It can be difficult to determine whether and when to refinance a car, but if you go about it correctly (and ask the right questions), you’ll be able to decide. Let’s come first, what does refinance car mean?
When you refinance a car, you take out a new loan with a lower interest rate to pay off your previous loan, which has a higher interest rate. Lower monthly payments, a shorter loan term, or even a lower interest rate are all advantages of refinancing.
The procedure for refinancing a car is the same as for applying for a car loan. Just like the first time, you must meet the requirements for the loan. Be ready for a slight drop in your credit score because the lender will make a hard inquiry on your credit report.
How Refinancing a Car Loan Works
When you are ready to refinance your auto loan, follow these steps to make the process more seamless:
- Check your credit.Verify that there are no errors in your credit report, and then file a dispute to address any you discover. You can raise your credit score by taking this action. Your chances of obtaining a new loan with favorable terms increase if your score is higher—670 or higher.
- Find the most competitive loan offers.You will need to compare prices since there are many auto loan refinance options available. For a list of loan offers you might be eligible for, read lender reviews and get prequalified.
- submit a formal application.Simple online applications are offered by the majority of banks, credit unions, and online lenders. To apply, you may also call or go to a branch. The financial institution might make a lending decision right away, but it might take some time for them to complete the closing papers.
- Seal the deal.Review the loan documents and discuss any issues with the lender after doing so. After you sign, the new lender will either handle the transaction themselves or give you a check to pay off your existing loan.
When You Should Refinance Your Car Loan
There are a few situations where you should refinance your car, but before you do, carefully examine your finances and make sure you know the specifics of the new loan you’re taking out. When is the right time to refinance your auto loan?
Your Credit Score Has Improved
Given that auto lenders group applications according to credit tiers, your credit score is crucial when applying for auto financing. The credit tier you are in has a significant impact on both the APR you receive and whether you even get an offer. If your credit rating has increased since you first bought the car and you’ve moved up a tier, you’ll probably be eligible for a better financing offer. Here’s how you can raise your credit rating.
Getting a lower APR could result in significant interest savings over the course of your loan. For instance, you would save about $800 in interest if you refinanced $15,000 from a 7% rate to a 5% rate with a couple hundred dollar monthly payments.
You Want to Change the Loan Term
When you require a lower monthly payment, it makes sense to refinance your auto loan. To get a lower payment on your car refinance, you could lengthen the loan. However, it’s crucial to remember that while extending the loan term will lower your monthly payment, it will also result in a higher overall interest cost. It also works the other way around: If you shorten the term, your monthly payment will go up while your overall interest expense goes down.
Loan Rates Are Down
You might be eligible for a lower APR if rates on U.S. consumer loans have decreased since you took out the auto loan. For instance, the Federal Reserve lowered the rate on consumer loans to 0%-0.25% in March 2020. Rates on auto loans decreased correspondingly. You can reduce your interest costs with a small change in rates.
You Have Positive Equity
If your car is worth more than you owe on it, you might be able to refinance at a better rate. Contact your current lender, find out how much you owe, divide it by the value of your car, and that number will be your loan-to-value ratio.
You Hate Your Current Lender
For no other reason than they don’t like how their current lender conducts business, many people decide to refinance. A relationship with a lender can be seriously soured by rude customer service representatives or shoddy record keeping. If you really hate your current lender, refinancing with a different lender might help you feel better.
When Should You Hold Off on Refinancing?
Although it’s not always the best choice, refinancing a car can help you save money. If any of these circumstances apply to you, you might want to delay refinancing.
You’ve Already Paid Off Most of Your Original Loan Amount
Frequently, interest is front-loaded, meaning that you pay off more of it initially. The more time you put off refinancing, the less interest you might be able to save.
Your Car is Old Or Has a Significant Amount of Miles on It
Cars depreciate quickly, so you’ll likely only be able to refinance within the first few years of owning your car. Some lenders won’t refinance vehicles that are more than a certain age or mileage. Cars older than seven years or with more than 90,000 to 125,000 miles on them, for instance, may not be refinanced by some banks.
The Fees Outweigh the Benefits
It’s crucial to keep an eye out for any refinancing fees. For example, there may be prepayment penalties for paying off your current auto loan earlier than planned with your refinance loan. Along with the principal, you might also have to pay some extra interest.
Even worse, some loans, such as loans with precomputed interest, make you pay all of the interest in addition to the principal.
Refinance fees are also something you should expect. Among them may be state re-registration fees and lien holder fees. It might be a good idea to determine your ability to pay these fees before refinancing even though they are not particularly expensive.
You’re Looking to Apply for More Credit in the Near Future
An auto refinance could negatively impact your credit. Hold off on an auto loan refinance if you’re thinking about applying for a mortgage or that really exclusive credit card you’ve been eyeing in order to maintain your chances of being approved and keep your credit scores as high as possible.
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Is Refinancing Worth It?
Refinancing is a no-brainer if you know you’ll get a better rate and save money. However, if you’re unsure whether you’ll save any money, use this auto refinance calculator to project your savings and determine whether refinancing makes sound financial sense.
Long-term savings from refinancing a car loan may be possible. If your financial situation has improved or interest rates have decreased since you took out your current loan, give it extra thought.
People frequently refinance in order to lower their monthly payments, usually as a result of an unanticipated financial crisis. It can be difficult to strike a balance between your short-term needs and long-term financial security, but if you do the math and plan carefully, you can choose the best course of action for your family’s financial future.
If you need to refinance your car in order to increase your cash flow, you can do so right away to get your finances back on track. If there aren’t any prepayment penalties on your new loan, you should begin making extra payments on your auto loan as soon as your personal finances have stabilized in order to pay it off sooner. You’ll save money on interest payments and pay off your auto loan faster.
Read about Pros and Cons of Refinancing Your Car
