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.
Reasons You Might Not Want To Refinance
Refinancing usually requires you to have a certain amount of equity in your home. If you dont have that, refinancing can be tough. The general refinancing rule of thumb is that lenders like you to have at least 20% equity in your home but there are exceptions.
Gone through some difficult financial times since you got your first mortgage? Say your credit has gotten worse since you first got your mortgage. You may not qualify for a refinance mortgage even if interest rates are available that are lower than what you have now.
Just like when you get a mortgage to first buy a home, there are some fees to refinancing your mortgage. The closing costs for a refinance cover things like application, loan origination and appraisal fees. If you dont have the money to pay for closing costs up front, there is an option to roll them into the new mortgage. But this isnt always the best decision. Sometimes adding those extra costs to your new monthly mortgage payments can negate any savings the refinance would otherwise get you.
Planning to move soon or have a job that uproots you regularly? Refinancing may not make sense because it generally takes some time to recoup those up-front closing costs.
And one more reason you might want to hold off on refinancing your mortgage: if you have to pay a penalty on your original mortgage. Some lenders will charge you a fee for paying off your mortgage early, even if youre refinancing. Again, this could totally negate the savings of the refinance.
Here Are Some More Details About Lightstream
- No vehicle age restrictions There are no restrictions on the age or mileage of the vehicles LightStream will refinance.
- No prequalification option Without the ability to prequalify, youll be able to see your loan terms only if you submit an application and are approved for a loan. This will involve a hard credit inquiry, which can lower your credit scores by a few points.
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When Should I Refinance My Car Loan
The best time to refinance your car loan is when it can save you money in the long term, but it may also help if youre hoping to catch a break on your monthly payments. Here are a few situations where it may make sense to refinance:
- Refinance car loan rates have gone down: Most car loan interest rates fluctuate based on the prime rate and other considerations. If you purchased your car a while ago, its possible that car loan rates have decreased since then.
- Youve improved your credit score: Even if market rates havent changed, improving your credit score may be enough to get a lower rate. The better your credit, the more favorable loan terms youll receive. If youve improved your credit score since signing for your initial loan, you may qualify for better loan terms.
- You got your initial loan from the dealer: Dealers tend to charge higher rates than banks and credit unions. If you took out your initial loan through dealer-arranged financing, refinancing directly with a lender could get you a lower rate.
- You need lower monthly payments: In some cases, refinancing a car loan may be your ticket to a more affordable payment, with or without a lower interest rate. If your budget is tight and you need to reduce your car payment, you could refinance your loan to a longer term . Keep in mind, though, that while you will pay less per month with this strategy, you can expect to pay more over the life of the longer loan.
Your Financial Situation Has Improved
Lenders canuse a number of factors to decide your auto loan rate, including your credit scores and debt-to-income ratio, which is calculated by dividing your monthly income by yourmonthly debt payments.
As such, improving your credit health and decreasing your DTI ratio can lead to more-favorable terms on your refinanced loan.
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Cons Of A Car Refinance
Refinancing is a process with costs attached to it. Before you agree to any type of offer, read through the information and know what you can expect to pay for this benefit.
Here are a few of the disadvantages associated with a car refinance.
The Cost of Refinancing
Like with most types of loans, some financial institutions charge closing costs and other fees to refinance. In some cases, these fees can add up.
When searching for a lender, find out about applicable car refinance fees. Youll find that some, especially credit unions, charge no fees.
Your lender should provide you with a breakdown of the costs. Be sure that any planned savings are actually more than the cost to refinance.
The Length Adds More Costs
There is more time for interest to apply to the debt if the car refinance has a longer loan length. As a direct result, you end up paying more for the loan than if you stuck with the current lender.
The longer the loan term, the more expensive the car refinance. However, this may still be beneficial if you need a lower monthly payment due to financial strain. In this case, paying a bit more over a few years may be better than trying to juggle a high monthly payment.
You Are Securing Your Debt
When you consolidate debt with a car refinance, the debt is linked to the vehicle. If you default on the car loan, they can force the sale of the car to repay the debt.
Cons Of Auto Refinancing
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You might pay refinancing fees. There are a variety of fees you can run into including transfer, exit and upfront fees. However, not all lenders charge the same fees and some may not charge any at all. When comparing your refinancing options, be sure to include what fees they charge. Paying too much to transfer your car loan could cost more in the end than staying put.
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You could pay more interest over the life of the loan. Its true that getting a lower interest rate can save you money. But if you extend the term of the loan, you might pay more interest over the life of the loan. For example: If you currently have a $10,000 loan with a 20% interest rate over a 36-month term, youll pay $3,378.89 in total interest. If you refinance that same $10,000 at a 15% interest rate for 60 months, youll pay $4,273.96. Thats almost $900 more.To create your own custom loan options, quickly plug a few numbers into our personal loan calculator.
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You Bought The Car Less Than 6 Months Ago
While technically you could refinance your car as soon as you buy it, its best to wait at least six months to a year to give your credit score time to recover after taking out the first car loan, build up a payment history and catch up on any depreciation that occurred when you purchased. Unless there are other reasons to refinance, its unlikely youll get a lower rate than what you currently have.
Its vital to know you can afford a new car before you make the initial purchase. If you have any doubt about your ability to make the payments, youre better off not making the purchase and looking for an alternative.
What You Need To Refinance
To refinance an existing loan, you need the following :
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Compare Auto Refinance Loans
Before applying for an auto refinance loan, you should be sure to compare quotes from multiple different providers. Some factors to take into consideration include:
- Loan amounts: Most lenders have minimum and maximum loan amount requirements, usually somewhere between $7,000 and $100,000. Make sure that the loan you want to refinance is in between these limits.
- Rates: One of the main goals of refinancing an auto loan is to lock in lower rates. Make sure to compare rates from multiple different providers to ensure youre getting the best possible deal.
- Repayment terms: Whether you want to pay off your loan faster, or need a longer term length with smaller monthly premiums, look for an auto refinance loan with repayment terms that meet your needs.
- Some lenders have minimum credit score requirements for borrowers. If your credit score isnt where you want it to be, consider holding off on applying until you raise your score.
- Car requirements: Not all lenders will issue auto refinance loans for all cars. Make sure that your car meets the requirements for any lenders that youre interested in.
Best For Members Of The Military: Usaa
USAA
USAA is a great choice for auto loan refinancing for members of the military and their families, with competitive rates and the option to take your car overseas when deployed, moving, or travelling.
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No payments for up to 60 days
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Easy application process
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Only available to USAA members
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Borrowers canât prequalify
USAA only works with members of the military and their families, but for those who serve our country, this nearly 100-year-old organization offers rates and customer service that is often hard to beat. You wonât have to pay for up to 60 days after you start the loan, giving you time to catch up if you are behind. You can also choose from many of their vehicle protection plans if thatâs something youâd like to add on as well. USAA offers to refinance for up to 60 months, and longer terms are also available. USAA takes the hassle out of refinancing by working directly with your lender. Their rates are stated on their website as being as low as 3.04% APR which is noted as including a discount of .25% for automatic payments. Rates are subject to change without notice and vary based on approved credit and other factors, such as term, model year, and loan amount.
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Next Steps: How To Refinance A Car Loan
When it comes time to actually refinance your loan, there are some steps youll need to take. These include gathering your documentation, doing some comparison loan shopping, choosing a lender, applying, then paying off your old loan and making payments to your new lender. Here are six steps you can take to refinance your car.
When youre shopping around, make sure you dont go with the first offer youre presented with, either. Take your time and request quotes from multiple lenders. Compare the APR, term, payment amount, fees and penalties from each lender to find the best offer. Once you make a choice, the lender will guide you through the exact process and what comes next.
Here Are Some More Details About Penfed Credit Union
- Membership required You must be a member to qualify for an auto loan from PenFed Credit Union. Joining is easy, and you dont necessarily have to be a member of the military.
- Large loan range PenFed Credit Union offers auto loans ranging from $500 to $100,000, depending on your loan term.
- Doesnt refinance its own loans If you got your current car loan from PenFed Credit Union, it wont refinance your loan. The lender only refinances auto loans from other lenders.
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Reduce Your Interest Rate
One of the best reasons to refinance a car loan is if you have an opportunity to reduce your interest rate. If you previously had no credit or bad credit, it is worth checking into refinancing your car loan after a couple of years to see if you receive better offers. Your credit score may have improved enough to qualify you for a lower interest rate. With a lower interest rate, you will be able to pay off your loan faster or lower your monthly payment while paying it off at the same pace. In either case, you’ll pay less over the life of the loan.
Check Your Credit Score And Credit Report
Before you consider refinancing your loan, youll need to know whether you qualify for a lower rate than what youre currently paying. If the new interest rate isnt significantly lower, it may not be worth it to refinance.
Most lenders will quote their best rate, but if you dont have A-plus credit, that may not be the rate you qualify for, Marlowe says. To get your credit score, check to see if your credit card issuer or financial institution provides this for free to their customers.
You can also request a free credit report annually from each of the three credit bureaus Equifax, Experian and TransUnion .
As youre shopping around for a new loan, determine whether lenders do a soft pull or hard pull of your credit score when giving you a quote. A hard credit score will negatively affect your score, at least in the short term, so youll want to get quotes from lenders that show you your rates using only a soft pull. This process is known as prequalification.
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When Should You Refinance Your Car Loan
First, its important to evaluate your current financial needs and determine whether anything has changed that could get you a lower interest rate, shorter loan term or a lower monthly payment this time around.
Lets take a look at some reasons why you should consider an auto loan refinance, and determine if its the right time for you to refinance.
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What Does It Mean To Refinance A Personal Loan
When you refinance a personal loan, youll apply for a new loan either with the same lender or a different one and then use the funds you receive to pay off your old loan. Then youll begin making payments on your new loan with a new interest rate and terms.
There are many reasons why one might want to do this, but ideally youll obtain a new, better interest rate as part of the process.
Usually the goal is reducing your payment or lowering your interest rate. The new loan may also be for a greater amount if the goal is to get more money for a new need, says Vida Awumey, former vice president and director of policy research for OneMain Financial.
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After Youve Been Approved
Once youre approved with several different lenders, compare the various offers carefully. The most important factor is the annual percentage rate and total interest paid over the life of the loan. The APR includes the interest rates and any fees, including the lender and title fees. A lower APR means youll pay less in fees and interest.
You may be approved for several different interest rates and loan terms. Loans with longer repayment terms generally have higher interest rates and lower monthly payments. A loan with a shorter term means youll have higher monthly payments and a lower interest rate.
Look at your budget and decide how much you can comfortably afford each month. Remember, you can also make extra payments on the loan if you choose a lender that doesnt charge a prepayment penalty.
After you select the lender, youll have to finalize the car loan. The new lender is responsible for paying off the loan balance from the old lender, but its a good idea to double-check that this goes through correctly. Its also important not to fall behind on your car payments during this transfer process. Once the first lender is paid off by the new lender, they should return any extra payments you made during that window.
Once the loan is paid off, you can start making payments to your new lender. Consider setting up automatic payments so you dont have to worry about remembering your new due date.
