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.
Should I Refinance My Car Loan
If youre facing a steep interest rate on your current auto loan, refinancing might be the right move. Many owners reap considerable savings when they refinance a car loan, but its only a good choice in certain situations.
After researching the top auto loan providers, weve discovered which options are best for those whod like to refinance a car loan. In this article, well explain situations when refinancing could be the correct choice and when you should keep financing a car with your current loan.
How Does Auto Refinancing Affect Your Credit Score
There are three major areas refinancing will affect when it comes to credit.
You can help minimize the impact by researching financial institutions before you apply, and determining which lenders are offering the best interest rate and loan term for your needs. If you know your credit score, you can ask a potential lender what rates they believe they could provide. Its fine to send loan applications out to multiple auto lenders, but if you go that route, its best to submit all the loan applications within a 14-day window. These inquiries will typically be grouped into one hard pull.”
Change in credit utilization. Credit utilization is the percentage of your credit that you have currently spent. For example: If you have a $100 credit card limit, and you buy something that costs $30, youre utilizing 30% of your credit. A general rule of thumb for creating a good credit score is to not use more than 30% of your credit. Refinancing your auto loan can change the percent of credit that you are utilizing, which could result in a lowered score.
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Car Refinancing Savings Can Add Up
Even a thousand dollar savings over the term of a loan can make a worthy difference. In a scenario where a buyer took possession of their new $25,000 car on a five-year loan at the time when rates were as high as 7.75 percent, refinancing the car down to a 4.75 percent rate for the balance of the four years would save them nearly $30 per month. Shortening the term alone will save consumers on interest charges. For individuals who have not significantly improved their credit scores, finding co-signers to a refinancing loan is an option.
The cost of refinancing should not be prohibitive. State licensing and lien holder fees shouldnt tally more than $100 and car appraisals are not required. To calculate potential savings, its necessary to obtain a free credit score to see where you stand.
There may be barriers to refinancing, including an advancing age and decreased value on the vehicle or the amount of the total balance that is being refinanced. Consumers must be certain there are no prepayment penalties on the original loan that could slash into any possible savings through refinancing before taking a new loan.
Note: Another reason for financing is when a car lease is expiring and the driver wants to execute the purchase option.
Waiting Too Long To Refinance
If you run the numbers and you determine that it makes sense to refinance, waiting can cost you. Rates are typically lowest on new vehicles, and some lenders wont refinance loans for cars over a certain age . You might even get a new car rate if you refinance immediately after purchasing from a dealer and taking advantage of dealer incentives. Used car loan rates are typically higher than new car rates.
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You Hate Your Current Lender
Many people choose to refinance simply because they dont like the way their current lender does business. Rude customer service reps or poor record keeping can really sour a relationship with a lender. If you really cant stand your current lender, refinancing with a new lender may help alleviate some of your frustrations.
Carefully Consider Your Options Before Refinancing
Refinancing your car loan can be a good idea in some situations, but not necessarily in others. If you’re thinking about replacing your current loan, make sure you understand your reasons and options.
Start by checking your credit score to see whether you’ve made progress since you first got the loan. Then consider why you want to refinance and what potential drawbacks and costs are associated with the process. Then compare auto loans based on your credit score to determine whether refinancing can save you money or if it might end up making things worse.
There’s no one-size-fits-all answer to whether refinancing is right for you, but following this process can help you come to the right conclusion.
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.
You Financed Your Current Auto Loan Through A Dealership
Dealerships may not offer you the best rates available. If you took out your loan through a dealer especially without negotiating the interest rate refinancing could potentially save you thousands of dollars over the remaining life of the loan.
If youre shopping around for the best interest rate, consider checking out auto refinance rates at a financial institution where you already do business. For many bank members, this could mean accessing special discounts.
For example, Chase offers a 0.25% interest-rate discount if youre a Chase Private Client. And Bank of America Preferred Rewards customers may qualify for a rate discount of up to 0.50%.
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How To Refinance A Car
For the most part, refinancing a car loan is similar to getting a car loan for a new purchase. Start by doing your research on various lenders to get an idea of what terms are available and which offers you might qualify for.
With some lenders, you may be able to submit an application to get pre-qualified. This process typically doesn’t affect your credit but can be valuable in helping you see what you qualify for based on your credit scores.
Once you have enough offers to compare, select the best one for you and submit an official application. The lender may require information on you, the car and your existing car loan. Provide this information as quickly as possible to make the process go smoothly.
If you get approved and you accept the terms the lender offers, finalize the loan by signing the paperwork. The lender will pay off your existing loan directly.
During this process, don’t forget to continue making payments on your current loan until it’s paid in full. The last thing you want is to have your credit dinged because your new lender didn’t pay off the old loan in time.
How We Rate Loan Providers
Our review process aims to deliver consistent and unbiased assessments of auto loan providers. While there are multiple qualities that make a loan company successful, our review team focuses on those we believe are the most important for consumers:
- Rates: Auto loan companies with high loan amounts and low APRs are more likely to meet customer needs.
- Reputation: Our review team explored ratings from experts and each lenders number of years in business when giving this score.
- Availability: Companies that cover a variety of circumstances scored best in this category.
- Customer Experience: This rating is based on transparency and consumer satisfaction ratings. We also took into account the helpfulness of each loan providers team based on our shopper analysis.
*Data accurate at time of publication.
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When To Refinance A Car Loan And When Not To
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When you see some of the rates lenders advertise, it can be hard not to consider refinancing your auto loan. But taking out a new loan on your vehicle to pay your existing loan off doesnt always help you and it can sometimes hurt. Knowing when to refinance a car loan and when to wait can help you make the right decision about your financial strategy.
We at the Home Media reviews team put this guide together to give you an idea of when refinancing could make sense for you. Refinancing is a major financial move, so shop around with lenders to find the best auto refinance rates and best auto loan rates before making a decision.
Make Sure Your Car Loan Doesnt Have Any Prepayment Penalties
A penalty for paying off a car loan early? Yes, its true. While rare, prepayment penalties can cost a lot of money, possibly too much to even consider refinancing for any financial benefit.
If you have a good credit score, you likely dont need to worry. Youll see this more often with buy-here, pay-here loans or subprime auto loans. Check your loan contract or reach out to your current lender to verify.
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You Bought The Car Within The Last Six Months
Your credit score takes a hit when you get a new loan. While you might find more favorable rates advertised soon after you buy your new or used car, the downswing in your credit score means you probably wont get as favorable a rate as you would if you waited for your score to recover. The general advice is to wait at least six months before refinancing your auto loan.
What Does It Mean To Refinance A Car Loan
Refinancing a car loan means youre taking out a new loan to cover whats left on your existing one. Its typically used by borrowers who want to get a lower interest rate.
Those who refinance car loans often save money on their monthly payments. However, even if they secure lower rates, they may end up paying more overall if they choose longer terms. Thats because extending a loan term means the borrower will pay more in interest over the life of the loan.
Many drivers keep more money in their savings accounts when they refinance a car loan, but using an auto loan calculator can help you determine if its right for you. Well explain when refinancing may be a solid option and when it may be better to keep your current car loan.
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Whats The Difference Between Car Loan Refinancing And Mortgage Refinancing
While the idea of refinancing is the same for vehicles and homes, they are two different loan products. Heres why.
- Asset value: Simply put, mortgages are much larger than car loans. In 2020, the average individual mortgage debt was $208,185. Compare that to the average auto loan balance when refinancing in 2020, $21,667.
- Asset age: Lenders often wont refinance a vehicle older than 12 model years. There generally arent any age limits for homes. They just need to meet minimum property standards.
- Term length: Home loans typically range anywhere from 10 to 30 years whereas car loan terms range from 24 to 84 months.
- Interest rates: While mortgage and auto refinance rates are impacted by some of the same factors, such as Fed rate drops, lenders may not necessarily offer the same annual percentage rate for both loan products.
- Amortization: While both are amortized loans, how interest is calculated and paid off may differ depending on the agreement. Car loans are typically simple-interest loans with fixed installments, as are fixed-rate mortgages. However, adjustable-rate mortgages and balloon loans are not that uncommon.
Now, lets take a look at how lenders evaluate your applications for each.
Auto Refinance Calculator
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Should You Ever Refinance Your Car Loan
Borrowing for a car can feel like a questionable financial decision, but there are definitely scenarios where car loans can help you get ahead. For example, new vehicles often come with 0% APR financing offers, and people with great credit often pay low interest rates that are on par with mortgage rates. Not only that, but borrowing for a car may be the only way for you to line up transportation to and from work.
So, what’s the problem? By and large, Americans have gotten into the habit of using car loans to finance more than they can reasonably afford. We know this because not only does the average auto loan amount keeps getting bigger every year, but it also keeps getting longer.
A 2021 report from Experian the Q3 State of the Automotive Finance Market just highlighted all the dreadful facts. Here are some of the most troubling statistics:
- As of Q3 2021, the average new car loan amount was at $37,280, up from $34,682 in Q3 of 2020.
- During the same quarter, the average new car payment worked out to $606, up from $565 in Q3 of 2020.
- During the same quarter, the average new car loan term lasted for 69.47 months. That’s actually shorter than 2020 when the average loan term lasted 69.64 months. But thats still almost 6 years!
Refinancing your car loan application.
Your Car Loan Is Almost Paid Off
Auto lenders commonly front-load interest, so most of your payment typically goes toward principal around the end of your contract. If you refinance a vehicle loan after making a sizable down payment or nearly paying the balance off, youll probably see your credit score dip in return for an interest rate similar to what youre already paying.
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Home Appraisal Vs Vehicle Bookout
Both types of refinancing involve an appraisal which will determine the current market value of the property.
The appraised value of your home or car is important because its used in calculating your loan-to-value ratio, or LTV. Its a percentage calculated comparing your loan balance to the propertys value.
To lenders, a lower loan-to-value ratio poses less risk to them. Because you owe less on your loan than the car or home is worth, that positive equity makes it easier to recoup any potential losses .
How much is your current car loan balance?
What’s your car’s current value?
A loan-to-value ratio over 100% means you owe more on your loan than your vehicle is worth. An LTV over 125% can make it harder, but not impossible, to qualify for a refinance loan.If your LTV is less than 100%, your car’s value is higher than what you owe on your loan. The lower your LTV, the better.
How To Refinance A Car Lease
Refinancing a car lease can reduce the high rates on a leasing agreement. Before deciding, however, consider the pros and the cons:
- Lose out on the money that you already paid into the lease
- Pay more in prepayment penalties
If refinancing isnt the best option for you, speak with your lender about a lease replacement swapping out your current lease for one with more favorable terms and rates.
Options for breaking your car lease include:
- Transferring the lease
- Selling your car back to the dealership
- Selling the vehicle to another person
Each of these has associated costs, so evaluate each alternative thoroughly before deciding how to proceed.
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When To Refinance A Car
Editorial Note: The content of this article is based on the authors opinions and recommendations alone. It may not have been previewed, commissioned or otherwise endorsed by any of our network partners.
Figuring out if and when you should refinance a car can be tricky, but if you approach it the right way , youll be able to make the right choice. You should refinance a car when it could help you save money, get you a lower payment or both. You should probably skip refinancing if youre underwater on your current loan, youve bought the car recently or your current loan has prepayment penalties.
Heres more on when to refinance a car and when to wait.