Your Financial Situation Has Improved
Lenders canuse a number of factors to decide your auto loan rate, including your credit scores and debt-to-income ratio, which is calculated by dividing your monthly income by yourmonthly debt payments.
As such, improving your credit health and decreasing your DTI ratio can lead to more-favorable terms on your refinanced loan.
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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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How Often Can I Refinance My Car
The quick and short answer is: you can refinance your car any number of times. However, it will only be possible if you can find a new lender to finance your car. Although theres no legal limit to the number of times you can refinance your car, the lender you want to refinance with should agree.
Lets face it, lenders offer car loans to make money. So if a lender finds out that youve already refinanced your car several times before, they may not be so inclined to issue a new loan. Have you been searching for a car insurance policy that meets your budget? Tap the banner below to obtain free car insurance quotes from the best car insurance companies in under 10 minutes!
Why Refinance Your Car Loan
There are some good reasons to consider refinancing your car loan. It could make sense to do so if:
- Interest rates have dropped. This is historically one of the key reasons people refinance their auto loans.
- Your credit score improved. If youve been working to raise your credit score, it could pay off by allowing you to qualify for a loan with a lower interest rate.
- You need lower payments. Sometimes, when certain life events occur, a monthly car loan payment that once seemed reasonable becomes too expensive.
- Theres a better deal. Many people who accept the loan terms offered by their dealership find that there are better deals available through other auto loan providers. Do some research to find out for certain.
Here is some additional information about the factors that could make refinancing an auto loan attractive.
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When To Refinance Your Car Loan
Here are some general guidelines to help you determine the best time to refinance.
During the first 60 to 90 days of the car loan
It usually takes at least two to three months for your vehicle title to transfer from the manufacturer or previous owner to your current lender. Most lenders wont even consider an application to refinance if the title hasnt transferred. So waiting will give you the opportunity to apply and be considered by more lenders.
When you applied for the original loan, the hard inquiry on your credit report may have caused a temporary small drop in your credit score. This drop could result in a higher interest rate on your new loan. Unless you already have good or excellent credit , you’ll benefit from waiting for your credit score to recover.
» MORE: Check your credit score for free
At least 6 months into the car loan
Waiting at least six months into your loan term provides more time for your credit score to rebound from any temporary drops. If your goal is to lower the interest rate and monthly payment, it makes sense to wait until your credit score enables you to qualify for a lower rate than your current one.
If this is your first time borrowing for a car, or you’ve had credit issues in the past, you should wait at least a year to refinance. This way, you’ll have time to build a good history of on-time payments. Most lenders require six to 12 months of on-time payments before they’ll consider a refinancing application.
Carefully Consider Your Options Before Refinancing
Refinancing your car loan can be a good idea in some situations, but not necessarily in others. If you’re thinking about replacing your current loan, make sure you understand your reasons and options.
Start by checking your credit score to see whether you’ve made progress since you first got the loan. Then consider why you want to refinance and what potential drawbacks and costs are associated with the process. Then compare auto loans based on your credit score to determine whether refinancing can save you money or if it might end up making things worse.
There’s no one-size-fits-all answer to whether refinancing is right for you, but following this process can help you come to the right conclusion.
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Refinancing Your Car Early
You dont need to wait until the end of a contract to refinance: it is often possible to settle your current arrangement and take out a new policy with a lower interest rate, or over a longer term, to cut your monthly costs.
This can involve you paying more in the long run, so it’s important to ensure that you fully understand what you’re signing up for. Refinancing is available if you’re on a PCP or Hire Purchase finance contract.
Any good finance provider will be able to offer refinancing. This will involve them paying the settlement fee on your current agreement, which ends your existing contract and transfers ownership if you are using a new lender. You’ll then begin payments on a new PCP or HP finance agreement secured on the car.
If this is at a lower interest rate, then your monthly payments may well be lower, and if the arrangement runs for a longer period, beyond the end date of the earlier contract, then you’re also likely to be paying less per month. The longer the finance term is, however, the more interest you’ll pay, so the total cost of finance is likely to be higher.
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You Bought The Car Within The Last Six Months
Your credit score takes a hit when you get a new loan. While you might find more favorable rates advertised soon after you buy your new or used car, the downswing in your credit score means you probably wont get as favorable a rate as you would if you waited for your score to recover. The general advice is to wait at least six months before refinancing your auto loan.
Your Auto Loan Has A Steep Prepayment Penalty
When you refinance a car loan, your old lender misses out on interest it otherwise would have gained in future months. To combat these losses, some lenders add prepayment penalties to loan contracts. If the prepayment penalties mentioned in your current contracts disclosures are high, you may lose money even if refinancing gets you a lower interest rate.
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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.
Understand The Costs Of Refinancing
Sometimes you can refinance with a lower interest rate, but because the loan is extended, you will actually pay more over the length of the loan. Use a loan calculator to make sure you are saving money overall. Getting the lower monthly rate might be what you are looking for, but if you really want to pay less overall, it is important to do the math.
For example, if you have a $5,000 loan with a 10% interest rate paid throughout two years, you will pay $5,537 in total. However, that same loan extended throughout five years will end up costing you $6,374. Thats $837 that could have been spent on something else. So make sure you extend your loan only if you need to do so.
Freeing up cash quickly is sometimes the only reason for refinancing a car loan. Beware of higher interest rates, though, because most lenders charge higher rates on older vehicles. When you’re looking to refinance your aging car, you might be surprised at the interest rate available to you compared to what you received when the car was new or almost new.
Many banks, including USAA Bank and Bank of America, do not charge an application fee for an auto loan refinancing.
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Refinancing Your Car: Good Idea Or Bad Idea
Its not uncommon for homeowners to refinance their home loans, but have you ever considered refinancing the loan on your car? Its surprisingly common and far easier than the sometimes painful process of trying to refinance your mortgage. But before you get too excited, weve listed some helpful hints for drivers trying to decide whether it would be a good or a bad idea to refinance a car loan.
When Its a Good Idea to Refinance
There are several situations in which it may be beneficial to refinance your car loan. One is if youre trying to take advantage of lower interest rates. For example, if you purchased your car several years ago back when rates were higher, you may want to consider refinancing in order to get a better rate. Doing so will lower your payment, but most importantly, it will decrease the amount of interest you have to pay on the loan.
Its also a good idea to consider if your credit situation has improved substantially compared to when you bought the car. If youve improved your credit enough, your interest rate is likely to go down, and that means youll make a lower monthly payment and youll pay out less money in interest.
When Its a Bad Idea to Refinance
Should You Do It?
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Interest Rates Have Gone Down
Interest rates fluctuate over time based on market conditions and government regulations. Paying attention to these rates can help you know when to refinance your car loan. Depending on when you took out your existing loan, refinance rates may be lower at a later time. If thats the case, you can likely save a substantial amount of money by refinancing your auto loan.
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Refinancing At The End Of A Pcp Agreement
If you want to keep your car at the end of a Personal Contract Purchase finance agreement, then youll have the option of buying it for a lump sum. But this can be a hefty amount, easily reaching £15,000 or more for some family cars. Refinancing allows you to spread the cost.
This can be done with a bank loan, which you would transfer to the finance company. The car would then be yours and you would need to repay the bank.
Alternatively, you can take out another car finance agreement for a set term and a new monthly payment. You’re effectively buying it on finance again – as a second-hand model. The major difference is that the payment will usually be considerably cheaper than before because youre only financing the cost of that remaining lump sum.
Most finance providers will be able to refinance your car. As with any credit, you should compare quotes based on the , which includes all charges and fees.
BuyaCar works with a panel of lenders that can offer finance tailored to your circumstances. If youd like more advice or a no-obligation quote, you can apply for finance or speak to one of our helpful team on .
Should You Use The Same Lender To Refinance Your Car Loan
In most cases, you probably can. But that doesnt mean its the right decision for you. The only upside of using the same lender to refinance your car loan is that youll have less paperwork since you are already their customer.
While it may seem easier to stick to your current lender, its prudent to shop around as you may find a better deal elsewhere. Finding the most favorable loan terms better interest rates and suitable loan terms should be your priority. In addition, most lenders have a streamlined application process, so switching to a new lender shouldnt be an issue.
However, its crucial to review your loan terms with your current lender because paying off your existing auto loan early may result in a prepayment penalty. And if it does, compare the penalty to the amount youll save on better terms when you refinance.
The bottom line is that it might be worth it to shop around for a new lender.
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When Interest Rates Have Decreased
If interest rates are significantly lower now than when you took out your car loan, theres a good chance you could get a better rate by refinancing. Prequalifying with lenders can help you find out whether youre eligible for lower interest rates than what your dealership or financial institution initially offered.
Things To Consider When Refinancing
Although plenty of people have at least considered the prospect of revisiting the interest rates attached to their home mortgage loans, few people are even aware of the fact that you can try the same strategy as a means of reducing interest payments on automotive lines of credit
As a matter of fact, lenders offer ample opportunities to retool lending contracts. And while there will certainly be fees associated with making changes to existing agreements, the money you end up saving on interest payments over the life of the contract could cover these costs – and then some
And it costs you nothing to consult with banks and other lending institutions to find out if you qualify to finance your vehicle at a lower rate of interest, as well as how much you could end up saving in the process. But in order to get the impetus to move forward, you may first need to understand some of the reasons why you should consider a new arrangement.
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You Can Tap The Equity In Your Car
If you need cash, you may be able to borrow with a cash-out refinance loan using your cars equity . So if your car is worth $20,000 and you have $10,000 remaining to pay on your loan, you could get a refinance loan for $15,000 and take $5,000 in cash. There are limits and some downsides associated with cash-out refinancing, so you might go this route only for financial emergencies or if you have a strategic plan for using the money to pay off higher-rate debt.
Question : Are My Finances In The Right Spot To Apply For A New Loan
Now that you have all the numbers laid out in front of you, this is the final question to ask yourself.
Are your finances in the right spot to make this move right now?
The answer may involve considering a few more things than youd expect:
- Has it gone up or down significantly since the last time you applied for a car loan? You can check your credit score for free in several different places. Many lenders use your credit score as a factor in determining your interest rate. So you want to make sure it has improved or at least remained constant if you expect to get a better rate than you have on your existing loan.
- Employment status: Are you making more or less money than you made when you took your original loan? If youve seen a significant dip in income, theres a chance that lenders will shy away from writing a new loan on your vehicle for fear of default.
- Big purchases coming up: A refinanced car loan is going to require a new inquiry on your credit, and that will likely change your credit score, debt ratios and credit history at least in the short term. If youre planning a major life purchase, such as a new home or a mortgage refinance, youre probably better off waiting until after those major purchases are complete before you tackle refinancing your car.
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