Be Wary Of Extending The Loan Term
While opting for a longer term loan can certainly reduce your monthly payment, it can also significantly increase the total cost over the life of the loan. A shorter term loan is usually a better deal, though there are situations in which extending the term may be warranted.
Even if you do take out a longer term loan, its worth noting that you can eventually start making extra payments to the principal, which could significantly reduce the overall cost.
Coronavirus Auto Finance Relief
COVID-19 has hurt lots of peoples finances. If youre worried about being able to keep your car, you may be able to get some help. Credit Karma has gathered a list of automakers and lenders that are offering relief options. We also have some other resources if youre looking for financial assistance.
But you may be looking to refinance to take advantage of lower interest rates which resulted from the Fed dropping its rates because of the pandemic. If thats the case, youll want to consider the advice in the article above.
In addition, some dealers are offering extreme financing deals for new vehicles, which may make sense for you if you were already considering trading in your car.
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If Your Financial Situation Has Changed Or You Just Want Better Car Loan Terms Refinancing Your Car Loan May Be A Good Move
When you refinance your car, you take on a new loan to pay off the balance on your current car loan. Maybe your credit has improved and you might qualify for a lower interest rate, or your financial situation has gotten better and you want to remove the co-signer from your original loan. Refinancing with a new loan could mean getting better terms and rates that are more in line with your current financial needs and long-term plans.
Read on for tips to help you determine if a refinance is right for you, and to learn how to refinance a car loan.
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Can You Refinance An Auto Loan With Bad Credit
If your credit scores have dropped significantly since you took out your original car loan, it may be difficult to find refinancing that saves you money because lenders typically charge higher interest rates to applicants with lower credit scores. If your refinancing goal is lower monthly payments, however, you may be able to find an auto lender that specializes in borrowers with less-than-ideal credit. You may qualify for a new loan with a longer repayment period that’ll cost more over time than the original loan did, but the extra expense could be worth it if it means you can pay today’s bills more easily.
If you’re at risk of missing a payment on your original car loan and having difficulty finding refinancing options, reach out to your lender as quickly as possible to explain the situation. While they are not obligated to do so, some lenders will work with you and may even modify your original loan terms to give you lower paymentsin exchange for a higher interest rate and potential fees.
Thinking About Making A Partial Payment
Before you do, make sure to find out about the potential consequences, since they can do significant harm to your credit and finances when youre not careful. After all, while a full payment might not seem affordable at first, the penalties and interest that gets added to your unpaid debt may not be worth the trouble.
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Pros Of Refinancing An Auto Loan
- Lower interest rate: One of the best reasons to refinance a car loan is to lower your interest rate. A lower interest rate can help you save money on the cost of the loan over time. If you previously had bad credit or even no credit and your credit has since improved, it can be worth looking into refinancing your auto loan to see if you may now qualify for a better interest rate. Or, rates in general may be lower than when you originally purchased the vehicle. If the rate you could qualify for is 1% or more lower than the rate you are currently paying, consider refinancing. A significantly lower interest rate will help you pay your loan off faster.
- Lower monthly payments: If you need to free up more room in your monthly budget, refinancing your auto loan can help you reduce your monthly expenses by extending the loan. Lengthening the life of the loan by 1-2 years can significantly lower your monthly payment. Even though it will take longer to pay off the loan in the long run, and you will pay more interest over the life of the loan, it will give you the needed wiggle room in your monthly finances in the short term.
What Do Lenders Require
Every lender has certain requirements when it comes to a car refinance. Typically, its not possible to refinance an auto loan if the original loan hasnt been open for at least three months.
This way, there’s enough time to transfer the vehicle’s title from the manufacturer to the existing lender. Other lenders may also specify a certain amount of time that should be remaining on the loan before they can proceed with an application.
However, to get the best out of a car loan refinance, you should have at least two years on your original loan. This is because there’s no use refinancing later when you’ve already paid the maximum interest, and it hardly leaves any room for savings.
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You May Already Have The Best Rate
If you purchased your car new, you likely got an attractive new car rate, especially if you took advantage of a special interest offer that can feature rates as low as 0% APR. The refinancing rates for some lenders, among them Bank of America, are higher than even their used-car rates. Also, interest rates have been at record lows due to COVID-19 experts predict rates will begin to rise in late 2022 to 2023.
What Should You Do If You Cant Make A Full Payment
If youre only able to make a partial payment this month, there are a few different options that can help you out of a jam, including but not limited to:
- Speak to Your Creditor/Institution If your credit source is open to negotiation, the simplest solution may be to ask them about deferring your payments or readjusting your payment plan. This can at least spare you from late penalties.
- Check if Theres a Skip Payment Option Depending on what kind of contract you have, your lender may allow you to miss one or two payments, as long as you pay them and any interest by the end of your term.
- Refinance Common with mortgages, some lenders permit you to refinance your loan before its final due date. This can lead to a repayment term, lower installments and, in some cases, a better interest rate.
- Balance Transfer Some revolving credit products allow you to make free or low-cost balance transfers . This is a great solution for credit cards and lines of credit.
- Find a Credit Counsellor These debt specialists can give you advice and help you access more effective solutions, like debt management programs, consumer proposals, and bankruptcies. If youre lucky, they may also be non-profit.
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Your Credit Report Will Be Pulled
- A lender or lenders pulling your credit report is known as a hard inquiry which can affect your credit score. Any time someone pulls your credit report, it can have a negative impactthough usually minimal and temporary.
- Your old loan will be paid off, and a new loan will be created in its place.
- Your new loan will be noted by all the credit bureaus as a new account. Too many new accounts in a period of time can impact your credit score.
Unless youre in the process of getting a mortgage or applying for multiple other credit accounts within a short amount of time, refinancing your auto loan should not have a negative impact on your credit score.
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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How Does An Auto Refinance Work And Is It A Good Plan For Me
When interest rates drop, its the perfect time to refinance a loan to lower your monthly payment and to save money on the life of the loan. Perhaps youve heard of a mortgage refinance, and maybe you even took advantage of low mortgage rates by refinancing your home loan. But did you know you can refinance your auto loan, too?
Process Of Refinancing A Car
The process of auto refinancing is actually fairly straightforward. It works in a similar manner to the original purchase. However, unlike haggling about the value of the vehicle, you are locked into the cost associated with the original purchase. Essentially, the new lender buys your debt and then lends that amount to you, typically at a lower rate and with an improved term.
There is some key information to gather before taking the leap. Approach the lender and discuss the interest rates available, along with any fees you will be expected to pay. Find out if there are penalties associated with refinancing and learn what the term of the new loan will be. Determine whether the costs of refinancing, both immediate and over the long term. From there, you can decide if it is amenable to your financial situation.
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Why You Can Trust Bankrate
Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. Weve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next.
Bankrate follows a strict editorial policy, so you can trust that were putting your interests first. All of our content is authored by highly qualified professionals and edited by subject matter experts, who ensure everything we publish is objective, accurate and trustworthy.
Our loans reporters and editors focus on the points consumers care about most the different types of lending options, the best rates, the best lenders, how to pay off debt and more so you can feel confident when investing your money.
Is My Credit Pulled When I Apply For An Auto Loan Refinance
Yes, any time you apply to refinance your current auto loan, you are creating a hard inquiry. All this means if the lender will review your credit report as part of their decision-making process for your new loan.
Keep in mind, the hard inquiry may cause a small dip in your credit score because a new loan often means added debt to the credit reporting agencies. With added debt, the chances of a borrower missing a payment increases, thus lowering your overall score.
However, once the credit reporting agency sees the old loan paid off, the amount of debt decreased and a few monthly payments made on time, your credit score should increase again.
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Pros And Cons Of Refinancing An Auto Loan
Considering a car loan refinance? If youre reading this, youre already doing your research and thats a smart start.
In certain circumstances, refinancing a car loan could lower your monthly payments and help keep some extra money in your pocket. But it comes with tradeoffs as well. Thats why its important to weigh the pros and cons of auto refinancing.
From what car loan refinancing is to how it may impact your finances, weve gathered some information to help you make an informed decision.
The Best Reason To Refinance: Pay Less Interest
The ability to borrow at a lower interest rate is a primary reason to refinance a loan. That lower rate means you pay less for your car after taking all of your borrowing costs into account. Because the interest rate is also part of your monthly payment calculation, your required payment should also decrease. As a result, managing your monthly cash flow becomes an easier task.
When you can replace your existing loan at a lower rate, its best to refinance as early as possible. Most auto loans are amortizing loans, which means you pay a fixed monthly payment with interest costs built into the payment.
Over time, you pay down your debt, but you pay most of your interest costs at the beginning of the loanso get that rate down sooner than later to start cutting costs. An amortization calculator can show you exactly how much you can save by refinancing.
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Time Remaining On Your Loan
Refinancing and extending your loan term can lower your payments and keep more money in your pocket each month but you may pay more in interest in the long run. On the other hand, refinancing to a lower interest rate at the same or shorter term as you have now will help you pay less overall.
If your answer to When should I refinance my car loan? is Soon, review our current refinance rates and take a look at our auto loan refinance calculator to get a better understanding of whether refinancing makes sense for you.
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Important Legal Disclosures And Information
Refinancing at a longer repayment term may lower your car payment, but may also increase the total interest paid over the life of the loan. Refinancing at a shorter repayment term may increase your car payment, but may lower the total interest paid over the life of the loan. Contact us to discuss the option that best meets your needs.
Automated payment must be set up at loan closing to qualify for the 0.25% discount. If automated payment is discontinued, you may no longer receive an automated payment discount and your rate will increase 0.25%
Certain restrictions and conditions apply.
May exclude weekends and holidays.
*Check Auto Loan Rates: APRs that will display include a 0.25% discount for automated payment from a PNC checking account. The lowest rates are available to well-qualified applicants. Your actual APR will be based upon multiple factors. Refer to Important Disclosures” under Get Rates for more details.
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A New Loan Is Created
Your new lender takes the amount due on the old loan, adds the new interest and amortizes it under the terms of the new loan. Lets say you bought a car for $20,000 at 8% interest for 60 months and had been paying $406 every month for a year.
You are now down to 48 months and $15,000. Your new lender has given an interest rate of 3.5%. Your new payment will only be $335 a month. Alternatively, you and your lender might agree to different terms. You might extend the loan back out to 60 months and only be paying $273 a month.
There are many variables that can be played with, from term to interest rate, to the down payment. Much depends on the age of the automobile, your current credit score and your debt to income ratio.
How Much Does It Cost To Refinance A Car Loan
The exact costs of refinancing will vary. Most auto lenders don’t charge application or origination fees, and auto loans don’t typically have a prepayment penalty. The most likely cost will be in terms of total interest if you extend the loan term, so be sure to review all terms on your current and potential new loan.
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What Are Some Reasons To Refinance An Auto Loan
Like any financial decision, you want to have a good reason. Refinancing an auto loan is no exception. Here are some factors to consider:
- Interest rates have dropped Lets face it: when it comes to auto loans , people like lower interest rates. Depending on your situation, you could enjoy some serious savings with an interest rate thats lower by even a point or two.
- You have a higher credit score Maybe your credit wasnt that great when you needed your last car but youve been working on improving it. In general, a better credit score means a better rate. Refinancing an auto loan could be a great opportunity to take advantage of a more attractive interest rate.
- Youve experienced a bump in the road Life is unscripted. Things happen. If your financial situation has taken a hit, refinancing for a longer term might be a way of lowering your monthly payments. Keep in mind, however, that lengthening your loan term could impact the cost of interest payments over time.
Covid + Credit: Refinancing A Car Loan During The Pandemic
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The Coronavirus/Covid-19 pandemic has resulted in immense financial strain across the country and left many industries looking for ways to provide relief to consumers while still encouraging necessary sales. For those Americans who remain relatively financially stable, now may be a good time to refinance an existing car loan to secure a new, more manageable interest rate.
The refinancing process involves getting a new secured loan with a lower interest rate to pay off your existing car loan. Refinancing could potentially save you money and result in a better deal than the one you got on your original loan. Many lenders are offering consumers great refinancing options with extremely low even zero percent interest rates in an effort to attract business.
Before you rush off to refinance, though, be sure to consider the following key factors to ensure that its the right decision for you. And remember: If you have recently become unemployed or experienced a similar reduction in income, you may have a challenging time refinancing your car loan. Because refinancing often involves an up-front cost to save you money in the long run, its generally better to consider refinancing your loan only if you are otherwise financially stable.
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