What Does Refinancing Mean In Regard To A Car Loan
I’ve heard the word refinancing many times, but I’m not sure what that means. Could you enlighten me?
- Interest rates have dropped, and youâd like better rates
- Your credit score has improved enough to get a lower interest rate
- You want to remove a cosigner
- You want to pay off your car loan sooner
- You want a lower monthly payment
879 per year
It Doesnt Make Sense For Everyone
Refinancing your auto loan makes sense if you can save money, but itâs not right for everyone. If youâre almost done paying off your current auto loan, refinancing to a loan with a lower rate wonât save you much money since youâve already paid most of the interest.
Lenders may also place some restrictions on refinancing. For example, some banks and other lending institutions wonât refinance your loan if your vehicle has above a certain number of miles or is more than ten years old.
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.
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When To Consider Refinancing Your Auto Loan
While an auto loan refinance can save you money, its not the right fit for everybody. You should assess your needs to decide if its a good time to refinance your auto loan before you apply. For example, if your credit score has improved or interest rates have dropped, you may be able to secure more favorable terms than your original plan. If youre having trouble making your monthly payments, refinancing your auto loan can also be an opportunity to lower premiums to meet your budget.
If your credit score is lower than it was when you initially applied, or if interest rates are much higher, it usually doesnt make sense to apply for an auto loan refinance. You should only go through with an auto loan refinance if the rates and terms are better than those of your original loan.
Gather The Necessary Documents
If you decide that refinancing your auto loan is right for you, you’ll want to start collecting the documents that lenders will need. Here are the types of documents that you’ll probably need to track down.
- Personal information like your social security number and driver’s license
- Income information like your last few pay stubs and tax forms from the last two to three years
- Car information like the title, registration, proof of insurance, VIN number, and mileage
- Loan information like the lender’s name and your current balance
Once you’ve gathered the necessary documents, it’s time to start the loan-shopping process.
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Cash Out Auto Refinancing Process
The process is pretty simple. You can speak with your credit union lending expert or fill out an application. However, there are a couple things you may want to consider.
- You want to know the value of your car or truck – Do some research. Look at the NADA website at to get an understanding of your vehicle’s value.
- Consider your credit score – As with all kinds of lending, your credit matters in determining whether you can get the financing you want as well as what interest rate you qualify for.
With any financial decision, you’ll want to examine why you want to refinance. You should think about what benefits you will reap from the refinancing, how it serves your financial interests, and how it fits into your personal financial picture.
What Does Refinance Your Car Mean
Refinancing is the act of borrowing money to pay off a current car loan. The old lender will release its lien over the vehicle and the new lender will take a lien instead. The benefits of refinancing a car include getting a lower interest rate to reduce your monthly payments or a shorter loan term.
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What Are Some Reasons Why I Should Refinance My Current Auto Loan
Car owners will generally refinance their auto loans for three different reasons.
Depending on your current situation, an auto refinance could achieve any of these results or even all of them.
For example, let us assume you are one year into your current auto loan. Your original loan amount was for $35,000, at an annual percentage rate of 9%, on a five-year term and a monthly payment of $726.
Loan amount: $35,000
Loan term: 5 years
Monthly payment: $726
Total interest paid over the life of the loan: $8,600
After a year of making regular payments, you decide to refinance your existing auto loan. You qualify for a loan amount of $29,000, a new lower rate of 1.74% APR* and a lower term of four years. This lowers your monthly payment to $626.15 per month, pays the loan off within the original five years, and saves you just over $4,600 in total interest.
New Loan amount: $29,000
*Interest rate of 1.74% APR includes a 0.25% discount for having a Benefits Checking account.
Loan term: 4 years
Monthly payment: $626.15
Total interest paid over the life of the loan: $3,969.89**
**Interest paid first year of original loan $2,915 plus total interest of new loan of $1,054.89.
Pros And Cons Of Refinancing
Refinancing has several potential benefits:
- It can lower your monthly payments if you refinance into a loan with an interest rate that’s lower than your existing rate. This might happen because you qualify for a lower rate based on market conditions or an improved credit score, factors that weren’t in place the first time you borrowed. Lower interest rates typically result in significant savings over the life of the loan, especially with large or long-term loans.
- You can extend repayment by increasing the term of the loan, but you’d potentially pay more in interest costs. You also can refinance into a shorter-term loan to pay it off sooner. For example, you might want to refinance a 30-year home loan into a 15-year home loan that comes with higher monthly payments but a lower interest rate. You’d have the loan paid off in 15 fewer years.
- It might make sense to consolidate multiple other loans into a single loan if you can get a lower interest rate than what you’re currently paying. Having just one loan also makes it easier to keep track of payments.
- You might prefer to switch to a loan at a fixed rate if you have a variable-rate loan that causes your monthly payments to fluctuate up and down as interest rates change. A fixed-rate loan offers protection if rates are currently low but are expected to rise, and it results in predictable monthly payments.
But refinancing isn’t always a smart money move. Some drawbacks include:
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Is Your Loan Balance Higher Than The Value Of Your Vehicle
Kelley Blue Book offers resources and tools for finding used-car values. If the outstanding loan amount is higher than the cars market value , you may have trouble getting approved for a new loan or see little difference in the new loan terms offered to you. Some lenders may allow you to roll the outstanding balance on your current loan into your new loan, but keep in mind that this will add to your overall debt.
The Pros And Cons Of Refinancing
You can get a lower monthly mortgage payment and interest rate.
You can convert an adjustable interest rate to a fixed interest rate, gaining predictability and possible savings.
You can acquire an influx of cash for a pressing financial need.
You can set a shorter loan term, allowing you to save money on total interest paid.
If your loan term is reset to its original length, your total interest payment over the life of the loan may outweigh what you save at the lower rate.
If interest rates drop, you wont get the benefit with a fixed-rate mortgage unless you refinance again.
You may reduce the equity you hold in your home.
Your monthly payment increases with a shorter loan term, and you have to pay closing costs on the refinance.
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What Are The Benefits Of Refinancing
Save Money with a Lower Interest Rate
You may be able to secure a lower interest rate, either because of the current economic climate, or because your own personal financial situation has improved. This is the primary motivator for people to refinance. By lowering your interest rate, you are lowering your monthly payments and will end up saving money over the course of the loan.
Save Money with a Shorter Payment Period
When you refinance, you may be able to change the terms of your payment period and shorten the period. This can save you money overall, as the sooner you pay back the loan, the less interest you will ultimately pay.
Reduce Your Monthly Payments with a Longer Payment Period
If money is a bit tight for one reason or another, car refinancing may allow you to lengthen your payment period. This will allow you to pay off the loan over a longer amount of time, reducing your monthly payments significantly. You will end up paying a bit more over the length of the loan because you will be paying interest for a longer period of time, but it can give you breathing room if you need it.
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.
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When Is It A Good Time To Refinance Your Car Loan
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Do you already have an auto loan to help finance your car? Are you looking to take advantage of lower interest rates to save money on your existing loan? If so, refinancing your loan could help you save money over the long haul and ease your financial burden.
If keeping more money in your pocket is on your agenda for the new year, you may want to consider refinancing your current car loan for one that comes with a lower interest rate. Let’s take a look at auto loan refinancing to see if it’s the right fit for you.
How Refinancing a Car Loan Works
Refinancing an auto loan involves taking out a new loan to pay off the remainder of your existing car loan principal. Like your original car loan, refinancing is secured by your vehicle and paid off in regular installments over a certain amount of time until the amount is paid off. Your replacement loan will come with new terms and a new interest rate, hopefully lower than what you’re paying right now.
Can Anyone Refinance Their Car Loan?
Before you apply to have your auto loan refinanced, it’s important that you understand the requirements for such an arrangement, which typically include the following:
Type of vehicle – Certain vehicle types might not qualify for auto loan refinancing, such as commercial vehicles or RVs.
In order to refinance an auto loan, you will need to gather the following documentation:
Choosing a Lender to Refinance With
Has Your Credit Improved
If your credit has improved, refinancing could result in a lower interest rate, which could save you money in interest over the life of the loan. But if your credit hasnt improved, getting a lower rate may be difficult unless interest rates have dropped since you got your current loan.
If youre not sure, check your credit to get an idea of where your credits at. Checking your credit reports can also help you identify any potential errors that may be impacting your credit scores and work on disputing them.
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Refinancing And Bad Credit
Like many things that go with traditional auto lending, refinancing typically requires a good credit score around 670 or above. However, if you originally took out a bad credit car loan, you may be able to refinance if your credit has improved since taking out your loan.
This typically takes some time, and most auto loans aren’t available for refinancing until at least one year has passed since the original loan date. Refinancing can be a good opportunity for borrowers with poor credit to lower their rates since they typically qualify for car loans with higher interest rates.
Having an improved credit score is just the beginning if you want to qualify for refinancing. You also need to have a vehicle and loan amount which fall within the new lender’s range, and you can’t have negative equity in the car.
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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Gather The Necessary Documents For A Loan Application
After you submit your application, you’ll typically be required to provide some documents to your new lender. Having this information before you even start the loan process will help it go more smoothly.
Documents that you may be required to share include:
- Copy of your driver’s license
- Vehicle registration
Your Credit Score Has Improved
Your credit score is very important in car finance, as auto lenders sort applications by credit tiers. The APR you get, as well as whether you even receive an offer, are both largely determined by the credit tier youre in. If your credit score has improved since you initially purchased the vehicle and youve moved up a tier, then its likely youll qualify for a better financing deal. Heres how you could improve your credit score.
Getting a better APR could save you quite a bit in interest over the life of your loan. For example, refinancing $15,000 from a 7% rate to 5% when making a monthly payment of a couple of hundred dollars would save you around $800 in interest.
Heres how much you would pay in interest over the life of a 5-year loan if you borrowed $25,000, based on the APRs for closed auto loans by credit score on the LendingTree platform in the first half of 2021.
|Lifetime Interest Charges on a $25,000 Loan|
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Refinancing A Car Loan With Lendingclub Bank
With LendingClub Bank, you can quickly check your potential auto loan refinancing terms online with no impact to your credit score. If you qualify, you can receive and compare multiple loan offers before choosing the one that works best for you. Once youve picked an offer, complete the application and LendingClub Bank will pay off your current auto loan directly.
Speak To A Credit Counselor
If youre not sure refinancing your auto loan is the right move, you may want to seek professional help, like talking to a certified counselor with the National Foundation for Credit Counseling . The NFCC is the largest nonprofit financial counseling service in the U.S. and helps people get financial control over their lives. It offers debt and credit counseling for free or at a minimal charge, and can help you figure out if refinancing is right for you.
Even though an auto loan cant be included in a debt settlement plan, theres still a benefit to talking with a credit counselor if youre having trouble making payments. A nonprofit credit counselor could provide solutions that you may not be able to find on your own. You can use the NFCC locator to find a credit counselor in your area.
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