Does Your Car Have Negative Equity
Negative equity refers to the outstanding loan amount on your vehicle being greater than its value. A common phrase you may have heard is that someone is upside down on their loan, meaning they have negative equity. For example, if you purchased a car for $23,000 and youve paid $5,000 towards your auto loan, you have a loan balance of $18,000. Should the vehicle be worth $15,000 in the market, then you have $3,000 of negative equity in that car. Some borrowers may have a harder time being approved for new loans or getting loans with favorable terms, since lenders want their loan security to be valued higher than the amount they lend. In the example above, you could be asked to cover the $3,000 difference before entering into a new loan.
When You Shouldnt Refinance Your Car Loan
If youre in the middle of shopping for a personal loan, mortgage or other financing option, now is not the right time to refinance your auto loan. Applying for a loan would hurt your credit score and possibly cause you to receive a higher interest rate on any loan offers.
If your current auto loan has a prepayment penalty, then refinancing could incur that penalty. Depending on the penalty and your current interest rate, it may not be worth refinancing. If youre not sure whether your loan has a prepayment penalty, look up the loan contract or call the lender and ask them. Some prepayment penalties only apply if you recently took out the loan, so its best to verify over the phone or through documentation.
What Fees You Might Have To Pay
Some lenders include a prepayment penalty in the car loan agreement for paying off the debt early. Be sure to check if your current loan has prepayment penalties, as it could negate any savings you get through refinancing.
Depending on the lender, you might also have to pay an application fee, registration fee and/or title transfer fee. When refinancing, some states will also require you to pay to re-register your vehiclebut the cost of these fees depends on where you live.
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What Happens When You Refinance A Car
When your new, refinanced loan is approved, your new lender will pay off your old loan, and you’ll start making loan payments to your new lender. If the lender is the same, they’ll retire your old loan and issue a new loan that you’ll start making payments on instead. If you are thinking of trading in your car, learn more about trading in a vehicle with a loan.
The Best Time To Refinance Your Car Loan
So, when should you look to replace your current car loan with a new one? There isnt a one-size-fits-all answer to this question. Once youre six months or even a year into the life of the loan, youll have an easier time finding willing lenders but is it the best time for you?
Lets explore some indicators that its the right time to refinance your car loan.
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If I Refinance Can I Get Additional Cash
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Can You Refinance A Car Loan
Yes, many lenders offer auto loan refinance opportunities, and several promise to make the process quick and easy. It can pay to refinance your loan in several different circumstances. For example, you might be able to improve your rate and monthly payment, shorten the term of your loan repayment, or extend the term if youre having trouble making payments.
Auto Refinance Data Methodology
The auto refinance rates published here are based on the results of comparative research done by Way.coms data team. We’ve used a mix of public and internal data to analyze refinance rates across thousands of lenders, credit scores, vehicle types, and all U.S. ZIP codes
The rates shown here are based on a national average of our findings, and may typically vary for each individual depending on your personal financial position and the US state you are in.
However, you can quickly determine where you stand by going through our Auto Refinance form. In just a few steps, find out how much you can save with way.com!
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Interest Rates Have Dropped Since You Took Out Your Original Auto Loan
Interest rates change regularly, so theres a possibility that rates have fallen since you took out your original auto loan. Even a drop of 2 or 3 percentage points may result in significant savings over the life of your loan.
Lets say your original auto loan was for $25,000, with a 7% interest rate and loan term of 60 months. If you keep this loan, youll end up paying a total of $29,702 on the loan. After a year of payments on this loan, your balance is now $20,673. If you were to refinance and get a loan for $20,673 for the remaining 48 months with a lower interest rate of 5%, youd end up paying a total of $22,852 on your refinance loan. Combined with the $4,327 you paid on the previous loan, youd have paid $2,522 less than if you had kept your original loan.
Collect All Necessary Documentation
Applying to refinance your auto loan is similar to applying for a new loan. During the application process, youll need to provide documentation to verify your identity and creditworthiness and your cars value.
You should prepare these documents before applying for an auto refinance loan:
- Personal information: Have your drivers license, address, phone number, Social Security number, proof of income and proof of insurance ready when you apply.
- Vehicle information: Have your vehicle identification number and your cars year, make, model and registration number handy for the lender.
- Current loans details: Gather your current lenders information, your account number and the existing payment amount.
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Coronavirus Auto Finance Relief
COVID-19 has hurt lots of peoples finances. If youre worried about being able to keep your car, you may be able to get some help. Credit Karma has gathered a list of automakers and lenders that are offering relief options. We also have some other resources if youre looking for financial assistance.
But you may be looking to refinance to take advantage of lower interest rates which resulted from the Fed dropping its rates because of the pandemic. If thats the case, youll want to consider the advice in the article above.
Should You Wait To Refinance Your Car Yes Heres Why
Dont rush to refinance your car loan or wait too long.
If youre a first-time car buyer, you might not be familiar with auto loan refinances.
Refinancing your auto loan can be a prudent financial move. The primary goal after all is to save money.
Ideally, your new loan will have a lower interest rate, thereby lowering your monthly car payment and reducing your total interest. You can then use the extra cash to pay down your loan faster, build up savings, or cover some other financial need.
But how long should you wait to refinance your car loan? Does it even matter?
Spoiler alert: Yes, it matters.
2022 Auto Refinance Rates
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Youre Having Trouble Keeping Up With Bills Each Month
Even if youre not able to secure a lower interest rate, it may still be worth trying to find a loan with a longer repayment period in order to reduce your monthly car payments.
If you cant find a suitable loan, you may also be able to renegotiate the repayment period on your current loan. But keep in mind that more time spent paying back your loan is also more time spent paying interest. In general, youll pay more interest overall if you have a loan with a longer term.
Proof Of Employment And Income
A refinanced car loan will typically require some proof of income. Lenders will often request this in the form of tax forms or tax returns. Refinance car loan lenders need this information before you can be approved for a new loan. There are different requirements for salaried, freelance, and self-employed individuals, and each may require a different proof of income.
Hourly/Salaried Employees Your lender will likely request pay stubs for the last two pay periods before allowing you to refinance your car loan. If you apply at the beginning of a year, they may also request a W-2 from the previous year.
Freelancers/Contract Employees The documents needed to refinance a car will change if you are a freelancer or contractor. Because freelancers and contract workers receive multiple 1099s from several companies, auto refinance lenders will ask for your tax returns instead.
Self-Employed For those who are self-employed and shopping for a refi car loan, lenders will instead ask to see tax returns from the last two years.
If you need a copy of your W-2, you can always request one from your employer. Additionally, tax returns can be requested online by visiting the IRSs website. Lastly, as a final tip, we recommend notifying your lender of any additional jobs or sources of income you have. This knowledge can be beneficial for a lender to know and may make a difference in your application.
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What To Consider Before Refinancing Your Car
As every financial institution is different, you may face different requirements and fees that could affect your vehicle refinancing. Here are some factors worth considering:
- Prepayment penalties: This is a fee thats charged if you pay your loan off early. Not every financial institution charges this, but its worth checking since it could cost you.
- Time remaining on your loan: If youre close to paying your loan off, it might not be worth it to refinance your car.
- Your financial situation: Lenders will look at your debt-to-income ratio when you apply for a refinance auto loan. If you owe a lot of money on credit cards or personal loans, pay your debt down beforehand to get better repayment terms.
Youve Increased Your Income
Your debt-to-income ratio is a critical factor that lenders evaluate when making loan decisions. This metric compares your monthly debt payments to your monthly income. In other words, what percentage of your debt is committed to obligations like credit card bills, a mortgage, student loans, etc.
If you recently benefited from an income boost, such as a promotion or part-time gig, your DTI should improve.
Mortgage lenders usually prefer to see a DTI below 36%. Thats not a hard-set rule in the auto loan industry. Generally speaking, a DTI of 50% is a good benchmark to stay below but the lower, the better.
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What Credit Scores Do I Need To Refinance My Auto Loan
Theres no universal minimum credit score for refinancing your auto loan. Different lenders have different requirements, and some lenders specialize in working with people with bad credit, including those who have bankruptcies or repossessions in their credit histories. But if your goal with a refinance is to get a lower rate, it helps to have better credit scores than when you applied for your original auto loan.
How To Refinance Without Hurting Your Credit
Refinancing your car will cause a temporary drop in your credit score. However, you can reduce the magnitude of the drop in the following ways:
- Rate shop within a certain window: Credit risk companies allow multiple inquiries to be clubbed together as one inquiry – if done for the same reason. For example, VantageScore allows a 14-day window, while FICO allows 45 days.
- Pre-qualify for offers using a soft credit pull: It involves only a soft credit inquiry and so won’t affect your credit score. It can help you shortlist the best few offers and avoid multiple credit hits.
- Check your credit score regularly: If you build your score to above 700, the credit drop will be significantly less.
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What Is A Good Interest Rate For A Car Loan
Currently, under 6% is considered a good interest rate for borrowers with a credit score in the mid 600s.
Interest depends on your credit score, the amount borrowed, the loan term and your debt-to-income ratio. Borrowers with excellent credit may be eligible for lower interest rates as low as 2 or 3% for a new vehicle. Occasionally dealerships will even offer a 0% interest car loan as a special promotion . For a borrower with fair or poor credit, the rate can exceed 10% or even 15%.
Here is how lenders weigh your credit score:
This example assumes that you borrow $40,000 for a car purchase . While the monthly payments of loan A are $154.47 more, loan B costs $5,770.58 more! Compare interest rates and limit the length to save serious money.
Is Refinancing Your Car Right For You
Before filling out a refinance application, youll want to consider whether you can score a lower interest rate. If national interest rates have decreased since you took out your original financing, it could be a good time to shop around.
Youll also want to think about your own credit. Financial institutions examine your credit score to determine how much of a credit risk you are. The higher your score, the less of a risk you are. Thus, if youve boosted your credit score since you took out your initial financing, you may qualify for a lower rate.
Finally, youll also need to consider what type of financial institution you are working with and determine if switching to another institution would yield you a better interest rate.
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Current Car Loan Information You Will Need
Original loan amount: This is the total amount of money you borrowed. If you bought a new car and made a down payment, it’s the purchase price of the car minus the amount you put down.
Current interest rate: This is the interest rate you qualified for at the beginning of your loan. If you financed through a car dealer, you might be paying a higher rate than you deserve. This often happens to people who dont get preapproved for a loan or those with below average credit, mainly because they are unaware that better rates are available.
Length of current loan: This is the number of months in the loan when you began paying it off. For new cars, most people take out 60-month loans.
Balance of current loan: Hopefully, youve been making payments on time each month. If youve had the loan for a year or more, your current balance is well below what you borrowed. If you dont know how much you still owe, look at your latest statement or call your lender and ask for the “payoff amount.”
Months left on current loan: This is the amount of time remaining on your original loan. Its hard to refinance at a better rate without a history of regular, on-time payments for at least six to 12 months. However, the more time you have left on your loan, the more you could save by refinancing.
What Is The Best Company To Refinance An Auto Loan With
There isnt a clear-cut best company to refinance with, as every applicant has different needs.
For example, if you have a very low credit score, you may find Auto Credit Express is your best option. Thats because the network partners with more than 1,200 different lenders many of whom deal specifically with bad-credit applicants.
If youre looking to take out a loan for more than you owe on your car, youll likely find RoadLoans.com is your best option. Thats because the networks cash-out refinancing allows you to borrow up to 90% of your vehicles total Kelley Blue Book value.
You can use part of the proceeds to pay off your existing loan and keep the rest for yourself to spend how you choose. Not every refinance company offers this kind of loan.
But, if youre looking for a company with a name you likely know and trust, you may consider Capital One to be the best. The worldwide brand has a long history of success and offers numerous financial products that meet the needs of all consumers.
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