issuing bank archives it, so it can’t be reused.

Keep in mind that the vendor’s bank can use several methods to move the money from your account to theirs, including using an electronic clearinghouse, or going through the Federal Reserve Banking System check-collection services.

When your bank processes a paper check, or “clears” the check, it will deduct the money from your account and give the money to the person or merchant you paid with your check. The paid check, or canceled check, now serves as your receipt.

Today, checks are mostly processed quickly and electronically, and banks aren’t obligated to give you your canceled checks back. While all checks that are processed will be reflected on your monthly bank statement, your bank or credit union may also provide a “substitute check,” which is a paper copy of your canceled check. This substitute check can be legally referenced as if it were the original check. And your online banking portal may be able to provide you a downloadable picture of your canceled check.

Why would I need a copy of a canceled check?

Several situations may pop up where you may need a canceled check, maybe to dispute a withdrawal from your bank account or serve as proof of transaction history. Here are some common issues you may face.

Disputing an error with your bank — For example, you may have deposited a check or paid someone with a check, but neither party can find a record of the payment.
Providing a receipt of charitable donations — In addition to a letter or receipt, you may need a copy of your canceled check as proof come tax time.
Proof of making a tax payment — If you made a payment to the Internal Revenue Service but it does not have a record of it, a canceled check could serve as your proof. If two weeks have passed since you mailed your tax check and it has not acknowledged your payment, a canceled check copy could serve as evidence for your case.
Resolving payment issues between companies or banks — If someone claims they didn’t get paid from your check, a canceled check or monthly statement referencing the check can prove payment was made.

Canceled check vs. returned check

So how is a canceled check different than a returned check?

A returned check is the paper equivalent of a declined debit or credit card transaction. Your bank has attempted to cash a check and provide the funds promised, but you unfortunately have insufficient funds to cover the check. This results in a returned check, which hasn’t been successfully cashed — and may incur additional fees as the bank may attempt to redeposit the check multiple times. Check with your bank to learn if it charges insufficient fund fees and whether it makes multiple attempts to clear your checks.

Canceled check vs. stop payment order

Although they may sound like the same thing, a stop payment and canceled check are fundamentally different. Generally, when you put a stop payment order on a check, the bank will not honor the check when the check holder submits it for payment. For example: Let’s say you paid a friend with a check and it got lost — and you want to avoid a stranger finding the check and cashing it. In this situation, you may want to request a stop payment on the check.

There are certain situations where a stop payment order may not be honored, such as failing to provide enough information to identify the check or notify the bank in a timely manner.

Some banks may charge a fee for stopping payment on a check. Check with your financial institution to learn more about how much it may cost.

How to search for canceled checks

If you end up needing a canceled check returned to you, it may not be easy to get your hands on it. That’s because banks aren’t required to provide you with physical copies of your canceled checks. So it’s important to understand your bank’s policies on how to get a copy. Here are two ways of getting a canceled check.

Using your online banking platform — Many banks provide images of canceled checks that you can download. How long they are available online will vary from bank to bank.
Request a copy in branch or over the phone — If you need access to a canceled check that’s not available online, you may still be able to request a copy from a bank teller or by calling the customer service number. Usually, banks and credit unions are required to keep copies of canceled checks for seven years. Accessing an older canceled check could come with a fee, so be sure to check with your bank or credit union.

Bottom line

Canceled checks serve as a receipt for any check you may have written after it’s been cashed by the recipient. By understanding how they work and when you might need one, you can be ready to use them for tax purposes, proving a payment or possibly helping to resolve some other payment dispute.

Veterans First Mortgage Review: Low down payment options for military families and veterans

Jennifer Nelson — Thu, 29 Jul 2021 00:00:22 +0000

Updated February 5, 2024

This date may not reflect recent changes in individual terms.

Editorial Note: Intuit Credit Karma receives compensation from third-party advertisers, but that doesn’t affect our editors’ opinions. Our third-party advertisers don’t review, approve or endorse our editorial content. Information about financial products not offered on Credit Karma is collected independently. Our content is accurate to the best of our knowledge when posted.

Written by: Jennifer Nelson

Veterans First mortgage loan at a glance

Conventional loans: No
FHA loans: Yes
VA loans: Yes
Refinancing: Yes
Jumbo loan: Not specified
Adjustable rates: No
Fixed rates: Yes ( 15- to 30-year loans)

Veterans First Mortgage’s roots date back to 1985 with the founding of Freedom Mortgage Corporation, which developed a focus on VA loans and FHA loans.

Today, Veterans First Mortgage has provided more than 212,000 families with loans and specializes in serving veterans and military families.

Pros

Specializes in VA loans
Low down payment options available
Walks veterans through the VA loan process

Cons

No conventional loans available
No info about rates on website
Must opt into calls and possibly texts when requesting that the company contact you

5 things to know about Veterans First Mortgage

1. Low down payment options are the norm

Veterans First Mortgage specializes in VA, FHA and USDA loans, so low to no down payments are the norm, making it easier for veterans and military families to purchase a home.

Qualifying veterans have $0 down payment VA loan options, and FHA loans have down payments as low as 3.5%. USDA loans, which are offered through the U.S. Department of Agriculture for rural properties, also have a low or no down payment requirement.

2. Walks homebuyers through the loan process

Veterans First Mortgage gives guidance to homebuyers through the entire VA loan process, which can be especially useful for first-time homebuying veterans.

3. Conventional loans are unavailable

Veterans First Mortgage is a specialized company concentrating on VA, FHA and USDA loans — so it doesn’t offer conventional loans (though its parent company, Wintrust Mortgage, does, and Veterans First can direct you to Wintrust to explore that option). If you’re a military veteran with a strong credit history, it may make sense to comparison shop with lenders that offer conventional loans, as well, so you’ll be able to compare loan products across the board and see which option makes the most sense for your situation.

4. Not transparent about rates

Veterans First Mortgage doesn’t list any rates on its site. To get that info, you’ll have to start the process by contacting Veterans First or by filling out the online form.

Though it doesn’t show rates, Veterans First’s site does list the types of fees that VA loans typically include such as an origination fee of up to 1%, a VA funding fee, VA appraisal fee, credit report fee, prepaid fees for escrow and typical closing costs like title insurance fee and recording fees. The site also mentions the option to purchase interest rate discount points. Veterans First also points out that VA loans have advantages, including forbidding certain fees that come with conventional loans and not requiring private mortgage insurance, or PMI.

5. Must opt into texting and calls when applying

To work with Veterans First Mortgage, you must opt into calls and possibly text messages — and be willing to work with your lender over phone and the internet. So before you apply, make sure you’re comfortable working remotely with your lender. If you prefer in-person service, Veterans First Mortgage probably isn’t the best fit.

Who is a Veterans First Mortgage loan good for?

Veterans First Mortgage may be a consideration for first-time homebuying veterans or military families who are comfortable working with their lender remotely. Veterans First can help eligible veterans use their VA entitlement to buy a home with a VA loan, and it also offers resources about VA loans and walks you through the VA loan process.

Veterans First also specializes in refinancing with VA loans, so homeowners looking for this option could also benefit from its specialized services. And finally, homebuyers interested in an FHA or USDA loan or refinance may find Veterans First Mortgage helpful to their unique needs.

How to apply for a Veterans First Mortgage loan?

Veterans First doesn’t explain much on its website about its application process.

If you’d like to complete the application in one step, you can call the company’s toll-free phone number and apply by phone. Otherwise, you can complete a basic online form requesting that the company contact you.

A representative can tell you about the process for applying to get prequalified for your home loan.

On its site Veterans First mentions that you’ll need to get your Certificate of Eligibility early on. Make sure to ask your representative what documentation you’ll need if you decide to go with Veterans First.

Not sure if Veterans First Mortgage is right for you? Consider these alternatives.

If you’re shopping for a mortgage, you have a window of time where multiple credit inquiries are only counted as one for your credit scores. You typically have 14 days — though it could be longer depending on the scoring model.

Wells Fargo mortgage: If you prefer a big bank experience where you can find information on conventional loans as well as VA, FHA, and USDA loans, check rates and use a mortgage calculator, Wells Fargo may offer the experience you’re looking for.
Veterans United Home Loans:If you’d like to try out another company that specializes in veterans and military families, Veterans United Home Loans includes a vast educational resource of information on its website, walking you through homeownership, various loan products, and the VA loan process.

Calculate your VA loan

Find out what your estimated monthly payment and other loan terms could be with our VA loan calculator.

ZeroMortgage review: A mortgage lender lacking in upfront information

Jennifer Nelson — Mon, 10 May 2021 15:25:12 +0000

Updated March 20, 2023

This date may not reflect recent changes in individual terms.

Written by: Jennifer Nelson

ZeroMortgage loans at a glance

Conventional loans: Yes
FHA loans: No
VA loans: No
Refinancing: Yes
Jumbo loan: Not specified
Adjustable rates: Not specified
Fixed rates: Yes

Founded in 2001 as Chicago Mortgage Solutions, Interfirst Mortgage Company operates a retail mortgage business for consumers (known as ZeroMortgage), and a wholesale and correspondent mortgage business that partners with brokers and allows them to offer mortgage loans to their clients.

ZeroMortgage, the company’s direct-to-consumer division, offers conventional home loans and refinance loans directly on its site.

Pros

Online application

Cons

Website is skimpy, making it hard to find basic information
Inconsistent operation history

3 things to know about a ZeroMortgage loan

If ZeroMortgage is on your list of home loan lenders you’re considering, here are some things you’ll want to keep in mind.

1. Online application available

If you apply for a mortgage loan with ZeroMortgage, your options include submitting an online application or giving the company a phone call. If you prefer to visit a branch, this company may not be the right fit for you since it doesn’t have physical branch locations.

ZeroMortgage offers conventional loans and refinancing options but no FHA or VA loans, so it’s not necessarily the best option for many first-time homebuyers.

Those limited mortgage offerings also make ZeroMortgage a less attractive option if you’re not sure what type of mortgage loan is best for you.

2. Website is skimpy

ZeroMortgage has relatively little information on its website. You can’t find info on current mortgage rates, the types of home loans offered, or even basic facts about any preapproval or prequalification process — not to mention guidance on what documents you’ll need to gather to begin a loan application.

3. Doesn’t operate in some states

ZeroMortgage isn’t licensed in all states, so you’ll want to check if it lends where you live before you submit an application. The company lists those states on its licensing and disclosures page.

Who is a ZeroMortgage loan good for?

A ZeroMortgage loan may be worth considering for people who are comfortable working remotely through the process since the options for applying for a loan only include an online application and a phone number. Keep in mind that ZeroMortgage doesn’t lend in some states.

Unfortunately you’ll have to apply first to learn how competitive ZeroMortgage’s mortgage rates are since the company doesn’t provide information on current rates on its website.

How to apply with ZeroMortgage

ZeroMortgage offers the ability to apply for a loan by phone or online application. For an online application you’ll begin by selecting whether you want to purchase or refinance.

From there, it’ll take you through a series of questions based on your response.

ZeroMortgage’s website doesn’t contain any easy-to-find information about rate quotes, document requirements, minimum eligibility requirements or restrictions.

Not sure if ZeroMortgage is right for you? Consider these alternatives.

If you want to compare rates with several lenders or your application is denied, keep in mind that you have a window of time where multiple hard credit inquiries by lenders only count as one for your credit scores. You typically have 14 days — though it could be longer depending on the scoring model.

Bank of America: If you prefer a large, national lender with resources like online prequalification, Bank of America may be more attractive to you.
New American Funding: If you’d like a lender that’s more transparent about current mortgage rates, New American is worth considering.

Guild Mortgage review: An option worth considering for first-time homebuyers

Jennifer Nelson — Wed, 17 Mar 2021 18:23:05 +0000

Updated April 22, 2021

This date may not reflect recent changes in individual terms.

Written by: Jennifer Nelson

Guild Mortgage loans at a glance

Conventional loans: Yes
FHA loans: Yes
VA loans: Yes
Refinancing: Yes
Jumbo loans: Yes
Adjustable rates: Yes (5/1, 7/1 and 10/1 ARMs)
Fixed rates: Yes (10 to 30 years)

Guild Mortgage is a mortgage lender based in San Diego, California. Guild has hundreds of branches across the country and offers many types of home loans. The company may be a good fit for first-time homebuyers, rural buyers, military families and people who want to buy new construction.

Pros

Hundreds of physical branches across the country
Offers a good variety of home loans
Online application process
Good resources and information for first-time home buyers

Cons

Controversial history of FHA loan originations
Not transparent about rates

5 things to know about a Guild Mortgage loan

If you’re considering taking out a home loan with Guild Mortgage, here are some things to keep in mind.

1. Physical branches for in-person service

Guild Mortgage has branches and satellite offices in more than 30 states, which is a plus if you prefer to do business in person and have a nearby branch you can visit.

Guild also offers an online application if you prefer to go that route. But you’ll have to apply to find out what mortgage rate you may be facing since the company doesn’t post rates online — unlike some competitors.

2. Good variety of home loans

Guild’s home loan options help it stand out, particularly if you’re a first-time homebuyer. For instance, the company offers FHA loans, USDA loans and VA loans, which can be good options if you don’t have a lot of money to put toward a down payment.

Guild also offers a few other notable types of home loans.

Renovation loans: These loans can help you make improvements to the fixer-upper you want to purchase. Guild offers a HomeStyle Renovation loan for conventional loans, as well as FHA 203(k) and FHA 203(k) Limited renovation loans.
Manufactured homes: Guild offers mortgages for manufactured and CrossMod™ homes that are built off-site.
Bridge loans: A bridge loan may be a good solution for people who need to buy a new home before they sell their current one. Guild offers bridge loans between $40,000 and $250,000 that must be repaid within six months.
Reverse mortgages: A reverse mortgage may help if you’re at least 62 years old and want to pull equity out of your home while you still live there.

3. Down payment assistance available

Guild Mortgage may be able to connect you with a down payment assistance program if you’re a first-time homebuyer who needs extra help coming up with a down payment. These are loans or grants secured as a lien that Guild says is often forgiven over time. Keep in mind the website specifies that down payment assistance is available county by county and may not be available everywhere.

4. Partners with builders

Guild Mortgage also partners with builders, so if you’re looking for a new home in one of those communities, you may be able to take advantage of programs like its extended-rate lock and rate buydowns. The company also gives you the option to bundle additions like solar energy panels and pool construction into its home loans.

5. Guild Mortgage has dealt with controversy in the past

In 2020, Guild Mortgage settled with the Justice Department for claims that it “knowingly approved” ineligible FHA loans that later defaulted and resulted in claims for mortgage insurance. If that gives you pause, you may want to consider another lender.

Who is Guild Mortgage good for?

Guild Mortgage loans can be a good choice for first-time buyers because of its down payment assistance programs. Guild also provides a number of helpful resources, from articles to mortgage calculators. People who want to purchase new-construction loans also may want to consider Guild.

And if you want to refinance your mortgage, Guild has tools and calculators that can help you decide whether refinancing your current loan is right for you.

How to apply for a Guild Mortgage loan

If you’re ready to apply for a mortgage with Guild, you can locate a Guild Mortgage branch near you or apply directly online.

You can also apply for prequalification, which can help you find out if you’re likely to be approved, how much you may qualify for and what kind of down payment you’ll likely need.

For prequalification purposes, Guild Mortgage will need to know your gross monthly income and your total monthly debt, including car payments, loans, credit cards and student loans.

To apply for a loan, you’ll need to create a Guild account with a password so you can save your application along the way. The website doesn’t list all the documents you’ll need to complete your application.

Not sure if Guild Mortgage is right for you? Consider these alternatives.

If you’re shopping for a mortgage, you have a window of time where multiple credit inquiries by lenders are only counted as one for your credit scores. You typically have 14 days to shop around — though it could be longer depending on the scoring model.

Rocket Mortgage: If you prefer an online-only application, you can often apply for a mortgage with this large lender without even talking to anyone.
New American Funding: If you’d like to compare potential rates before you apply, New American makes it simple by posting its rates on the site.

What is usage-based insurance?

Jennifer Nelson — Fri, 31 Jan 2020 19:46:54 +0000

If you’re a safe driver and willing to prove it by having your insurer monitor your driving habits, you may be able save on your auto insurance.

Usage-based insurance, or UBI, is a newer type of auto insurance that looks at additional factors, like how many miles you drive or how safe of a driver you are, to determine your auto insurance premium. If you typically drive short distances or stick to the speed limit, for example, you might find you qualify for a lower premium with UBI versus traditional auto insurance.

Depending on your driving habits, UBI may or may not be a good fit for you. Let’s take a look at how usage-based insurance works, what the various types are and what factors to consider if you’re trying to decide whether to opt for UBI.

How does usage-based insurance work?
Types of usage-based insurance
What companies offer usage-based insurance?
Is usage-based insurance worth it?

How does usage-based insurance work?

While traditional car insurance may use factors such as your age, location and insurance score to determine your premium, usage-based insurance also considers your driving habits to calculate how much you’ll pay for coverage.

UBI can be a win-win for both insurance companies and drivers. Some drivers can snag a lower premium with UBI than with traditional insurance, while insurance companies benefit by motivating policyholders to drive more safely.

“How much you save depends on the plan and how you drive, naturally, but typically, you can reduce your rate by 10% to 30%,” says Penny Gusner, an analyst for Insurance.com and CarInsurance.com.

With a UBI program, your insurance company will track your mileage and/or driving habits with telecommunication devices called telematics. Data may be collected and sent to your insurance company through a self-installed plug-in device, a smartphone app or equipment already installed in your vehicle by the manufacturer.

“Telematics uses cellular, GPS and other technology to collect information on how motorists drive, and tracks time of day and vehicle speed, how many miles you drive and sudden changes in speed, or how often you brake hard or accelerate significantly,” Gusner says. “Some also track how much you idle. Still others may also include “cornering” (how you take a corner) and phone use behind the wheel.”

The information an insurance company collects is based on the type of UBI program it offers.

Types of usage-based insurance

Usage-based insurance generally falls into two categories. One type of UBI monitors driving behaviors such as mileage, the time of day you drive and changes in speed. These may be referred to as pay-how-you-drive programs. The other type only tracks how many miles you drive and may be called pay-as-you-drive, or PAYD, pay-as-you-go or pay-per-mile plans.

Pay-how-you-drive insurance programs

UBI programs that track driving behavior generally collect data for a specific period of time — typically until your next policy renewal — to establish your habits and discount your premium, if you qualify. Some may also give you an immediate discount of 5% to 10% when you sign up for the program.

With some insurance companies, such as Progressive, your premium may increase through its UBI program. But other companies, including Nationwide, promise that their UBI programs can only discount your rate.

Pay-as-you-go insurance programs

With UBI programs that track only mileage, the company will often charge you a monthly base rate plus a per-mile charge.

Keep in mind that an insurance company’s UBI program details may vary by state or not be available in certain states.

What companies offer usage-based insurance?

Here are brief summaries of some usage-based programs out there.

Allstate Drivewise — The mobile app tracks your speed, breaking habits and the time of day you drive to determine your cash back.
Esurance DriveSense — The app measures a range of driving behaviors, such as miles driven at high speeds, hard braking and major speed changes.
Liberty Mutual RightTrack — The program tracks nighttime driving, braking and acceleration.
Metromile — The app uses a base rate and the number of miles you’ve driven to determine how much you pay for coverage each month.
Nationwide SmartRide — The app measures miles driven, hard braking, acceleration, idle time and night-time driving.
Progressive Snapshot — The Snapshot device or mobile app tracks your mileage, the time of day you drive and how you drive.
State Farm Drive Safe & Save — The mobile app measures mileage and behaviors like acceleration, braking, cornering, speed and distracted driving.
Travelers IntelliDrive — The app captures the time of day you drive, along with your speed, acceleration, braking and distractions.

Check with your insurance agent or the insurance company for more details on these programs.

Is usage-based insurance worth it?

Usage-based insurance may be worth it if you have safe driving habits or don’t get behind the wheel often — for example, if you work from home. Think about these factors to help determine if a usage-based insurance program might be a fit for you.

Your driving habits

If you’re a safe driver, you may be able to get a lower premium with a UBI program. You may also be able to save money if you’ve made one or more previous accident claims. UBI plans measure driving in real time using telematics and may not rely as much on historical data like your driving record.

When shopping for a UBI policy, look at all of the factors each company monitors and weigh them against your driving habits. For example, if you drive to a late-shift job every night, you may not save much (or any money at all) with a UBI plan that measures the time of day you’re driving — some insurance companies consider daytime driving to be safer.

The National Association of Insurance Commissioners’ DriveCheck tool could help you get a sense of whether you might benefit from UBI.

How comfortable you are with driving-data collection

You should also consider whether you’re willing to trade potentially lower auto insurance premiums for privacy. Having your driving habits, mileage and phone use monitored may or may not be worth the potential savings for you.

Before you sign up for a UBI program, Gusner says, make sure you know exactly what the plan monitors and who — if anyone — the company shares the data with.

What’s next?

If you’re a safe driver or work remotely, have a short commute or log low mileage in general, usage-based insurance could help bring down your auto insurance rates.

Be sure to shop around and compare car insurance programs to understand what data the insurance company collects, how much you could potentially save and how the program works in your state.

How to calculate APR on a car loan

Jennifer Nelson — Fri, 08 Nov 2019 23:05:55 +0000

Between choosing a make, model and options, shopping for a car can feel overwhelming. And you’re not done there. Car loan shopping is just as important — and knowing how to calculate the APR on an auto loan can help you determine whether a loan might be right for you.

The more you know about how to calculate the APR on a car loan, the more informed you’ll be when it’s time to either sign on the dotted line — or walk away if the loan doesn’t fit your financial needs.

A car loan’s APR is the cost you’ll pay to borrow money each year, expressed as a percentage. It includes not only the interest rate on the loan but also certain fees. The interest rate, on the other hand, reflects only the annual cost of borrowing the money — no fees included. When comparing loans, the Consumer Financial Protection Bureau suggests looking at APRs versus interest rates, because APR more accurately reflects how much you’ll pay to finance a car.

Let’s take a look at how to calculate APR on a car loan using a computer spreadsheet program and some of the factors that could affect the APR you’re offered.

How do I know what my APR is?
How do I calculate APR on a car loan?
Why is APR important?
What’s a good car loan APR?

How do I know what my APR is?

Once you’ve received a formal and final offer on a loan, you can find out what the APR is in one of two ways.

Ask your lender. The federal Truth in Lending Act, a law that helps ensure consumers are informed, requires lenders to give you certain information on your loan, including the APR, before you sign the loan agreement. If you have the loan documents in hand, you should be able to find the APR on your contract.
Estimate it yourself. If you have the loan details on hand, you can calculate the estimated APR on an auto loan with a computer spreadsheet program. Check out the formula below for how to calculate the estimated APR on a car loan.

How do I calculate APR on a car loan?

To calculate the estimated APR on a car loan, we’ve put together a method using computer spreadsheet software. To go that route, you’ll need the following information:

Loan amount — The total amount you plan to finance, typically the price of the vehicle, minus any down payment or trade-in (a down payment on your auto loan or trade-in will lower the amount you need to finance, which can reduce your monthly payment)
Loan term — The length of your auto loan
The loan’s interest rate (this is an estimated rate until you formally apply)
Certain fees, like origination fees

The first step in calculating APR yourself is calculating your estimated monthly payment.

1. Calculate your monthly estimated payment

If you already know your estimated monthly loan payment, you can skip this step. If you don’t, you can easily estimate your monthly car payment on a spreadsheet by typing the formula below into a cell.

=PMT(interest rate as a decimal/12, number of months in loan term, loan amount, with fees)

The result is your estimated monthly payment. It will be a negative number, but don’t worry. You didn’t make a mistake. Keep this number handy for calculating your APR.

Let’s say you want to finance $13,000 ($12,500, plus a $500 loan application fee) with a loan term of 60 months and an interest rate of 4%. Here’s what your formula would look like with those numbers plugged in.

=PMT(.04/12, 60, 13000)

Using this example, your spreadsheet would calculate your monthly payment to be $239.41.

2. Calculate your estimated APR

To estimate your APR on the loan using a spreadsheet, enter the formula below into a cell. This formula assumes that your monthly payment was either calculated in step 1 or otherwise includes fees. If you didn’t calculate your monthly payment in step 1 or aren’t sure whether the monthly payment you’re using reflects fees, keep in mind that this formula may not be the best way to calculate your estimated APR.

=RATE(number of months in loan term, estimated monthly payment, value of loan minus fees)*12

Using the monthly payment you calculated (-$239.41), here’s what you’d enter into the cell for this loan example.

=RATE(60,-239.41,12500)*12

Entering the formula above would calculate your estimated APR at approximately 5.6%.

Why is APR important?

Knowing the APR on a car loan is important because it helps you understand how much borrowing money from that lender will cost you. The lower the APR, the less you’ll pay to finance your car.

When comparing loans side by side, pay attention to the APRs to help identify the least expensive loan. The difference of even just one percentage point can add up over time.

For example, let’s say you’re comparing two $23,000 loans, each with a four-year term. One loan has a 5% APR and the other has a 6% APR. You’d end up paying $503 more in interest on the loan with the 6% APR than you would on the loan at 5% APR.

What’s a good car loan APR?

In August 2020, commercial banks charged an average APR of 4.98% on 48- and 60-month car loans, according to the Federal Reserve. But keep in mind that interest rates vary by lender, and a range of other factors can affect the APR you’re offered. Here are a few.

Your credit scores

The better credit you have, the lower your loan rate is likely to be. Check your credit scores before you shop for a car so that you have a good idea of where your credit stands overall.

Your guide to credit score ranges

Your loan term

A longer loan term, like 72 or 84 months, can lower your monthly payment, but may come with a higher interest rate than you’d get on a shorter-term loan. And with a longer term, you’ll end up paying more in interest over the life of the loan.

Your loan-to-value ratio

If the amount you want to borrow is significantly less than the value of the car you’re buying — maybe because you made a sizable down payment or have a car with a substantial trade-in value — you may be charged a lower APR. This is because the loan is less of a risk for the lender than a loan to finance the full amount of the car’s value.

What’s next?

Learning how to calculate APR on a car loan can come in handy when you’re auto loan shopping. Before you sign any loan paperwork, make sure you know the loan’s APR — it’s critical to understanding how much you’ll pay to borrow money from that lender.

Interest rates and fees vary from lender to lender. That’s why it’s important to shop around and compare quotes before settling on a loan. Prequalifying for an auto loan can help you get a sense of the rate and loan terms you might qualify for and identify which lender may be the best fit for your financing needs.