How Does An Auto Refinance Work And Is It A Good Plan For Me
When interest rates drop, its the perfect time to refinance a loan to lower your monthly payment and to save money on the life of the loan. Perhaps youve heard of a mortgage refinance, and maybe you even took advantage of low mortgage rates by refinancing your home loan. But did you know you can refinance your auto loan, too?
Pros Of A Car Refinance
There are some benefits to refinancing. The process does not take long, and you can obtain a free quote to determine if these benefits apply to your case.
Here are several advantages of refinancing your car loan.
A Lower Interest Rate
If you had a poor credit score when you first purchased the car, your interest rate may be significantly lower than it is right now.
In addition, an individual who refinanced several years ago may also qualify for a lower rate because interest rates have fallen since they purchased the loan.
If the current interest rate you could obtain is one or more percent lower than what you are paying, consider refinancing. You will spend less overall to buy your car.
You Want to Consolidate Debt
Your vehicle is a valuable asset. As a result, it is possible to borrow against the value of it.
For example, if you own a car worth $12,000 but you only owe $8,000 on it, you may be able to borrow against that $4,000 value. You could use these funds to help you pay off debt or handle other financial needs.
In some situations, you can use this equity in your vehicle to pay off all of your credit cards . This, too, can save you money.
You Want a Lower Monthly Payment
There are several ways you could obtain a lower monthly payment on the loan.
First, if you secure a lower interest rate, the monthly payment will be lower as well. This could help make your budget a bit easier to manage. How much lower depends on the debt you owe, the interest rate, and the term.
How Does It Work When You Refinance Your Car Bad
While the amount of refinancing is unlimited, refinancing a car affects your creditworthiness and can reduce your debt. With longer term refinancing, there is a risk that your car loan will be reversed or become a debt that is higher than the value of the car. This risk increases if you refinance multiple times over a longer period of time.
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Pros & Cons Of Refinancing Your Auto Loan
When buying a car, many buyers accept the loan package they are offered at the dealership. Though convenient at the time, you may later come to regret the conditions of your auto loan once youve started making payments. Refinancing your auto loan is one way to get better terms and potentially reduce your interest rate and monthly payments, helping you save more money. An auto loan refinance involves taking out a new loan to pay off the balance of your existing loan, and transferring the title to the new lender. While refinancing your auto loan can improve your overall finances, it may not always be the right choice for you. There are a few things to consider before applying for an auto loan refinance.
You Need To Modify Your Monthly Payment
You may be in a much better financial situation now than when you bought your car. You may have a better job or more financial security. You may have paid off credit card or other debt. Less debt frees up how much you can pay per month. Paying more over a shorter-term loan, when combined with the lower interest rates that often come with a loan refinance, can save you a lot of money over the long haul.
On the other hand, if money is tight, think about refinancing into a longer-term loan. While you might end up paying more in interest, you can reduce your monthly payments and free up money you need right now.
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Does Refinancing An Auto Loan Hurt Credit
In a perfect world, youd refinance your car loan and keep your credit score where it is. The reality, however, is that refinancing can hurt your credit because lenders will assess your creditworthiness or how worthy you are to receive credit.
To do this, theyll likely pull a hard inquiry, which may bring your credit score down by up to five points. Lets dive deeper into how refinancing an auto loan may hurt your credit.
You Bought The Car Less Than 6 Months Ago
While technically you could refinance your car as soon as you buy it, its best to wait at least six months to a year to give your credit score time to recover after taking out the first car loan, build up a payment history and catch up on any depreciation that occurred when you purchased. Unless there are other reasons to refinance, its unlikely youll get a lower rate than what you currently have.
Its vital to know you can afford a new car before you make the initial purchase. If you have any doubt about your ability to make the payments, youre better off not making the purchase and looking for an alternative.
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Is It Time To Refinance Your Car Loan Heres What You Need To Know
Anuj Nayar is the first financial health officer at LendingClub .
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A significant shortage in key auto parts and a lack of new car inventory as a result of the pandemic have forced many people to put a pin in scoring a new set of wheels. Whats more, the lack of inventory is causing a spike in the average car price for both new and used cars. Sticker prices for new cars are up 8.6% year over year, and used car prices are up 27%, according to data from Edmunds.
But even if you are not going to be driving a new set of wheels this fall, you can still use your car or truck to do something almost as exciting save you money. Auto represents the third-highest share of U.S. household debt, with Americans owing more than $1.4 trillion on their auto loans as of Q2 2021. So working to bring an auto loan down could be huge when it comes to debt management.
If you didnt shop around for an auto loan the first time around, or if your credit score prevented you from receiving a favorable interest rate, you may be able to benefit by refinancing now. If youre interested in an auto refi, heres what you need to consider.
Check your APR rates.
If You Qualify For A More Favorable Loan Agreement
Another reason consumers choose to refinance is when their financial well-being has improved since they initially applied for the loan. A jump in credit score, for example, could qualify you for lower interest rates or more favorable loan terms with a refinanced loan.
According to TransUnions VantageSore system, here is how credit scores are graded on an A-F scale:
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You Want A Lower Interest Rate
Interest rates have dropped since you got your car loan or perhaps you just found a much better loan rate. You may have financed through your dealer when purchasing your car for the sake of convenience. At the time you didnt realize the interest rate was high. Dealers do want to make a profit after all. Since then, youve seen a rate advertised by your local credit union or another financial institution that was much lower. Refinancing if the rate difference is significant can potentially save you a nice sum over the remaining life of the loan. There may even be further rate discounts for signing up for services such as direct deposit and automatic loan payments. Never hurts to ask so you know youre getting the best rate.
Does Ford Make Cars
Ford Motor Company makes all brands of Ford, Lincoln and Mercury, but also partners with Volvo, Mazda, Aston Marin and, until recently, Land Rover and Jaguar. These other car lines can be found in Sweden, Japan and England. In fact, many of Ford’s major car manufacturing operations are located outside of the United States.
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What Do You Need To Know About Refinancing Your Car 2019
Then you can consider refinancing your car in 2019. Refinancing a car means that you get a new loan and thus pay off your existing car loan. Then go back to your new lender. Ideally, the interest on your new car loan is much lower than the interest on your current loan, so that you can reduce the repayment costs of your loan.
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.
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Understand Your Credit Score
Before you begin the process of refinancing your car loan, you should know where you stand credit wise. Since checking your credit reports wont take a toll on your credit, its wise to do so. You can get a copy from them for free once a year on AnnualCreditReport.com.
Once you know what your credit is like, youll have a better idea of the types of lenders that may approve you. With access to your credit reports, youll also be able to check for any errors that may hinder your ability to get approved for a loan. If you notice any inaccuracies, make sure to dispute them before you apply for refinancing.
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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Is Refinancing Worth It
If youre simply refinancing, and you know youll get a better rate and save yourself some money, its really a no-brainer. If, however, youre not sure youll save any money, use this auto refinance calculator to estimate your savings and decide if it makes good financial sense to refinance.
In many cases, people refinance because they need to lower their monthly payment, usually due to some unforeseen financial crisis. Finding balance between your immediate financial needs and long-term financial health is never easy but if you do the math and plan accordingly, you can make the right financial decision for you and your family.
If refinancing your vehicle is necessary to improve your cash flow, you may refinance now to get back into a positive financial situation. Once your personal finances have stabilized, start making extra payments on your auto loan to pay it down faster, provided that there arent prepayment penalties on your new loan. Youll pay off your auto loan sooner and save yourself some interest expense.
How To Buy A Car At The End Of A Lease
- Think about the terms of the lease. In some cases, the question may not be so much about how to buy a rental car, but more about when to buy it.
- Appreciate cars. Retail Value – How much you are willing to pay to buy a car from a dealer.
- Look for financing options.
- Let the leasing company take the first step.
- Try some conversation starters.
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What Does Refinancing A Car Mean
According to Investopedias definition of refinancing, a refinance is when a lender agrees to offer a new loan to a consumer with terms that would ideally work in the consumers favor, whether its a reduced interest, lower monthly payments, or some other benefit as a result. Refinances typically happen when theres been a change in the interest rate market, or when a consumers improved credit qualifies them for more favorable loan terms.
There are many potential risks and benefits to refinancing a car loan, which well discuss a little later on.
How To Refinance A Car Loan
Once youve weighed your options and decided a refi is the way to go, follow these simple steps.
7 steps to apply for an auto refinance
If you have good credit, you’ll likely get a better deal. This may be a good time to find and dispute any incorrect information in your credit report.
Having all your information at hand will help speed the application process.
While it may take some time, thoroughly researching your new lenders and loan offers to find the best auto loan can not only help you compare rates, but also identify any potential red flags. You can also see whether your current lender offers a competitive refinance option.
Getting a pre-approval, when available, presents you as a good candidate for a refinance.
Once you’ve gathered all your documents and have chosen a lender, it’s time to apply.
Carefully read the loan’s fine print and terms. Check whether you can keep your current insurance policy under the new lenders requirements.
Remember to make sure to keep making your payments until the refinance is finalized.
Documents Needed To Refinance Your Auto Loan
To refinance any kind of loan, some documentation is required. These pertain to personally identifiable information, income, residence and your cars specifications, among others.
Heres a detailed list:
Social security number Car registration and mileage information Proof of insurance
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Refinancing A Car Loan During The Pandemic
Consider these five factors before moving forward with a refinance:
1. The interest rate on your loan. If the interest rate on your current car loan is higher than youd like, look around at different banks and credit unions to see what comparable lenders are charging. Getting a better interest rate is the main reason people refinance, as it means lower and more manageable monthly payments.
Even if you can only reduce your car payment by just a bit, that small amount might be worth the effort and up-front expense. For example, lowering your car payment by just $25 per month when you have three years left on your loan can result in $900 of overall savings.
2. The state of your credit scores. Your ability to secure a lower interest rate through refinancing depends on your credit history and credit scores. Therefore, you are in a good position to refinance if your credit has improved since you got your current auto loan. Refinancing can also help improve your credit scores if youre struggling to make your car payments on time and in full.
If your credit has not improved since getting your original auto loan, you probably will not benefit from refinancing as its unlikely that youll qualify for a better interest rate.
Additionally, its important to remember that a shorter loan term will mean that you increase the amount you pay each month, so make sure this additional expense is something youre prepared to cover in your monthly budget.
The Best Reason To Refinance: Pay Less Interest
The ability to borrow at a lower interest rate is a primary reason to refinance a loan. That lower rate means you pay less for your car after taking all of your borrowing costs into account. Because the interest rate is also part of your monthly payment calculation, your required payment should also decrease. As a result, managing your monthly cash flow becomes an easier task.
When you can replace your existing loan at a lower rate, its best to refinance as early as possible. Most auto loans are amortizing loans, which means you pay a fixed monthly payment with interest costs built into the payment.
Over time, you pay down your debt, but you pay most of your interest costs at the beginning of the loanso get that rate down sooner than later to start cutting costs. An amortization table can show you exactly how much you can save by refinancing.
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What Happens With A Car Refinance
When you refinance your car loan, you obtain a new loan for a new lender to pay off the existing loan. Sometimes, your current lender will refinance with you, too.
The goal is to secure new terms, interest rates, or debt. You have to prove to the lender you are still creditworthy and that you have the means to repay the debt.
Today, with interest rates so low, many people are benefiting from the process.
How Does Auto Loan Refinancing Work
By Shannon Bradley, NerdWallet auto loans expert
Refinancing your auto loan means replacing your current loan with a new one, usually with a new lender. It’s a way to start your auto loan over, with a lower loan interest rate and loan term that you choose. Your new loan’s term can be the same as the number of months remaining on your current loan, or you can shorten or extend it.
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