When Should You Refinance Your Car Loan

Cant Make Your Car Payments

Having a car provides many conveniences. You do not have to worry about lugging groceries on the bus or waiting 45 minutes for the train. However, for those experiencing financial problems, having to pay a car loan can make owning a car seem more like a burden than a convenience. If you are behind with payments, or worried you will be soon, assessing your financial situation and actively pursuing your options can help you make the best of a difficult situation.

What Happens If You Stop Making Car Payments

When you first fall behind, your lender may call you and/or send you letters in an attempt to collect the delinquent amount. If you continue to miss payments, and do not reach an agreement with your lender, the car will likely be repossessed. If reported, the late payments and repossession can damage your credit score and make it harder to get credit in the future.

Considerations That May Stand In The Way

• Age of your car. In general, the newer the car, the better. To your lender, an older car has lower collateral value so you may not have an option to refinance the loan balance if it exceeds the vehicle’s current value.
• Prepayment penalties. Check that your current lender doesn’t require you to pay a penalty for paying off your loan early.
• Other fees. State re-registration fees can vary significantly. Check with your state for the amount to be sure refinancing is worth as much to you as you expect. Also check for any fees your new lender will charge you for the refinance as those fees will impact the value of the new loan.

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Lowering Your Monthly Payment

For many of us, Life Happens and we have expensive unexpected responsibilities like having a baby, dentist bills, and other unexpected medical bills, or maybe even a natural disaster can put you in a situation where youll want or need to reduce your monthly bills and expenditures.

Refinancing your auto loan could help you to significantly reduce your monthly bill.

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.

Although the drawback is you would be paying for two additional years, youd free up more cash on hand monthly to boost your savingsand other personal/household needs.

If you can, its smart to pay a little more on your monthly to pay more on the principle and less in interest.

How Does Auto Loan Refinancing Work

Auto loan refinancing is a unique process that depends on a multitude of factors. Why should I refinance? Some of these are listed below:

• Initial loan terms and interest
• Vehicle worth
• State you live in

With so many variables, its hard to make concrete predictions on when youll be able to refinance an auto loan without any context. There are a few situations when youll want to seek refinancing, however.

When should you refinance your loan? Its a good idea to refinance your auto loan if you fall under these circumstances:

• Notable credit score improvement
• Lower monthly payments are available
• Your vehicles value is stable or increasing
• Interest rates have improved with the market

Many lenders will have fluctuating interest rates by month depending on the performance of the market overall. This could mean youll pay a substantial amount more on interest for the same vehicle just because the market isnt thriving.

In other circumstances, you could lower your monthly payments by refinancing to a loan with a longer term. This often depends on the vehicles worth and mileage.

Lenders wont provide a loan for a vehicle that could break down due to old age or high mileage. If they do, you can expect to pay more for interest. The lender has to be sure their money is repaid.

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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.

The Refinance Could Lower Your Dti

Plot twist: Refinancing your car loan before buying a house might not only negatively affect your future home purchase. A refinance loan that lowers your monthly payment could also reduce your DTI.

Lets say that refinancing your car loan dropped your monthly car payment from $500 to $350 in the example above. Here are the new numbers:

Pre-tax income: $5,000Mortgage payment: $840

Total debt payments: $1,940

To calculate your DTI, divide your total monthly debt payments by your pre-tax income and multiply by 100.

$1,940 ÷ $5,000 x 100 = 38.8%

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Interest Rates Vary Depending On The Lender And Your Credit Score

The interest rate that youll pay can vary considerably from one lender to another, and you can rest assured that we offer some of the lowest rates on the market. Not only that, but the rate can vary considerably depending on whether you have a solid credit history. Also, the amount that is approved will vary depending on the lender and your credit score.

When Your Credit Health Has Improved

Your credit scores are a factor in determining your auto loan rate. If your scores have gone up since you bought the car, and youve made on-time car payments, you might get a better rate, which could save you money in interest over the life of the loan.

Lenders may use your FICO® Auto Scores or base credit scores to help determine your creditworthiness. But no matter which they use, better credit scores can indicate to lenders that youre more likely to pay off your loan, so they may give you a lower rate.

Not sure if your scores have improved? On Credit Karma, you can get your free VantageScore 3.0 credit scores from TransUnion and Equifax.

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Our Take On Auto Approve: 40 Stars

While Auto Approve only offers one type of auto loan , it does it well. The online application process is very fast, and with no fee, there is no reason not to submit an application if you have met the loan eligibility requirements. You may be able to find a lower interest rate and save money every month.

Overall, heres our verdict on Auto Approve:

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.

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What Do You Need To Refinance Your Car

Since it isnt much different than making a car purchase, chances are you already have most of the information you need. However, before you take the leap, be certain that you are eligible to refinance. Consider whether you have defaulted on the lease or are in good standing. Be sure that your and working situation are stable and viable for refinancing. Provided you are eligible for the new loan, the next step is getting your documents together.

Tax information is a common request, so bring your most recent filing records. Additionally, three months of pay stubs from your employer are necessary as well. Plan ahead and bring your banking details. Often, people go with a void cheque to speed up the process and eliminate the chance of errors. You will also need relevant identification. Both a government issued photo ID and a second identification are required. A drivers licence and a passport are both suitable options. Additionally, be sure to have all the necessary details for your vehicle. Registration documents work well for this purpose.

Ensuring that you have all the essential documentation is not only important, but it is also a great way to speed up the process and develop a better rapport with the lender. Preparing ahead of time gives you a good opportunity to highlight all reasons for refinancing in an organized manner.

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 table can show you exactly how much you can save by refinancing.

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Why You Might Want To Refinance

The prospect of paying less interest or lowering your monthly payments are the main reasons to consider refinancing. Lets say your current auto loan has a 10% interest rate, and youve been making payments for a year or so. Chances are, your credit has improved and you could now qualify for a lower interest rate, which could lower your monthly payments. If you simply go to your current lender and ask it to lower your rate, it will likely say no. After all, you signed a contract at a certain interest rate and the lender wants its money.

Lucky for you, in todays competitive market, plenty of other lenders are eager to get your business. When you refinance, you can simply start a new loan with another bank, credit union or online lender. The new lender pays off what you owe on your existing loan, called the balance, and creates a new loan. You then start sending your monthly payments to the new lender.

If you meet the requirements, refinancing your car loan for a smaller payment could allow you to put more into savings, investing or a home improvement project. Or you may be able to pay off your car sooner. All of these options are better than pouring your money down the drain by paying more interest than you need to on a car loan.

When Is The Best Time To Refinance Your Car

If you purchased a vehicle within the last five-to-seven years, you may have concerns about your auto loan. Fluctuating interest rates or changes in your personal financial situation may make refinancing your auto loan a beneficial option. A new loan could potentially:

• Lower your interest rate
• Enable you to pay off your car more quickly
• Lower your monthly payment

Maybe your income has increased and you’d like to pay off your vehicle loan sooner than it is scheduled to end. Perhaps your credit score has risen and you qualify for a lower rate. Or, maybe you just want to reevaluate your options.

Whatever your reasons for considering a refinance, timing is crucial. To help you make the decision thats right for you, weve gathered some information on the advantages and disadvantages of refinancing at various times during your loan period.

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Refinance Your Car Loan First If Your Debt

You can have great credit but still struggle to get an approval for mortgage loan refinancing if your debt-to-income ratio is over 43%. Since auto loan refinancing has a higher maximum DTI, around 50%, you can refinance your car loan to help you qualify for the mortgage refinance loan.

Heres how it works: While hard credit inquiries do impact your credit score, the truth is theyre really just a small slice of the credit pie, about 10%. And credit score is only one of many factors that lenders take into consideration when evaluating loan applications. Your debt-to-income ratio is another significant piece of information.

If refinancing your car loan lowers your DTI to meet your mortgage lenders guidelines, the benefit can outweigh the small credit hit from the car refinance loan application. In other words, refinancing your car loan helps your mortgage refinance application.

Before you submit any refinance application, find out your credit score. You can get scores for free on sites like Credit Karma and Credit Sesame. You may also have access to your free score through your credit card company or other credit service.

Pros & Cons Of Refinancing Your Auto Loan

When buying a car, many buyers accept the loan package they are offered at the dealership. Though convenient at the time, you may later come to regret the conditions of your auto loan once youve started making payments. Refinancing your auto loan is one way to get better terms and potentially reduce your interest rate and monthly payments, helping you save more money. An auto loan refinance involves taking out a new loan to pay off the balance of your existing loan, and transferring the title to the new lender. While refinancing your auto loan can improve your overall finances, it may not always be the right choice for you. There are a few things to consider before applying for an auto loan refinance.

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Refinancing A Car Loan

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Every year, you go through long-term budget arrangements and try to find new ways to save. Car refinancing has the potential to improve your monthly budget. Those who entered into a subprime auto loan and have since gotten a raise, reduced debt, or improved their credit, may be eligible for refinancing. To learn whether refinancing is the right step, its important to learn the options available to you. Armed with this information, you can make an informed decision and choose the best possible refinancing arrangement.

You Want To Change The Loan Term

It also makes sense to refinance your car loan when you need a lower monthly payment. You could extend the length of the loan on your car refinance to get a lower payment. Still, its important to note that extending the length of your loan, which is known as the loan term, reduces your payment but also increases the amount of interest youll pay over time. And it works the other way, too: Reduce the term, and your monthly payment will increase while the amount of interest you pay overall will fall.

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Youre Looking To Change Your Monthly Payments

There was a change in your financial situation and your car payment is straining your budget. Refinancing at a lower interest rate for a longer term can lower your monthly payment and make it a bit more manageable. Keep in mind, as your vehicle decreases in value, you may owe more on the loan than the car is actually worth. Although it might be tempting to refinance for a longer term, even with a lower interest rate, you may be paying more in interest over the life of the loan. Do the math for an accurate picture. On the flip side, if youre income has increased, perhaps you can afford a higher payment. If you can find a lower interest rate and can refinance and shorten your term, even if your monthly payment increases, you will be saving in overall interest.

How Difficult Is It To Refinance

Each lender has a variety of requirements. It can be difficult to sort through them all, but Credit Karma can help you narrow down some of the options.

One lender requirement youll want to be aware of is mileage.

LendingClub will refinance a personal vehicle with fewer than 120,000 miles. But for some lenders, lower mileage could mean better rates. Navy Federal Credit Union, for example, offers loans with rates as low as 1.79% as of May 2020, but only for vehicles that havent logged 7,500 miles or more.

Also, be aware that some lenders may not refinance loans for your vehicles make or model. For example, if you drive an Oldsmobile, Daewoo, Saab, Suzuki or Isuzu, you cant qualify for an auto refinance loan through Capital One.

You may also need to look outside your current lender for a loan. While some lenders, like Bank of America, will refinance an existing loan theyve given you, other lenders wont.

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