Auto Refinance In Todays Economy
Its not surprising that people are struggling with finances. Recent Census Bureau shows that about 40% of adults are experiencing difficulty keeping up with basic household expenses.
One avenue for potential savings? Auto loan refinance. Many auto refinance companies currently tout a monthly payment drop of about $100, and a few others claim their average customer saves closer to $150.
Monthly new car payments have been affected as well: about 13% pay more than $1,000 per month, almost twice as many people as last year.
Used car prices have gone up too, sometimes surpassing the cost of a newer version of the same make and model.
However, auto refinance remains a viable option. A lot of companies will even work with borrowers with car loans originated as recently as one month ago.
When Can I Refinance My Car
You should refinance an auto loan if it helps you save money, when you have a good credit score or when your score has improved. Refinancing your car loan with better credit can get you better loan interest rates, and help you negotiate for a reduced loan term length.
You shouldn’t consider refinancing your car loan if you’re financially stressed or if your loan value goes underwater, meaning that the loan’s value is higher than what your car is worth. This type of loan will impact your loan-to-value ratio, and significantly reduce the chances of receiving favorable loan repayment terms for a refinance.
Can You Refinance Your Car Loan When You Have Bad Credit
Refinancing your car loan when you have bad credit may be possible, but it could be difficult to get a lower rate if your credit hasnt improved since you got your original auto loan. In general, the lower your credit scores, the higher your interest rate.
If auto loan rates have decreased since you got your current loan, you may be able to get a better interest rate. Checking historical data on average interest rates on new auto loans is one way to tell if rates have generally improved. If the interest rate for the month you got your original loan is higher than todays rates, it may be a good time to look into refinancing for a lower rate.
But keep in mind that new-car rates are different from refinance loan rates historical data is just a way to get a general sense of how auto loan interest rates are trending.
If your refinance goal is to get a lower monthly payment , you may need to extend your loan term. Be aware that a longer term could increase the total amount of interest you pay over the length of your loan.
Here are some steps that can help you find an auto refinance loan that fits your needs.
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Shop For A Refi Lender
You should apply for an auto loan refinance with several different banks and lenders, including your current bank, online lenders and other local and national banks and credit unions. You can often leverage one banks offer with another bank to get a better rate.
When you apply for an auto loan refinance, it will show up immediately on your credit report and count as a hard inquiry. A hard inquiry can cause a five-point drop in your credit score, so every auto loan refinance request has consequences to your credit.
However, if you submit all the applications within 14 to 45 days of each other, those multiple applications will only count as one inquiry. If you wait too long, you may miss the shopping window. In that case, each application will be treated as separate hard inquiries, and will have a greater negative impact on your credit score.
When Should You Refinance A Car
When to refinance depends on your circumstances and needs. Refinancing could make sense if your credit score has recently improved, if car loan rates have fallen, or if you need a lower monthly payment. Overall, consider refinancing when you can get a better deal on your car loan and it won’t cause you to pay more for the vehicle.
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Weigh Auto Loan Options And Prequalify If Available
A prequalification is a soft inquiry that may or may not impact your credit score you can ask the lender to confirm. While prequalification isnt available with all lenders, it allows them to look at your information and tell you the offers you may be eligible for. However, note that even if you prequalify for a loan, you will still have to submit a full application.
Either way, prequalification is a great way to shop for offers without committing. Once you have looked at different lenders and seen what they have to offer, you can go to the next step.
Check Your Credit Score
Your and history is a major factor lenders consider when you apply for refinancing. If you have made smart money decisions since then paying down your credit card debt and making on-time payments, for example your Lenders will view you as less of a risk and may offer you better rates.
Check your credit score before you start applying. This will help guide you toward lenders you qualify for and predict potential rates. Even those who have bad credit may still be able to get a loan with a lower rate by finding the right lender.
The bottom line: The better your credit score, the lower interest rate you will likely receive from a lender. Ultimately, it depends on both your score and your payment history.
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What Is Required To Refinance A Car Loan
Every lender determines eligibility differently, but there are some documents and information they typically require to refinance your auto loan.
- Personal information: Youll need to prove you are who you say you are, so be prepared with a copy of your drivers license or proof of residence, phone number and Social Security or another identity number. Lenders want to know that youll be able to repay your loan, so theyll ask about your income, current debt and your employers information. They might also ask for a paycheck stub, a tax return or your employment history.
- Vehicle information: The lender will need to make an accurate valuation on the vehicle under consideration for financing, so theyll want to know the VIN, make, model, mileage, year and registration number. You might also be asked to provide evidence of active auto insurance.
- Current loan information: Be prepared to provide the name of your current auto lender, loan number, current balance, monthly payment and payoff amount. Typically, lenders like to see an on-time payment history of at least two years before theyre willing to approve you for refinancing. But check with your lender since it can vary.
Consider The Time Remaining On Your Loan
How far along are you in your car loan repayment schedule? If you only have a year or two left, you may be better off sticking with your original loan.
You can lower your monthly payments by extending your repayment period. But when you add in the money you’ll pay in interest charges, you may end up paying more overall.
On the other hand, refinancing into a shorter repayment term could be a good idea, as you might get a lower interest rate with a shorter term. Your monthly payment will probably go up with a shorter term, but if you qualify for a better interest rate than what you have now, it may not go up as much as you’d think. You could actually save money overall.
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Shop Around And Compare Lenders
Each lender weighs factors differently when calculating auto refinance rates and offers. Start with local banks and credit unions when shopping around. Most financial institutions offer car loans, and you may qualify for special discounts at the bank where youre a member. Once you have those rates in hand, compare them to offers from other lenders to get a better sense of which provides the best deal.
Apply For Your Auto Refinance Loan
There are a few steps youll need to take to apply for an auto refinance loan. Once youve decided on a lender, youll need to gather all required documents before applying. This can include information about yourself, like your name, address, and social security number, as well as information about your vehicle and your previous loan.
If youre interested in applying for an auto refinance loan, its a good idea to wait to apply until your finances are in order. For example, if your credit score is near a threshold, you might want to take steps to raise your score before applying to qualify for lower rates. Once your application is accepted, youll need to begin repaying your new loan. Its a good idea to set up automatic payments each month to make sure you never miss a payment.
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Best Bad Credit Auto Refinance Loans
As a BadCredit.org contributor, Matt uses his financial expertise and communications background to keep audiences informed on ways to make their financial lives easier. By exploring the latest fintech, budgeting tools, and financial literacy options, Matt hopes to help subprime consumers move into the prime territory.
Edited by: Lillian Guevara-Castro
Lillian brings more than 30 years of editing and journalism experience, having written and edited for major news organizations, including The Atlanta Journal-Constitution and the New York Times. A former business writer and business desk editor, Lillian ensures all BadCredit.org content equips readers with financial literacy.
U.S. car owners have $1.4 trillion in outstanding auto loan debt which generates billions in interest profits each year for banks and lenders. But with one of the best bad credit auto refinance loans, you dont have to contribute more than your fair share to that total.
If youre stuck in an outdated loan with a higher-than-average interest rate, refinancing your debt can lower your monthly payment, decrease your overall cost of credit, and help you pay your loan off earlier.
And, since the lenders listed below specialize in refinance loans for consumers who have bad credit, you dont have to worry about a damaged financial past keeping you from obtaining the savings you deserve.
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Disadvantages Of Auto Refinancing
Online lending networks provide access to many lenders with a single application. That alone will improve your chances of approval despite having bad credit. But it also means that every potential loan offer you receive will have varying terms and conditions.
Some lenders tack on origination fees that make the loan more expensive than it seems on the surface. Those fees can get tricky, so make sure you know exactly what youll have to pay back before you accept a loan.
Depending on the terms of the loan, you could also end up paying more in finance charges. Extending your loans repayment window can lower your monthly payment but may also increase your overall cost of the loan.
For example, a $15,000 loan at 3.5% interest over 36 months will cost $15,823 to pay off at $440 per month. If you extend that loan to 60 months, youll save $167 every month, but also pay $16,373 to pay off your loan.
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When Should You Refinance Your Car Loan
Refinancing an auto loan makes sense in many conditions. You should consider applying for a refinance loan if:
- Youve improved your credit score from when you originally financed the vehicle
- Your current interest rate is above todays average rates
- Youre unhappy for any reason with your current lender
- You want to lower your monthly payment by reducing your APR or lengthening your repayment period
- You want to borrow money via cash-out refinancing
- You owe $7,500 or more on your current loan
Refinancing your loan may not make sense if youve paid off most of your existing loan, or if your vehicle is older and has a lot of miles on it. You may also have trouble refinancing if you owe more than what your car is worth, as we explain in the next question.
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Decide If Refinancing Is The Right Financial Move
There are two main reasons to refinance: if you can get a better rate or if you are struggling to make payments.
The first scenario is common if you took out your auto loan when interest rates were high or when you had a low credit score. If your since you got your loan, lenders will likely offer you better terms, which will help you save money over the life of the loan.
On the other hand, if you feel like you are stretching your monthly budget with your current payment, you can refinance your car loan to a longer term. By extending your repayment term, your monthly payments will decrease but you will likely pay more in interest over time.
The bottom line: The key to knowing if refinancing your vehicle is the right choice is whether you will save money. If you cant get a lower interest rate through refinancing, it is not a great idea. Refinancing to a higher interest rate will make your loan more expensive even if your payments are lower each month.
Estimate The Value Of Your Car
The cost of your loan isnt the only factor to consider when thinking about whether to refinance. You will also want to get a sense of what your car is worth. To do this, you can use resources like Kelley Blue Book and Edmunds.
If your car is newer with low mileage and a sizable balance that will still take years to pay off, refinancing could save you money and prevent you from going upside-down on your loan. If its worth less than what you owe, you may be out of luck.
And if your vehicle is almost paid off, it makes less sense to refinance since interest currently makes up a small portion of your remaining payments.
The bottom line: Knowing the value of your car can help you determine whether lenders will be willing to refinance. If your vehicle isnt worth much, refinancing could cost you more money than youd save.
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Waiting Too Long To Refinance
If you run the numbers and you determine that it makes sense to refinance, waiting can cost you. Rates are typically lowest on new vehicles, and some lenders wont refinance loans for cars over a certain age . You might even get a new car rate if you refinance immediately after purchasing from a dealer and taking advantage of dealer incentives. Used car loan rates are typically higher than new car rates.
You Would Like To Change Your Loan Terms
Loan terms are the expected guidelines and conditions you accepted before taking your original auto loan. They generally cover the repayment period for the loan, monthly payments, interest rates, associated costs, fees for late penalties or other expenses, and any special situations. Borrowers are advised to review loan terms thoroughly to ensure they understand their financial obligations before they borrow and to spot potential hidden fees or clauses that could cost them more money.
If you would like to change an aspect of your loan, refinancing may provide that opportunity. You may be able to acquire a lower interest rate, lower monthly payment, or a longer repayment period. However, while increasing your loan repayment period may lower your monthly payment, it could also increase the total amount of interest you pay over the life of the loan.
Alternatively, reducing your repayment period will likely increase your monthly payments, but could reduce the total amount of interest you pay on the car loan, especially if you can negotiate a lower rate. Either way, refinancing may provide borrowers with an opportunity to adjust their loan terms.
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When Refinancing A Car Loan May Not Be A Good Idea
With issues such as, prepayment penalties, loan fees and upcoming major purchases, the costs may mean refinancing isn’t worth it.
If your current car loan has a prepayment penalty, you’ll need to determine whether the savings of refinancing outweigh the penalty you’ll pay.
Your lender may charge specific fees to get a loan going origination fees and title transfer fees, to name a few possibilities. You’ll want to get a clear picture of the total costs of those fees to ensure you’ll still come out ahead.
Are you about to apply for a loan for a separate large purchase? The credit inquiries for refinancing a car loan will reduce your credit score by a few points for a while. If your current score is between a higher and lower tier of credit, the effect of the car refinance may prevent you from getting the best terms on that other loan. And paying higher interest will cost you more money in the long run.
How To Handle A Bad Mechanic
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Car trouble is frustrating on its own. Add a bad mechanic to the mix, and youve got the recipe for a major headache.
It is more likely that you have a bad repair than a bad mechanic. There is a difference between trial-and-error diagnosis of a problem and unnecessary work performed only for profit.
The good news is that most states have consumer protections in place to help you dispute issues with auto repairs. But the fastest way to resolve an issue is directly with the mechanic.
Here are the steps to handling a dispute with a mechanic and tips for making it a smoother process.
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