Friday, March 29, 2024

Should I Refinance My Car Loan

Don't Miss

Buy Now Pay Later Services

Should I Refinance My $13,000 Car?

If you buy something online or on your mobile device, you might see the option to buy now and pay later. This feature allows you to buy the item right away without paying the full price upfront. These services may help break up larger payments into smaller, more affordable ones, but can also encourage excessive spending. Learn more about buy now pay later services and how they can affect your finances.

Cant Make Your Car Payments

Having a car provides many conveniences. You do not have to worry about lugging groceries on the bus or waiting 45 minutes for the train. However, for those experiencing financial problems, having to pay a car loan can make owning a car seem more like a burden than a convenience. If you are behind with payments, or worried you will be soon, assessing your financial situation and actively pursuing your options can help you make the best of a difficult situation.

Considerations That May Stand In The Way

  • Age of your car. In general, the newer the car, the better. To your lender, an older car has lower collateral value so you may not have an option to refinance the loan balance if it exceeds the vehicle’s current value.
  • Prepayment penalties. Check that your current lender doesn’t require you to pay a penalty for paying off your loan early.
  • Other fees. State re-registration fees can vary significantly. Check with your state for the amount to be sure refinancing is worth as much to you as you expect. Also check for any fees your new lender will charge you for the refinance as those fees will impact the value of the new loan.
  • Car was recently purchased. If you’re thinking of refinancing your loan, consider waiting at least 6 months after the purchase of your vehicle. This allows your loan time to establish a loan history and to address any depreciation from the time of purchase.

You May Like: How To Clean Car Interior Fabric

You Can Pay Less In Interest

If you had poor or no credit when you bought your car and your credit has since improved, you could qualify for a lower interest rate. This is especially true if you have consistently made on-time payments for six to 12 months. Also, interest rates in general might have dropped, or you might have accepted a higher rate than you could have qualified for in order to get a better deal on the car itself.

Whatever the situation, if you can lower your current loan rate by 1% or more, you could save enough in interest over the life of the loan to make refinancing worthwhile.

When You Should And Shouldnt Refinance Your Car Loan

Should You Ever Refinance a Car Loan?

Is there ever a right or wrong time to refinance a car loan?

Whether you opt for a new or used vehicle, buying a car can be an expensive endeavor. Its no surprise, then, that the vast majority of cars on the road today are financed with the help of an auto loan.

As you pay down that debt over the months and years to follow, however, you may decide that the loan you have simply isnt working anymore. Or for some people, you might discover that you could save both time and money by refinancing that car loan.

But is refinancing really the right decision for your auto loan? If so, when is the right time to refinance that loan and, more importantly, is there a time when refinancing is actually a bad idea?

Lets take a look at what it means to refinance an auto loan and when you should consider it.

2022 Auto Refinance Rates

Also Check: How Much Does It Cost To Tune Your Car

How To Shop Around And Compare Lenders

In addition to your current lender, you should compare the offerings of auto finance companies, online lenders, traditional banks and credit unions. This will ensure you get the best rate possible.

Keep in mind that applying for an auto loan refinance counts as a hard inquiry on your credit report, which could cause your credit score to drop by a few points. If you submit all the applications within a certain period of time, however, theyll count as a single inquiry.

The time frame is typically between 14 and 45 days. This limits the negative impact on your credit score and allows you to explore as many options as you want.

Related:Best Auto Loan Refinance Lenders

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.

You May Like: How Expensive Is Car Insurance

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

Refinancing Your Car After Buying A House: Is It Possible

Should I Refinance My Car Loan? | Capital One

Yes, its possible to refinance your car after buying a home. In fact, you might find that auto lenders are a bit less stringent with qualifying criteria than mortgage lenders.

For example, you might be able to qualify for car loan refinancing with a DTI as high as 50%, but DTI requirements can also vary from one lender to another.

If youre not able to get approved for car loan refinancing that has a competitive rate with one lender, you can always shop around for rates with others. Consider shopping with banks, , and alternative lenders to see what each type of financial institution has to offer you.

Read Also: How To Apply Car Wax

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

Lower Your Monthly Payment

Sometimes, an expensive occurrence such as having a baby, unexpected medical bills, or a natural disaster can put you in a situation where you have to reduce your monthly expenses. Refinancing might allow you to extend the duration of your loan, thereby lowering your monthly payments. For instance, if you owe two more years on your current loan, it may be possible to refinance and extend the term to four years.

Adding two years onto your loan should substantially lower your monthly payment, depending on the interest rate you get. You will be paying for two years more, but you will free up some cash on a monthly basis, helping you get through a rough patch. Keep in mind, though, that this will also mean that you’ll pay more interest over the total life of the loan.

Changing lenders can be a pro or a con, depending on the relationship you have with your current lender. If your lender has poor customer service, changing lenders could be a benefit. If you like your lender, you can try to refinance with them, but you may need to look elsewhere to get the best rate.

You May Like: How To Unlock A Car Door With A Screwdriver

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.

Refinance Your Car Loan First If Your Debt

Family Budget

You can have great credit but still struggle to get an approval for mortgage loan refinancing if your debt-to-income ratio is over 43%. Since auto loan refinancing has a higher maximum DTI, around 50%, you can refinance your car loan to help you qualify for the mortgage refinance loan.

Heres how it works: While hard credit inquiries do impact your credit score, the truth is theyre really just a small slice of the credit pie, about 10%. And credit score is only one of many factors that lenders take into consideration when evaluating loan applications. Your debt-to-income ratio is another significant piece of information.

If refinancing your car loan lowers your DTI to meet your mortgage lenders guidelines, the benefit can outweigh the small credit hit from the car refinance loan application. In other words, refinancing your car loan helps your mortgage refinance application.

Before you submit any refinance application, find out your credit score. You can get scores for free on sites like Credit Karma and Credit Sesame. You may also have access to your free score through your credit card company or other credit service.

You May Like: What Model Is My Car

The Refinance Could Lower Your Dti

Plot twist: Refinancing your car loan before buying a house might not only negatively affect your future home purchase. A refinance loan that lowers your monthly payment could also reduce your DTI.

Lets say that refinancing your car loan dropped your monthly car payment from $500 to $350 in the example above. Here are the new numbers:

Pre-tax income: $5,000Mortgage payment: $840

Total debt payments: $1,940

To calculate your DTI, divide your total monthly debt payments by your pre-tax income and multiply by 100.

$1,940 ÷ $5,000 x 100 = 38.8%

You May Not Qualify For A Top Rate

If it has only been a short time since you got your initial loan, your credit score still may be suffering from the temporary hit from a hard inquiry to your credit report, especially if youve also applied for other types of credit, such as a mortgage or one or more credit cards. Your refinancing rate may also be affected if you were late on or missed loan payments, or you havent had the loan long enough to demonstrate that youll consistently pay on time, especially if you dont have a long credit history.

You May Like: Can You Use Synthetic Oil In Any Car

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.

You Need To Reduce Your Monthly Payments

Should You Refinance Your Car Loan?

Sometimes its not about saving money in the long term. Life changes like unexpected medical expenses or the loss of a job can mean you need lower payments. While it may cost you more overall, refinancing your current loan to get a longer term can help you reduce your monthly payments to be more manageable in the short term.

Read Also: How To Deal With Car Dealers

How Does Refinancing A Car Work

Refinancing a car loan works almost the same way as the original car loan process. You can shop around for the best offer. You can get multiple offers within about two weeks, with it only counting as one inquiry on your credit history. And you’ll need to provide almost all the same documentation you provided for your original loan. Learn more about the documents necessary for getting an auto loan.

You Could Find A Lower Rate

Each lender has a unique range of APRs based on lots of variables. Shopping around can help you discover the lowest, most cost-saving rates available for your vehicle, your credit scores and your financial situation. You may even be able to use low rate quotes to help you negotiate a better deal with your original lender.

Read Also: What Car Companies Does Ford Own

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.

Understand How Your Credit Will Be Impacted

Can I Refinance My Auto Loan With The Same Bank

Virtually every time you apply for credit, a hard inquiry will reduce your credit score by a few points. If you then open a new loan account, it will lower the average age of your accounts, which may also lower your credit score.

That said, both factors are much less important in calculating your credit score than your payment history and making timely payments on your new loan will increase your score over time. So, unless you have applied for other credit recently or you dont have a long credit history, refinancing is unlikely to make much of a difference.

Don’t Miss: How To Get Cigarette Smoke Smell Out Of Car

When Refinancing Doesnt Make Sense

Refinancing a car loan isnt always the right choice. If you are close to paying off your loan, refinancing may not save you money. Just stick with it unless you desperately need to extend your loan term to reduce your monthly payment.

Lenders typically wont approve you if you owe more on the car than it is worth. This is also called being underwater or upside down and it will make it hard to refinance.

If your car is older or has quite a few miles on it, lenders may not want to refinance. This usually looks like a vehicle that is 10 model years old or has more than 100,000 miles, although the specifics vary by lender.

Finally, with interest rates on the rise, you may end up paying more by refinancing in the current market environment. The Federal Reserve has been working to control inflation by increasing the federal funds rate, which in turn causes interest rate increases on everything from credit cards to car loans.

The average APR for new vehicles was 5.7 percent as of 2022s third quarter, according to Edmunds.

More articles

Popular Articles