When To Refinance Your Car Loan

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.

Understand The Costs Of Refinancing

Sometimes you can refinance with a lower interest rate, but because the loan is extended, you will actually pay more over the length of the loan. Use a loan calculator to make sure you are saving money overall. Getting the lower monthly rate might be what you are looking for, but if you really want to pay less overall, it is important to do the math.

For example, if you have a $5,000 loan with a 10% interest rate paid throughout two years, you will pay $5,537 in total. However, that same loan extended throughout five years will end up costing you $6,374. Thats $837 that could have been spent on something else. So make sure you extend your loan only if you need to do so.

Freeing up cash quickly is sometimes the only reason for refinancing a car loan. Beware of higher interest rates, though, because most lenders charge higher rates on older vehicles. When you’re looking to refinance your aging car, you might be surprised at the interest rate available to you compared to what you received when the car was new or almost new.

Many banks, including USAA Bank and Bank of America, do not charge an application fee for an auto loan refinancing.

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 auto 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.

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How To Compare Car Loan Refinance Offers In Canada

Youll want to compare the following features of your refinance loan to make sure its a good fit for you:

• Loan amount. Make sure that the lender you choose can give you enough money to pay off your current car loan as well as any fees youll have to pay for closing early.
• Interest rates. Double-check that the rates youll pay with the new lender are lower than what youre currently paying to guarantee that youll save money in the long run.
• Fees. Find out what fees your new lender will charge you to set up and maintain your loan as well as what penalties you might incur to pay it off early.
• Repayment flexibility. Learn more about the lenders policies for handling late payments or changing repayment dates to accommodate your cash flow.
• Reputation. Make sure the lender you want to switch to has positive online reviews and a good reputation for customer service.

Use the car loan calculator below to find out how much you might pay in monthly payments with a new rate and/or loan term.

How Interest Rates And Credit Scores Make A Difference

Your interest rate affects how much you pay each month, so your goal in refinancing is to get a new loan with a lower interest rate than your current loan. Your credit score is primarily what affects the rate for which you’ll qualifythe higher your credit score, the lower the interest rate you’ll likely get. If your credit has improved since you first got your loan, you’re more likely to qualify for a lower rate. So it’s important to make sure your finances are in order before you apply.

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You Wont Be Penalized For Repaying Your Existing Loan

Refinancing your auto loan means paying off your existing loan early. This could be a problem if your existing loan contract includes a prepayment penalty clause.

Take a look at your contract to see if youll be charged fees for early repayment. Before applying for auto refinancing, make sure to crunch the numbers so you can determine whether prepayment fees would cancel out the financial benefit of refinancing.

Pros And Cons Of Refinancing A Car Loan

Now that you know the potential savings, let’s hit the brakes and look at the advantages and disadvantages of refinancing your car loan.

Those are some of the basic pros and cons of refinancing a car loan. But one area that could be a pro or a con is your credit score.

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The 4 Best Companies To Refinance Your Auto Loan

If youre stuck with a bad rate on your current auto loan, you could be paying significantly more than you need to. Refinancing your auto loan can help you get a better rate and pay less for your car over time if your car is worth more than you owe or your credit score has improved or interest rates have dropped since you got your loan. Auto refinancing may not be the right option if your loan has prepayment penalties or you owe more than your car is worth.

In this review, we at the Home Media reviews team will take a close look at which lenders offer the best auto loan rates for refinancing. Our experts have researched the top lenders in the industry based on their rates, reputations, availability and customer experience to help you get started.

Nerdwallet’s Top Auto Loan Refinancing Lenders

• RefiJet – Refinance loan: Best for comparing offers from multiple lenders
• RateGenius – Refinance loan: Best for comparing offers from multiple lenders
• LendingClub – Refinance loan: Best for applying directly with a lender
• MyAutoloan – Refinance loan: Best for comparing offers from multiple lenders
• Upstart – Refinance loan: Best for comparing offers from multiple lenders
• LightStream – Refinance loan: Best for applying directly with a lender
• Tresl – Refinance loan: Best for comparing offers from multiple lenders
• Autopay – Refinance loan: Best for comparing offers from multiple lenders

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Should I Refinance My Car

Many people decide that refinancing their vehicle is of benefit, and well start by taking a look at some of the reasons why.

With refinancing, you can free up extra cash which can have a significant impact on your life. A new loan plan where you pay out a little less each month can enable you to have a bit more disposable income for when life throws surprises and throw it does. On the other hand, paying off your loan quicker with bigger instalments will enable you to access better interest rates, meaning you save money overall.

Its not uncommon to refinance for debt management reasons – you may find income retained from a new plan helps with settling other bills and necessities.

Comparing car finance plans may show that there are better deals out there, especially if your credit score has improved. Well talk more about this later.

You Want To Change The Loan Repayment Terms

What if you want to free up some funds from your budget to purchase an extended warranty before the manufacturers warranty expires? Or, you want a different repayment interval, such as paying twice per month instead of once per month or moving the payment to a different due date. Or you may want to extend the term of the loan so money is freed up in the monthly budget for expenses such as student loans. If you borrow enough principal to pay off the first loan and refinance at a lower interest rate, you should save money in the long run.

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You Need To Change Your Monthly Payment

If your income has decreased recently, or you want to free up funds to meet other financial goals, it could be time to refinance your car loan to get a lower monthly payment, even if you get the same interest rate. But if you get the same interest rate, you will have to take a longer term to lower your payment, which means you will pay more interest over the life of your loan.

When You Should Consider Refinancing

Heres when it might be a good time to refinance your existing loan:

• Your credit score improved:A bad credit score may have forced you to take a high interest rate on your original loan. If your credit score has improved, you may be able to secure a new auto loan with a lower rate and save hundreds or thousands of dollars.
• Interest rates dropped:Interest rates rise and fall over time. If rates are much lower now than when you got your existing loan, it might be a good time to refinance your auto loan.
• Your car is worth more than you owe: If you have a low LTV ratio on your car and owe less than the car is worth, you might be able to secure lower interest rates.

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What Is Auto Refinancing

Auto refinancing is when you renegotiate the terms of your auto loan. Since the original lender has no real reason to offer you better terms, its really up to you to go out there and shop around. Refinancing is beneficial to borrowers since it can lower your monthly payments, says Ruby Bilin, a Coast Capital relationship manager. Your new lender would pay off your existing balance, and then they would lend you that amount at a lower interest rate.

Another appealing aspect about auto refinancing is that theres often no fee associated with switching lenders. That said, you do need to read the terms and conditions of your original contract to ensure there are no penalties for paying off your balance early. Youll also want to check with your new lender to see if there are any additional fees.

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.

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How Will Refinancing My Car Affect My Credit Score

Struggling to keep up with payments will impact your credit score, and not in a good way. And as soon as you miss a repayment, the pool of lenders willing to help you might diminish. So to keep your credit score ogle-worthy, its better to ensure all payments are made on time even if theyre smaller. Youre sticking to a plan.

If youre strapped for cash, refinancing your car could be a great option. Small consistent payments over an extended period of time is better than unpredictable or bouncing payments.

How To Calculate Your Loan Payoff Amount

Check for Prepayment Penalties

When determining your payoff amount, you need to check to see if your current loan has any prepayment penalties. Some do not have any fees associated with an early payoff, while others will have fees that are high enough to discourage refinance.

Look carefully through your paperwork to determine what the penalties are. If it is unclear to you, call your lender and ask.

The easiest way to calculate your total loan payoff amount is to go online or call your lender directly. Many lenders have calculators available so that you can pick a date in the future and calculate your payoff from then.

You will most likely need to have your account number and your VIN available to log on to get this information. So be sure to have your information handy .

Do the Math Yourself

If you prefer, you can do the math yourself to get an estimate. Get out your loan contract and determine the total principal amount on your loan. Then you will need to calculate your interest payments. You do this by calculating your annual percentage yield . You can use the formula below:

APY=

This gives you the total cost of interest. You will need to add this to the principal amount of the loan. Then, subtract any payments youve already made. Add in any prepayment penalties, et voila, you have your total loan payoff amount.

Payoff Amount = Principal + APY + Prepayment Fees – Previous Payments

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When Refinancing Might Be A Bad Idea

While refinancing your car loan can have a positive impact on your finances, there are some pitfalls to watch out for.

• Your loan has a prepayment penalty. A prepayment penalty can kick in if you pay off your loan in full before it’s due. While this fee isn’t too common among major car lenders, it does exist. If your loan documents show a prepayment penalty, refinancing likely won’t make sense if the savings you get from the loan switch don’t exceed the cost of the penalty.
• You want to extend the loan term. While this strategy can be helpful if the alternative is defaulting on the loan and losing your car, it’s generally not a good idea if you can afford the payments you currently have. That’s because if you replace your current loan with one that has a longer repayment term, you will pay more in interest over the life of the new loanunless you can manage to pay it off early.
• You owe more than it’s worth. If you’re underwater on your car loanmeaning you owe more than the value of the vehiclerefinancing is still possible but not always a great idea. This is primarily because your original lender will require you to pay the difference as a lump sum before considering the matter closed. If you don’t have enough cash lying around, you’ll have a difficult time making it work.

Your Credit Score Improves

Your score not only could determine the interest rate on your car loan it may impact the premium you pay for auto insurance and what other fees your lender might charge. If your current credit score is higher than it was when you bought your car, refinancing could be a good option. Ask your lender to consider giving you a lower rate.

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Transition To Your New Loan

Your new lender will most likely handle the actual transition of your loan. However, you might want to confirm with your original lender that your old loan was paid off and you’re no longer responsible for those monthly payments. That way, you’ll have peace of mind knowing you won’t miss any final payments, which could show up on your .

You Want To Pay Off Your Car Faster

If you want to pay your car loan off faster, refinancing into a new loan with a shorter repayment timeline could get you on track. This is especially true if your current car loan is one of the longer ones for up to 84 months.

Of course, you don’t have to refinance your car loan to pay off your car faster. Provided your current loan doesn’t charge any prepayment penalties, which it shouldn’t, you can pay more than the minimum loan payment on your car and accomplish the same thing.

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What Do You Need Before Refinancing

Your credit score.Knowing your credit score is important to determine what refinancing offers you can expect. If your credit score has gone down, its unlikely that you’ll find better terms than you have on your existing loan. Luckily, everyone is entitled to know their credit score for free from each of the credit bureaus.

Your car details. Financial institutions will want to know details about the vehicle youre refinancing. Be prepared with your cars make, model, VIN number, and mileage. The older a vehicle is, and the more miles on its odometer, the less value it holds, which means its less attractive as collateral for an auto lender. If you have an old car, you might have a difficult time finding an institution to refinance.

Research.If you’ve read this far, you’re already well on your way! You know the reasons that you should refinance . Now it’s a question of finding the best deal for you. Like shopping for a car, you should research different financial institutions in your area. Don’t just look at rates. Consider a potential lenders services, features, and digital capabilities. Repaying the loan should be easier than taking it out.