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What Does It Mean To Refinance Your Car Loan

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How Does Refinancing My Car Loan Affect My Credit

How does auto loan refinancing affect credit score?

Refinancing your car loan will affect your credit but that doesnt mean you shouldnt consider it.

If you wish your current auto loan was more affordable, refinancing may be a good option. It can allow you to replace your current loan with a new loan and save a lot of money on interest over time. Refinancing may also leave you with lower monthly payments and free up your monthly cash flow.

It may be a good option if your car is retaining value, interest rates are going down, or your has increased. Refinancing may also make sense if youre short on cash flow, want to add or remove a co-borrower, or are worried about repossession.

Before you take the plunge and decide to pursue this strategy, however, its important to consider how refinancing a car loan affects credit. After all, good credit is the key to landing the best interest rates and most favorable terms down the road. You dont want to refinance and later find out that your credit score has taken a large, long-term hit.

2021 Auto Refinance Rates

Understanding The Pros And Cons Of Refinancing Your Car

In every situation, it is up to you to determine which scenario is best for your needs.

Work with your lender to request a quote. Gather information about the costs involved in the process. Then, consider both the pros and cons of refinancing your car.

Could it help you save money or make your debt easier to repay over the long term?

For many people, a car refinance offers a bit of freedom, enabling you to pay off other debts. It also gives you a fresh start with a new lender.

Theres no risk in obtaining a car refinance quote to find out how you could benefit.

Your Credit Score Has Increased

Your credit score may have been lower when you took out your original car loan than what it is today. If youve earned a substantially higher credit score in the year or so after you took out your car loan, you may want refinance. Chances are youll be able to lock down a car loan with a much better interest rate.

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What Is Car Loan Refinancing

In simple terms, refinancing is the act of taking out a new loan either with the same lender or a new lender in order to replace an existing loan. There are many aspects of a loan that can be changed with a refinance: the interest rate being charged, the monthly payment amount, the repayment term, and even the parties responsible for that debt.

Essentially, refinancing allows you to swap out your car loan for a replacement loan. Youre still in debt, of course, but your loan has been revised in a way that benefits you.

Your new refinance loan will serve to pay off the original loan balance in full. From that point on, your debt will be held with the new lender, so thats where you will direct any questions or concerns and where you will send your monthly payments.

Each lender will have their own specific guidelines regarding auto refinance loans and eligible borrowers. In general, though, you can refinance an auto loan as early as youd like, and you can even refinance the same debt more than once.

Auto Refinance Calculator

Pros And Cons Of Refinancing

What Does Refinancing a Car Loan Mean

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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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.

If I Shop Around For Rates Will That Hurt My Score More

A common misconception is if you shop around for rates and have your credit pulled multiple times, this will hurt your credit score beyond doing just a single application.

This is not true. The credit scoring agencies of both FICO and Vantage are aware this is happening, and they encourage borrowers to shop around. Making multiple hard inquiries within a few weeks span will behave as one single credit pull as far as your score is concerned.

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Improve Your Cash Flow

If you currently owe less than what your vehicle is worth, you may be able to access more cash by refinancing. For instance, lets say you have owned your vehicle for three years. Your vehicle is currently worth $8,000, and you still owe $5,000 on your auto loan. You need money for a small home improvement project. One option would be to refinance your vehicle for $6,500. You will still owe less than what the vehicle is worth and have $1,500 of new money available to spend after the new loan pays off your previous $5,000 balance. The $1,500 can now be used for your home improvement project.

Be careful, though. A car, unlike a home, is always a depreciating asset that can lose more than 10 percent of its value within the first month of ownership and more than 20 percent within the first year.

You dont want to risk going underwater on your loanthat is, owing more on your car than the car is worth.

Get Your Documents In Order

What does it mean to refinance a loan?

Youll need to have both your personal and loan documents ready. Your new lender may use these to verify your identity, vehicle ownership, and loan eligibility.

Youll need:

As well as details about your loan:

  • Current monthly payment
  • Outstanding balance
  • Number of remaining payments

Some lenders, including LendingClub Bank, can look up the cars details if you have the vehicle identification number to save you time.

Once your new loan is approved and you accept, your new lender will often pay off your old auto loan directly

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Refinancing Can Ding Your Credit Score

If you need your credit score in tiptop shape for any reason, you may want to consider holding off on refinancing your auto loan. When you apply for a new loan, lenders will conduct a credit inquiry, which can take some points off your credit report.

If youâre just straddling the line between âgood creditâ and âgreat credit,â the process of refinancing your loan might keep you from that better score. However, as with all loans, making your payments in full and on time is good for your credit score, so taking a small hit to your credit score may be worth it in the long run, if it helps you avoid missing any payments or defaulting on a loan.

Itâs also worth noting that if you shop around with a few lenders, it wonât necessarily harm your credit score anymore than if you just applied with one. If multiple auto lenders conduct hard inquiries within a certain time frame, it will only count as a single inquiry, and the damage to your credit score will stay minimal.

How To Refinance Your Car Loan

Through April 20, 2022, Experian, TransUnion and Equifax will offer all U.S. consumers free weekly credit reports through to help you protect your financial health during the sudden and unprecedented hardship caused by COVID-19.

In this article:

Refinancing a car loan can help you save money by lowering your interest rate. The process involves replacing your current car loan with a new one, typically with a different lender. Your car will act as collateral on your new loan, just as it did on the original loan. Here’s how the auto loan refinance process works and what to think about before you apply.

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Potential Outcomes Of Refinancing An Auto Loan

1. Lower monthly payment

A lower payment could result from dropping the interest rate, extending the duration of the loan, or both together.

2. Lower interest rate

When a refinanced loan comes with a lower rate than the current note, it may reduce the total interest paid over the life of the loan, in cases where the term is not extended or extended by much. Interest rates will vary according to the lender, market rates and factors like a borrowers .

3. Different loan duration

Longer Extending the loan term means the loan amount will be paid back over a greater period of time, reducing the monthly payment needed to meet that sum. However, it might also mean you end up paying more for your car in total, including interest, by the end.

Shorter A loan can also be refinanced to shorten the term, such as when a borrower is seeking to pay off the debt more quickly and save. Depending on the interest rate, a shorter loan may raise the monthly payment but reduce the total interest paid.

Your Credit Score Has Improved

How Soon Can You Refinance a Car Loan

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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A Better Way To Move Forward

Its common for people who are new to financing to ask how refinancing a car works, and its a question well worth asking. Taking the time to understand the process may help you find an auto loan with better terms for your situation, and enjoy a more comfortable journey to vehicle ownership.

Apply for auto refinancing and see if you can save.

These statements are informational suggestions only and should not be construed as legal, accounting or professional advice, nor are they intended as a substitute for legal or professional guidance.

RoadLoans is not a credit counseling service and makes no representations about the responsible use of or restoration of consumer credit.

* Bad or Poor credit generally is considered a FICO score around 600 and below by sources including the Consumer Federation of America and National Credit Reporting Association ,,, Investopedia, and others. The Congressional Budget Office identifies a FICO score of 620 as the cutoff for prime loans. FICO scores are not the sole factor in lending decisions by and Santander Consumer USA.

Check With Your Current Lender First

Refinancing your car could save you thousands of dollars-and you may not have to do a thing to save that cash. Before you go shopping elsewhere for a refinancing deal, talk to your current lender and see if they can lower your rate to current levels.

If interest rates have fallen sharply since you bought your car, you may be able to get a lower rate with your current lender. It never hurts to ask, and refinancing your car with the current lender will save you a lot of time and hassle.

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You Have An Older Car

If you have a car thats 10 years or older, you may have difficulties finding a lender willing to refinance. Many lenders set limits on how old a vehicle can be in order to qualify for the loan. If you find yourself in a situation where you need to refinance, consider taking out a personal loan or trading in the vehicle as alternative options.

Getting A Longer Term

How to Refinance a Car Loan (The Right Way)

Even if you canât refinance for a lower interest rate, if your monthly payments are too high, you can look into refinancing with a new loan that has a longer term.

Going from a 36-month loan term to a 72-month loan term wonât save you money overall â longer term lengths usually mean you wind up paying more over the life of the loan â but it will lower your monthly payments. If youâre struggling to keep your head above water each month, lower monthly payments might be helpful.

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Lower Your Monthly Payment

Sometimes, an expensive occurrence such as having a baby, unexpected medical bills, or a natural disaster can put you in a situation where you have to reduce your monthly expenses. Refinancing might allow you to extend the duration of your loan, thereby lowering your monthly payments. For instance, if you owe two more years on your current loan, it may be possible to refinance and extend the term to four years.

Adding two years onto your loan should substantially lower your monthly payment, depending on the interest rate you get. You will be paying for two years more, but you will free up some cash on a monthly basis, helping you get through a rough patch. Keep in mind, though, that this will also mean that you’ll pay more interest over the total life of the loan.

Changing lenders can be a pro or a con, depending on the relationship you have with your current lender. If your lender has poor customer service, changing lenders could be a benefit. If you like your lender, you can try to refinance with them, but you may need to look elsewhere to get the best rate.

Does My Car Loan Qualify For A Refinance

Auto lenders have rules on which cars are eligible for an auto loan refinance. Most lenders wont refinance a loan for a car with more than 100,000 miles or with a salvage title.

The lender will also assess the cars value before approving a refinance request. If the value is too low, you wont qualify. The lender will calculate the cars loan-to-value ratio, which generally needs to be below 125% to qualify.

Before you apply to refinance your car loan, determine the LTV ratio. To find the cars current value, use sites like Kelley Blue Book, Edmunds and NADAguides. Take the average from all three sites to find a general estimate.

Calculating the LTV is simple. Divide the current loan balance by the cars value: the resulting percentage is the LTV. For example, lets say you have a $9,000 balance on a car worth $11,000. In this case, your LTV ratio would be 82%.

But if the current balance is $15,000 and the car is only worth $10,000, your LTV would be 150%. This is much higher than what most lenders allow, so refinancing is likely impossible.

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