Refinancing a Car Loan
This article will answer why someone would refinance a car loan, how refinancing can help you save money, what’s a reasonable interest rate, and much more! So read on to find out everything you need to know about refinancing your vehicle.
Refinancing is the process of replacing one auto loan with another at a lower interest rate. It may sound like an easy way to save some cash, but many things go into refinancing. Before you decide to take this route, make sure you weigh all the pros and cons.
When Should You Refinance
The best time to refinance is when interest rates drop below your current interest rate. However, two other things to consider will determine if it’s the right time to refinance your existing loan.
- Has your credit rating improved? Your initial interest rate will likely be high with a poor credit score. However, making on-time payments for 1 to 2 years improves scores in most cases, making it easier to refinance and get a better rate.
- Does your current loan balance have equity? Unfortunately, your vehicle depreciates yearly, making it difficult to build enough equity to refinance it. However, after a couple of years, there should be enough equity to refinance the car.
When Should You Not Refinance
It’s not always a good idea to refinance if your current terms are favorable. However, if you fall into any of the scenarios below, you may want to reconsider.
- The loan is paid off or almost finished: If you only have one year remaining on your original car loan, or there’s no remaining balance, it’s probably a good idea to avoid refinancing and pay off the balance.
- Your automobile has high mileage: If you’re trying to refinance a car with high mileage, an institution will most likely turn you down. A financial institution considers this type of loan high risk and, in most cases, will reject it.
- There are too many fees or penalties: Some high-interest lenders might charge additional application fees or penalties for paying off your account early. Leaving your original lender to refinance with one that has high application fees or penalties for paying off the balance early could end up costing you more money in the end.
FICO Credit Score Factors
Filling out a credit application to determine what percentage rate you qualify for requires a soft credit check that doesn’t affect your score. However, your score will take an initial dip after a hard credit inquiry and be lower for a short amount of time after your credit report updates with the new loan information. But, on a good note, your FICO score will typically go back up within a few months.
There are roughly five fundamental factors of credit scores, and the higher your score, the better chance you have of getting approved for a low-interest rate. Below are the key factors and their estimated effect on your score by percentage.
- Payment history = 35%
- Debt-to-income ratio or credit usage = 30%
- Length of credit history = 15%
- Credit types you have open = 10%
- New credit opened = 10%
Check out MyFico.com for additional education on credit reporting and how each type affects your consumer credit report.
Auto Refinance Calculator
The auto loan calculator below will help you determine an estimate for your new payment amount. Start by entering the current loan payoff amount in the vehicle value field. After that, move the slider to match your expected new auto loan rate, enter the number of months you plan to refinance, then add an initial deposit if one exists.
The monthly car payment amounts displayed by the calculator are rough estimates based on your selections. Contact the financing department within a bank for the lowest rates and actual savings based on your credit pull.
Top 4 Reasons to Refinance a Car
There are many reasons to have an auto refinance loan. It may not always be the best option, though. Here are four reasons why you should consider refinancing:
Lower Your Loan Interest Rate
As mentioned earlier in this article, if you had bad credit when taking out the original loan on your vehicle, chances are you didn’t get very competitive rates. However, if you’ve made on-time payments on your car for at least one year, you may qualify for lower auto financing rates. It’s possible to save an additional $50 or more per month by lowering the interest and extending the term.
Reduce Your High Monthly Payment
As mentioned above, refinancing can lower your original payments by more than $50. This potential saving each month is helpful if you’re trying to pay off things like additional credit card debt.
Shorten Term
A 72-month car loan feels like a long time, and shortening that length to something like a 24-month loan term is a great way to speed up payoff time for your current auto loan. Of course, shortening the length won’t save you money each month, but it will help you pay off the loan faster.
Improve Cash Flow
There are a couple of ways to improve cash flow through refinancing. One is by lowering high-interest rates, and the other is by increasing the term length. These are possible ways to free up additional money for other expenses.
Preparing for the Refinance Process
There are some initial steps to take before initiating the application process for your vehicle. Below are some key points that you’ll want to consider when preparing for the refinancing process:
- Check your credit score: Your credit history helps determine if refinancing makes sense in your situation, so performing a credit review is helpful before initiating the refinancing process. For example, if you have fair credit health, lower than 600, refinancing may not be the best option. However, if your credit check shows a score over 600, then refinancing might be a great idea to help pay off your car faster.
- Get preapproved for refinancing: Gather up all the necessary paperwork and documents. Ensure that you’ve got all of your financial information ready to hand over to your lender. Also, keep in mind that auto lenders usually require a minimum amount of equity for approval.
- Pay down other debts if possible: Paying down other debts before refinancing can improve your credit score and increase your chances of getting a better interest rate. If you have multiple credit cards, paying them off could also give you a better chance of getting approved.
- Find out how much money you can borrow: Once you’ve gathered all of your required documentation, contact your current provider to see how much you can borrow. You’ll want to compare this figure and the monthly payment to determine whether refinancing will save you money.
- Make sure you understand the terms: Once you’ve learned how much you can borrow, make sure you fully understand the finance terms. For instance, do they offer fixed payments or variable payments? Do they include a processing fee or other hidden costs? How long until you must start repaying the loan? These details matter because they affect your overall cost of borrowing.
FAQ
- Is it wrong to extend my auto loan term? If you’re having trouble making your current payments, an extended repayment period may benefit you. But, remember you’ll ultimately pay more for the vehicle in interest if you extend the loan length.
- Can I refinance a car that’s older than ten years in age? Unfortunately, some auto refinancing institutions are hesitant to refinance vehicles exceeding 7 to 10 years in age. For example, we found Capital One only finances vehicles less than seven years old.
- How long should you have your car before refinancing? Each lender will have different requirements preventing you from refinancing within a specific amount of time. For example, some lenders may allow you to refinance after six months, while others may only allow you to do so after one year.
- If I refinance a car, will I receive money back? In most cases, cash-out refinance loans only work if there’s equity in the vehicle. Unfortunately, getting money back after refinancing a car doesn’t often happen since they usually depreciate at roughly 20-25% each year.
- Can I refinance a car loan with poor credit? Yes! As long as you meet the requirements, you can still apply for a car loan even if you have poor credit. In most cases, a score over 650 will benefit you.
- Is refinancing an auto loan for 72 months bad? The maximum loan term shouldn’t be a concern unless you plan to buy another vehicle within the next few years. It’s more important to know what the total cost of the loan is going to be.
- What’s the average APR for auto loans? According to Experian Automotive, the national average APR for auto loans is currently at 4.7% when writing this article. The average APR for used cars is higher at 5.3%, while the average APR for new cars is slightly lower at 4.5%. If you have bad credit, lenders may offer you an interest rate of 10% or higher. It’s best to avoid high rates if you plan to pay the car off quickly. Check with your local lender to get an exact rate based on your credit score.
- Is a personal loan better than refinancing a car loan to lower payments? Private loans will typically have higher interest rates and an origination fee, making them less attractive options. But, if you need more flexibility, a personal loan might be right for you.
- What should my credit score be to get a reasonable interest rate? Credit scores range between 300-850 points. Lenders tend to look for borrowers who have a credit score above 700. However, if you don’t have excellent credit and your score is below 700, you might qualify for a rate discount after 1 to 2 years of on-time payments. In addition, we recommend setting up automatic payments to ensure there aren’t any gaps in your payment history.
- Should I refinance my car with the current lender? Refinancing through your previous lender might be easier since all your data is already in their system. However, you may get a better rate by shopping around.
- Is it better to refinance through credit unions or banks? Most people think that credit union lending is cheaper because they’re not as expensive as traditional banks. However, this isn’t always true. Some credit unions charge higher fees and require higher down payments. Do your homework and shop around before making a final decision on which type of lender to use.
- Is there a penalty for paying off a car loan early? No, a prepayment penalty isn’t standard. However, some institutions require you to pay the remaining interests on a loan when paying it off early.
- Can I apply with multiple creditors? Yes, but numerous credit inquiries can lower your score unless the banks perform soft credit inquiries, so do some research before applying to multiple places.
- How does refinancing impact my credit score? Refinancing won’t necessarily hurt your credit score. However, it can cause a temporary dip in your score until the original car loan drops off your credit report.
- What are lease buyout loans? Lease buyouts allow you to pay off a leased vehicle by buying it at its fair market value. This option is available on leased vehicles.
Key Takeaways
- You should only refinance if your credit has improved or you have equity in your vehicle.
- You should not refinance a car loan that’s almost paid off or a car that has high mileage.
- Auto loan refinancing can lower monthly payments and improve your cash flow.
- You’ll have better auto loan options by paying down debts and improving your credit.
- A credit score average of more than 650 will improve the rates on your auto loan offers.
Final Thoughts
Refinancing an auto loan is one way to save money and improve your financial situation. It’s also a great way to reduce debt and build credit. However, before you make a decision, consider how much you need to borrow, what kind of payment term you want, and whether your credit score is good enough to accommodate your requirements.
Auto Glass Locator is not a financial advisor, lender, bank, or other financial institution. However, we performed a lot of research to write this article to help you decide whether to refinance your car or not. Consider sharing this article if you found it helpful.
