The Rules Of Car Loan Refinancing
Access to a car is pretty much a necessity and a freedom that most Americans wouldnt want to do withouteven if car loan payments take a big bite out of their budget. In a 2018 survey conducted by the;National Endowment for Financial Education,;15 percent;of U.S. adults;said they worried about their car loan;debt. Whether or not you agree that owning your car is a financial burden, bringing monthly costs down is a good goal to have.
So the big question: When is it a good time to refinance your car loan? How about when you need monthly payments to be more manageable. Thats a good answer. But there are a few other things to consider. But first you should get a good understanding of;how;refinancing a car;works;so the route you choose meets your specific goals.
How Does That Work
Thats because applications for new credit ding your credit score in two ways. And even a tiny change in your score could make a significant difference to the mortgage rate;for which you qualify.
When youre borrowing big sums over many years, even a tiny increase in your mortgage rate can add many thousands to your total cost of borrowing.
The two knocks your score takes when you open a new account are:
1. New credit
Every time a lender checks your credit report to decide whether to lend to you , your credit score takes a small hit. The impact is relatively small and recedes in importance quite quickly. But its real.
Luckily, there are exceptions. When you rate shop for a mortgage or auto loan, all your applications count as one, provided you make them within a focused period. And you can check your own score and report as often as you want without penalty.
2. Length of credit history
The length of your credit history determines 15 percent of your FICO credit score. And part of that is based on the average age of all your open accounts.
When you open a new account, you lower that average age. Closing an old one has a similar effect.
So avoid applying for credit or opening or closing accounts in the months leading up to your mortgage application.
You can see how the additions stack up by looking at Fannie Maes Loan Level Pricing Adjustment matrix below.
Should You Refinance Your Auto Loan
Is now a good time to refinance your auto loan? Interest rates for new and even used car loans are low, but the answer to that question really depends on a few different factors.
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When Might Refinancing Not Make Sense
Interest rates aside, if youve almost paid off your balance, you may want to ride out your financing to the end of your term. While you could potentially save a little each month, it may not be worth it to refinance depending on the work and cost associated. Some institutions charge a pretty sizeable application or documentation fee, but it varies by lender or institution.
Lenders are also less likely to offer refinancing options if you owe more than the car is worth. This can happen when your car loses value at a faster rate than youve been paying down the balance. This is usually the result of having a low monthly payment because of a longer term.
You also might want to hold off on refinancing your car if youre planning on making any major purchases in the near future, like another car, a house, or anything that would require applying for credit, to avoid any potential changes to your qualifying credentials.
And you might want to skip out on refinancing completely if your existing auto finance package has prepayment penalties. While uncommon, some lenders do impose a fee when the car is paid off ahead of schedule which could make refinancing cost more than its worth.
Best Refinance Rates: Openroad Lending
- Starting interest rate: Not stated
- Minimum credit score: Not stated
- Loan terms : Up to 72 months
OpenRoad Lending offers auto refinance loans with extremely low rates. While they dont disclose their starting interest rates online, qualified borrowers can expect to receive quotes for competitive rates.
Minimum refinance amount of $7,500
Refinance restrictions on vehicle mileage, age, and brand
OpenRoad Lending specializes in auto refinancing, offering traditional and cash-back refinancing options and a wide range of loan terms. Borrowers with excellent credit can refinance into some of the lowest rates available. In addition, it provides financing options for individuals across the credit spectrum.
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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.
Youve Had The Loan For At Least 90 Days
How soon can you refinance a car you just purchased?
Most lenders require that youve had the loan for a few months before you can apply to refinance. When you apply through LendingClub, the minimum required is 90 days. This is usually to confirm that youre making on-time payments, so stay on top of those payments if youre hoping to refinance in the near future.
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What Should I Know Before Refinancing
Say you financed your car with a 6% interest rate, but you see a lender offering 5%. Sounds like a good offer, right? Not necessarily. There are more factors that play into refinancing than just the interest rate.
Once youve determined that it makes sense for you to refinance, youll need to consider a few factors before starting the process.
- Determine if youll incur any fees. Youll need to find out if your lender imposes a fee on those who pay off their loans before a certain date, like a prepayment penalty. Some contracts include this in fine print, and the lender uses it as an incentive for you to stick with them through the life of your loan. If your auto loan is through PSECU, theres no fee for paying off your loan early.
- Calculate your new estimated payment. Compare what your monthly payment is now and what it would be if you refinance. If youre only saving a few dollars, it may not be worth it to refinance.
- Review your credit history. Remember that lenders take your payment history into consideration when reviewing a loan application. Having good credit could get you a better rate. Your payment history is a factor that impacts your score significantly. So, if youve missed payments on your current loan, you may be less likely to get approved for refinancing.
Undoing Insurance And Warranties
If you purchased additional items that were installed on your vehicle, such as a theft deterrent system or paint sealant, you probably won’t be able to return, cancel or get a refund for those products.
If you regret buying an extended warranty or other coverage, such as gap insurance, a prepaid maintenance plan, or tire and wheel protection for your vehicle, it is possible to cancel the coverage and get a partial refund of your purchase price.
You can cancel optional coverage and insurance by contacting your dealership or the company that provides the service. You should be able to find the name of the company that administers your coverage or insurance on your sales contract.
Depending on the product you’re canceling, you may need to provide documentation that has to be filled out in person at the dealership, such as an odometer mileage disclosure that would have to be verified by a dealership employee. You’ll need to work with a sales manager or a person from the finance department to complete the cancellation. After the paperwork is completed, it can take a few weeks or months for the money to be refunded to you.
The refunded amount will be reduced from the balance of your car loan, and although the balance reduction won’t lower your monthly payment, it will shorten the length of your loan. If, for example, canceling products nets you a refund of $1,000 and you have a monthly payment of $500, the term of your loan would be reduced by two months.
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What Are Todays Mortgage Rates
Todays mortgage rates are as low as theyve been in months. But if you throw a monkey wrench into your application during escrow, your lender could increase that rate.
Avoid that if possible, shop for the best rate and choose the most appropriate program to maximize your savings.
Will Car Refinancing Save Me Money
The best way to figure out whether or how much you can save by refinancing your car loan is to see what auto loan rates you;pre-qualify;for without affecting your credit. But there are a few watch-outs you should be aware of before refinancing your car loan:
Pre-payment penalties: Most auto lenders dont charge prepayment penalties, but make sure yours isnt one of them. If yours does, you need to calculate whether those fees will cost you more than youd save with a new loan.
Longer loan terms: Often, the lowest monthly payment will be for a loan with a longer term because youre spreading your repayments over a longer period of time. Longer-term loans often carry a higher APR than shorter-term loans. Only you can decide whats right for you, but we advise most people to choose the lowest APR with monthly car payments they can afford.
Ancillary products: If you purchased a GAP waiver policy with your original loan, it will not automatically carry over into a new loan. If you still want GAP coverage , you will need to explore your options for a new policy.
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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.
You Might Face Prepayment Penalties
While Rocket Mortgage® does not have a prepayment penalty, some lenders include clauses that penalize you if you pay off your loan before your term ends. For example, you may need to pay anything you saved in interest if you pay your loan off within 5 years of your term.
This can create a problem if youve already gotten one refinance and reset your loans term. Read through the terms of your last refinance and see if your loan has an early repayment penalty before you apply for a new one.
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Love Your Car But Not Your Loan
If you bought a car recently, there was likely a lot to think about. Its possible you gave more attention to the details of the vehicle youd be driving rather than the loan you now have. If youre feeling iffy about your car loan and wondering if theres potential to lower your monthly loan payment, you might want to consider refinancing.
How an Auto Loan Refinance Works
Refinancing an auto loan means you take out a new loan to pay off the balance of the existing loan. For example, if you financed a car at a dealership at a higher interest rate than what your financial institution is offering, refinancing your car loan with a new loan at your financial institution could get you a lower interest rate and lower payments.
When Refinancing Makes Sense
Refinancing your car loan can save you money, but the circumstances need to be right. Here are a few scenarios in which refinancing might be worth considering:
Interest rates have dropped. If interest rates have gone down, its a great reason to refinance. If you can refinance at a lower rate, your monthly payment could decrease. By reducing your monthly payment obligation, you can choose to pay extra and apply more money to the principal. This can allow you to pay off your loan faster and still save on interest.
When Refinancing Might Not Make Sense
Your car is older or has high mileage. If your car is older than 7 years or has more than 90,000 to 125,000 miles, some lenders may not refinance your loan.
Know Your Goals
Other Auto Refinance Companies We Considered
- The annual percentage rate starts at 2.49%
- Offers lease buyout and cash-out refinance loans
- Pre-qualify with soft credit pull
- Vehicles must be less than 10 years old
- Mileage must not exceed 150,000 miles
- No consumer experience data on the CFPB database
While RefiJet considers a range of credit histories, the companys requirements considerably limit the type of cars that can be refinanced.
- Low starting rate and no application fee
- Terms range from 12 to 72 months
- Offers lease buyout option
- Pre-qualify with a soft credit check
- No application fee
- No standout features to rank in our top picks
- Minimum monthly income requirement of $1,500
- 2.25% APR only applies to vehicles from 2019 or newer
- Vehicles must be less than 10 years old
Auto Approve didnt make our top picks because it didnt have any standout features that differentiated the company from its competition.
- Loan marketplace favorable to lower credit scores
- Pre-qualify and compare rates from multiple lenders
- Performs soft credit check for pre-qualification purposes
- Vehicles must be less than 10 years old
- Mileage must not exceed 120,000
- Wide range of APR rates: 3.99% APR to 24.99%
Lendingclub did not make the cut due to its high APR rates and limiting requirements for refinancing cars.
- Rates start at 3.19% APR
- Loan terms range from 48 to 72 months
- Offers lease buyouts
- Car loan calculator to help determine savings
While Bank of America offers good starting terms, these are only for qualified applicants.
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How Does Refinancing Work
If you refinance your car loan, you change the terms, either length of the loan and/or the interest rate, for the amount of money you owe on the loan. For example, if after two years of paying a $20,000, 4 year loan at 7% you decide to refinance the remaining balance of $10,697 for another 4 year loan at 7%, your monthly payment would decrease from $478.92 to $256.15, a savings of over $200 a month.
The same result can be achieved with a loan modification if your current lender is willing to extend your loan and lower your monthly payment. Having a lower payment can help cash-strapped individuals who want to keep their cars, but because you are borrowing money for a longer period of time, refinancing can increase the total interest paid over the life of the loans. Furthermore, if your , it may be hard to get a new loan.
Common Requirements For Refinancing A Car Loan
If youve already refinanced your auto loan, theres a chance that you may not qualify for it again . Lenders have stipulations for refinancing, and as time goes on, vehicles can lose the ability to qualify.
Here are the common requirements for refinancing a car loan:
- Vehicle has less than 100,000 miles
- Car is less than 10 years old
- The auto loan is at least a year old
- Youre current on the monthly payments
- Your credit score is considered good or has improved since the start of the loan
- Loan cant big or too small
- Vehicle cant have negative equity
Not everyone can refinance all the time, and as time passes, your car may not qualify either. If refinancing doesnt feel like the right move for you, getting another vehicle might be the next step.
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