Pros And Cons Of Refinancing A Car Loan
Now that you know the potential savings, let’s hit the brakes and look at the advantages and disadvantages of refinancing your car loan.
|Pros of Refinancing
|You have the opportunity to lower your interest rate and monthly payment
|Your refinanced loan could have a higher interest rate than your original loan
|Lowering your monthly payments could increase your cash flow
|Some lenders may issue a prepayment penalty for paying off your original loan early
|You could save money on interest if you shorten your loan term
|You could pay more over time if you extend your loan term
Those are some of the basic pros and cons of refinancing a car loan. But one area that could be a pro or a con is your credit score.
Gather All The Things
Next, youll want to have lots of documentation on hand to ensure a smooth and efficient loan application process. The list of essentials is longer than when you applied for your first loan since youll need to provide details of your car and, of course, details of your existing loan.
This isnt a comprehensive list since every lender is different, but this will cover what 80% of lenders will ask for:
How To Refinance A Car
To refinance an auto loan, gather all the necessary documents. Then, evaluate your credit profile and your car’s information to determine if refinancing is beneficial and if you qualify. Lenders will post their requirements online and some even allow you to file for pre-qualification.
Before starting the application process, shop around and compare offers from different auto refinance lenders. When you settle on the best one, submit a formal application and wait for the lender’s formal offer. If accepted, you can finalize the document, settle the previous loan, and start your loan payments with the new lender.
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Does Refinancing A Car Hurt Your Credit
Like with any loan, it’s important to know the potential effects on credit scores. Does refinancing a car hurt your credit or will it raise your score?
Ultimately, reducing debt that you can’t afford is a good thing. So, in the long run, refinancing can help to increase your credit score. If you do refinance, be sure to make your payments on time because that contributes to 35% of your .
But as is common with taking out a loan, refinancing does require a hard credit inquiry. That means your credit score will temporarily drop up to five points when you submit an application with your lender.
If you shop around and submit multiple applications with various lenders, your credit score can drop. But, the impact to your credit score should be the same as if you only submitted one application, assuming you submit all your applications within a 14 to 45 day window.
Now that you understand the pros and cons of refinancing a car loan, let’s dig into the right time of when to refinance.
Details Of Your Existing Loan
Lastly, your new lender may want to hear details about your relationship with your current lender. They may ask about your existing interest rate, your loan amount remaining, and other terms.
Now, your new lender also may not ask about this stuff at all. It could be because they dont care, or it could be because they plan to look it up themselves.
Either way, however, you might as well gather this info for your own benefit. Having your interest rate, remaining loan amount, prepayment penalties, and other key details on hand will help you cross-shop, do fast math, and ensure youre getting a better deal on a refinance.
Once you have all the things ready, its time to start window shopping.
You May Know About The Benefits Of Refinancing A Mortgage But Did You Know That You Can Also Refinance An Auto Loan To Lower Your Interest Rate And Potentially Reduce Your Monthly Payment Thomas Lazenby Senior Vice President Of Regions Bank Dealer Financial Services Suggests Asking These Questions Before Your Refinance An Auto Loan
1. Under what circumstances might you consider refinancing an auto loan?
- You werent offered the lowest interest rate on your original vehicle purchase
- Interest rates have dropped since your original loan date
- Your or financial health has improved since you first applied for an auto loan
- You currently lease your vehicle, and you want to purchase it
2. What factors could make it difficult to refinance an auto loan?
- If your credit score has declined, you may not be able to lower your rate
- If your vehicle valuation is less than the amount you owe, you may not be able to lower your rate
- If you have a history of delinquent payments, you may not receive loan approval
3. What should you consider before refinancing an auto loan?
- Increasing the term of the loan may change the total costs overall
- Some existing loans may include a pre-payment penalty or early-termination fees
- Refinancing your auto loan may change or void any warranties, service contracts, or other related products that may not be covered under a new loan
4. What steps should you take to start the process?
- Collect all your original loan documents
- Check your credit history
- If youre changing lenders, call you current lender to find out the payoff amount
- Use a loan calculator to determine the interest rate and term you will need to save money on interest
If you think you may benefit from auto financing, talk to your lender about your options.
Content Type: Checklist
How Are Car Loan Interest Rates Calculated
To secure a low car loan interest rate, you need to understand how lenders determine the rate theyre going to charge you. Your car loan interest rate is typically referred to as the Annual Percentage Rate , which represents the total cost of borrowing a specific amount of money to buy a car. Your APR includes your interest rate and all fees involved.
To calculate your APR, your lender will consider various factors to ensure theyre charging you an appropriate amount, including the following:
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Us Consumer Loan Rates May Fluctuate
The interest rate on your loan may depend on factors like your income, credit score, loan term, and loan amount. Did you also know that the Federal Reserve can lower consumer loan rates to reduce borrowing costs for businesses and consumers? This often happens during financial downturns like the COVID pandemic. The Federal Reserve has the authority to increase loan rates too, as weve seen in 2022.
When You Should Consider Refinancing
Heres when it might be a good time to refinance your existing loan:
- Your credit score improved:A bad credit score may have forced you to take a high interest rate on your original loan. If your credit score has improved, you may be able to secure a new auto loan with a lower rate and save hundreds or thousands of dollars.
- Interest rates dropped:Interest rates rise and fall over time. If rates are much lower now than when you got your existing loan, it might be a good time to refinance your auto loan.
- Your car is worth more than you owe: If you have a low LTV ratio on your car and owe less than the car is worth, you might be able to secure lower interest rates.
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Proof Of Employment And Income
A refinanced car loan will typically require some proof of income. Lenders will often request this in the form of tax forms or tax returns. Refinance car loan lenders need this information before you can be approved for a new loan. There are different requirements for salaried, freelance, and self-employed individuals, and each may require a different proof of income.
Hourly/Salaried Employees Your lender will likely request pay stubs for the last two pay periods before allowing you to refinance your car loan. If you apply at the beginning of a year, they may also request a W-2 from the previous year.
Freelancers/Contract Employees The documents needed to refinance a car will change if you are a freelancer or contractor. Because freelancers and contract workers receive multiple 1099s from several companies, auto refinance lenders will ask for your tax returns instead.
Self-Employed For those who are self-employed and shopping for a refi car loan, lenders will instead ask to see tax returns from the last two years.
If you need a copy of your W-2, you can always request one from your employer. Additionally, tax returns can be requested online by visiting the IRSs website. Lastly, as a final tip, we recommend notifying your lender of any additional jobs or sources of income you have. This knowledge can be beneficial for a lender to know and may make a difference in your application.
What Fees You Might Have To Pay
Some lenders include a prepayment penalty in the car loan agreement for paying off the debt early. Be sure to check if your current loan has prepayment penalties, as it could negate any savings you get through refinancing.
Depending on the lender, you might also have to pay an application fee, registration fee and/or title transfer fee. When refinancing, some states will also require you to pay to re-register your vehicleâbut the cost of these fees depends on where you live.
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Will Your Cars Age And Mileage Disqualify It For Refinancing
Lastly, many lenders have strict age or mileage requirements for refinancing. Generally speaking, options tend to start drying up around 100,000 miles or eight model years old. Bank of America, for example, wont refinance cars with over 125k on the odometer, while Capital One wont touch cars over seven years old.
Hopefully, your car is young and youthful enough to qualify for refinancing, so lets move on to step three: gathering all the things!
Can I Refinance Any Loan
You may be wondering can I refinance any loan that I have? For the most part, it is a yes. Most types of loans, especially home loans, car loans, and personal loans, which are also the more common loans that customers choose to take out and refinance, offer refinancing schemes.
Another method of refinancing to potentially enjoy lower interest rates and therefore savings would also be debt consolidation. A Debt Consolidation Plan is a type of debt refinancing programme that consolidates all of a customers unsecured loans and credit cards across all banks with 1 bank, allowing the customer to make repayments on all his loans and credit facilities at once, usually with a lower overall interest rate. This allows borrowers to refinance any big purchases, such as homes, cars and other big-ticket items.
However, it is important to note that the Debt Consolidation Plan excludes refinancing options for renovation loans, education loan, medical loans, and some other credit facilities.
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Should You Refinance For A Longer Or Shorter Term
In order to decide how to approach your refinancing, there are some key things to consider. A key aspect is the duration of the new loan. The term of the agreement dictates what it will cost you in the long run. Loans with a shorter term will cost more on a monthly basis, though will end sooner. This results in less interest payments over time.
Conversely, longer-term agreements have smaller monthly payments. However, that does not mean you will ultimately pay less. Long-term loans have more time to compound the interest. It results in your paying a significantly higher price for the vehicle than you would with a shorter term.
In order to understand how the term of the loan will play into your households larger financial picture, there are other details to consider.
Consider your ability to make payments and how much you can afford. Weigh this against your willingness to pay out the loan faster, even if it means some frugality. Additionally, consider whether you will qualify for a better rate. If your credit is better than when you initially entered into the agreement, you should be fine to proceed.
New Loan Term
When you pay out a loan over a longer term, you are eventually spending more in interest. Depending on how well you are able to make your existing regular payments, it may be worth discharging the loan faster. Conversely, if youre struggling and dont have a long-term solution yet, refinancing is a reasonable option.
Can You Lower Your Apr Without Refinancing
Refinancing involves taking out a new car loan to pay off your current loan at a lower interest rate, different loan terms, and a revised payment schedule. Many borrowers refinance when theyre able to secure a lower APR compared to the rate they were currently locked in at. As a result, it may save quite a bit of money over the life of the loan.
However, you might not want to refinance your car loan if the penalty costs outweigh the savings. The only other option you might have is renegotiating your car loan with your lender or paying off the loan entirely.
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What Are The Terms Of Your Existing Loan
Naturally, youll want to get a clear picture of your existing loan terms before you start cross-shopping. What is your interest rate? Is it fixed or variable? How much of your loan amount do you still have to pay off? How many months do you have to pay it off?
All in all, specifically what are you trying to get out of a new loan?
Tinker around with MU30s handy Loan Payoff Calculator and see where the weak link is in your existing loan. Most commonly, folks are trying to lower their interest rate. In addition to lower interest, you may want a slightly longer loan term to lower your monthly payments .
One quick note before I move on: if you got your financing directly from the dealer where you bought the car, you probably want to refinance. Thats because dealers arent known for offering customers the best financing deals . Dealers offer convenience, not savings. So it may be time to break up with your dealer/lender and find someone with a better rate.
In addition to basic details like your interest rate, term, and loan amount, theres another important factor buried in your loan document that most folks tend to gloss over.
What Refinancing Is And How It Works
Refinancing allows you to replace your current loan with a new one. This new loan will hold better rates and terms and thus save you money each month. Your existing loan will be replaced with one from a new lender, but it is always wise to calculate potential savings if you stayed with your current bank or lender.
The choice to refinance does not come without risk. By extending the lifetime of your loan you are more likely to become upside-down on your vehicle loan. To avoid this, stay away from long repayment terms which can feel enticing when refinancing.
It is also important to consider that lenders do hold specific requirements when it comes to refinancing. Many banks and lenders will look for a clean vehicle title, history of payments and the value and age of the vehicle.
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Factors To Consider Before Refinancing
Lender requirements, additional fees and your finances should all be considered before you refinance your vehicle.
- Requirements for refinancing: Every bank or lender has its own criteria to determine if you are eligible for refinancing. Be sure that you are not upside-down on your loan and are current on payments.
- Prepayment penalties: A prepayment penalty is the fee that you must pay if you pay off your loan early. Not all lenders charge this, but it could affect your overall savings.
- Time remaining on the loan: If you are near the end of your current loan, it may make more sense to finish paying it off instead of sinking time and money into refinancing.
- Your financial state: Your debt-to-income ratio is one of the many factors considered by lenders. The more debt you are able to pay off before applying for a new loan, the better terms you receive will be.
How Does Auto Loan Refinance Work
Refinancing an auto loan replaces your existing loan with a new one, generally to save money overall by reducing your rate or to reduce your monthly payment by extending your loan term. You apply for a new auto loan through a dealership, bank, credit union or other lender. If youre approved, your existing auto loan will be paid off and youll receive a new interest rate, loan agreement and loan term.
Before you begin applying or searching for the best auto loan refinance providers, we recommend following these steps to ensure youre ready for the application process.
- Review your current auto loan: Gather all of your loan information, including the following: lenders name, loan term, annual percentage rate , monthly payment and payoff amount. This will save you time when you begin speaking with auto refinance lenders, who will ask for this information up front. Also, you can plug this information into an auto refinance calculator or comparison tool to see how much money you could save.
- Check your credit score: Find out if your credit score has improved. A higher credit score means you may qualify for more competitive rates that could help you save money long term.
- Apply and compare offers: To get the best auto refinance rates, shop around and compare offers from lenders, and then pick the one thats best for you. We recommend reaching out to at least five lenders so you can compare several offers.
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