How Does Refinancing My Car Loan Affect My Credit
Refinancing your car loan will affect your credit but that doesnt mean you shouldnt consider it.
If you wish your current auto loan was more affordable, refinancing may be a good option. It can allow you to replace your current loan with a new loan and save a lot of money on interest over time. Refinancing may also leave you with lower monthly payments and free up your monthly cash flow.
It may be a good option if your car is retaining value, interest rates are going down, or your has increased. Refinancing may also make sense if youre short on cash flow, want to add or remove a co-borrower, or are worried about repossession.
Before you take the plunge and decide to pursue this strategy, however, its important to consider how refinancing a car loan affects credit. After all, good credit is the key to landing the best interest rates and most favorable terms down the road. You dont want to refinance and later find out that your credit score has taken a large, long-term hit.
2021 Auto Refinance Rates
Pay Down Your Existing Auto Loan
Paying off some of your current loan can provide multiple benefits. First, it can significantly improve your chances of securing a new car loan because your LTV will decrease. Second, it reduces your loans total interest and your monthly car payments. You save more money and lessen the financial burden on your income. Think of it as a down payment on your new auto loan.
If youre strapped for cash though, this isnt the best route to take you dont want to jeopardize your financial stability.
Best Auto Refinance Company Reviews
- Compare rates with various lenders
- Quote request form takes less than five minutes
- You may not qualify for advertised rates
- There may be limits on some loans
LendingTree is a marketplace where you can compare rates for just about any financial product, including auto refinance loans. The companys approach is simple: complete a short form online and connect with up to five different lenders that can help you refinance your car loan. LendingTree also has its own customer support team. If you have any queries regarding your lender or LendingTrees services, its staff is there to help you.
- Loan terms between 36-72 months
- 150+ partnered auto refinance companies
- Requires a hard credit check
- Approval can take up to 48 hours
rateGenius, another rate comparison site, offers refinancing options that match your existing term length so you dont pay more over the life of the loan. If you can get a better rate with one of their lenders, youll work directly with rateGenius lending specialists to complete your loan application process. rateGenius will even handle the back-end work, such as making sure your old loan gets paid off on time and that your new auto loan is set up correctly.
- Rates as low as 1.99% with no application fee
- 94% loan approval rate
- May require a down payment
- May charge a prepayment penalty
- Excellent credit required for best rates
- Membership is required
- PenFed auto loans are not eligible
- No cash-out refinance or lease buyout
- Minimum credit score requirement of 575
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Refinancing A Car Loan
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Every year, you go through long-term budget arrangements and try to find new ways to save. Car refinancing has the potential to improve your monthly budget. Those who entered into a subprime auto loan and have since gotten a raise, reduced debt, or improved their credit, may be eligible for refinancing. To learn whether refinancing is the right step, its important to learn the options available to you. Armed with this information, you can make an informed decision and choose the best possible refinancing arrangement.
Things To Watch Out For When Refinancing A Car Loan
Just like with any financial arrangement, it is important to keep your eyes out for red flags. Ensure that the lending agency is reputable and offers a reasonable interest rate. Make sure that you are dealing with a proven institution and be sure to read all the fine print. If you are unsure as to the meaning of a phrase, it is better to ask.
Take a look at the cost of refinancing the vehicle. Are there any upfront expenses? Are you going to be paying more down the line? If so, how much more? Make sure that you have all of the information above before making your decision. As always, avoid deals that seem too good to be true. Understand your rights and the responsibilities of the lender. Be certain that you are comfortable with the arrangement and that it is in your best financial interests.
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How To Refinance Your Car Loan In 7 Steps
Modified date: Jun. 8, 2021
Has your credit score improved since you took out your first auto loan? Are you seeking a lower interest rate? Or do you just have a gut feeling that you can find a better deal with a new lender?
If you answered yes! to one or more of the above questions, refinancing your auto loan might be a smart money move. Put simply, refinancing an auto loan involves taking out a new loan to pay off your old loan and starting over with a new lender.
If youre ready to explore the possibility of refinancing, you probably have a new set of questions:
- How can you determine that refinancing is right for you?
- Do you and your car qualify for refinancing?
- What documentation will you need to prep?
- How will refinancing affect your credit score?
- What are some common pitfalls to avoid when refinancing an auto loan?
Ill answer these questions and more as I explore how to refinance your car loan in seven steps.
My Credit Score And Refinancing My Auto Loan
Prior to you beginning the research phase of finding the right auto loan refinance lender, you will need to know what is on your credit report and understand what steps you can take to eradicate any negative items. Having so-so credit can impact the interest rate that an auto refinance company will offer you. The worse your credit score is, the higher your interest rate and monthly payment will be.
You should also understand what can impact your credit score. Did you know there are many different things that can bring your score down? For example, if a company does an inquiry on your credit, that can negatively impact your score. The same is true for using too much of the credit you have available to you. Take care to check your score and do what you can to improve it, including paying bills on time and paying down debt.
Typically, before refinancing your car, you will want to make sure that your credit score is at least 555. While that score number is not considered good, it is widely viewed as an okay starting point at which you can begin to get loans from bad credit lenders. You might find that you can refinance you car regardless of your credit score, but you will pay more if your score is below a certain threshold and you have to use a subprime lender. The key is to find a lender who specializes in auto refinancing and subscribes to that motto of your credit score not being a factor. Nonetheless, you will have your work cut out for you if your score is very low.
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Can I Get Money Back If I Refinance My Car
A cash-out auto refinance is similar to a traditional auto refinance loan with one major twist: The new loan exceeds the total needed to pay off your existing car loan and you pocket the difference. This only works if your car is worth more than the remaining balance, or payoff amount we discussed earlier. It also means youre taking on more debt and taking a chance that you could wind up underwater on your car loan.
Apply For Anauto Refinance Loan
Once youve shopped around, collected all of your information and made a decision, youre ready to apply.
Youll need to complete a loan application for the lender you choose. This is where the documentation you gathered can come in handy, as you may have to provide it in the application. This application will count as a hard inquiry, which can lower your credit scores by a few points.
If your loan is approved and you sign the loan paperwork provided by the lender, you should get a document from your lender with all the terms of your new loan. Keep a copy for your records, as it will include details on when your payment is due, the minimum amount youll need to pay each month and your options for making loan payments.
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Refinancing My Auto Loan What Credit Score Do I Need
While you may be very eager and confident that Im ready for refinancing my auto loan, there are a few factors that you should consider so you can get ready to refinance. One of those factors is your credit score. Credit affects just about every loan or financial transaction. Consider the following, if you had to have a certain credit score to qualify for the initial car loan, you can bet that you will need to either sustain the credit score that you had or raise it to something altogether better.
What Credit Score Do You Need To Buy A Car In 2020
Typically, a credit score of 700 or higher will put you in a good position to find favorable auto loan terms. If your credit score is lower, you’ll probably be offered a higher interest rate. And the lower it is, the more you’re likely to pay. If your credit score is very poorless than 450then you may not be able to get a car loan.
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Covid + Credit: Refinancing A Car Loan During The Pandemic
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The Coronavirus/Covid-19 pandemic has resulted in immense financial strain across the country and left many industries looking for ways to provide relief to consumers while still encouraging necessary sales. For those Americans who remain relatively financially stable, now may be a good time to refinance an existing car loan to secure a new, more manageable interest rate.
The refinancing process involves getting a new secured loan with a lower interest rate to pay off your existing car loan. Refinancing could potentially save you money and result in a better deal than the one you got on your original loan. Many lenders are offering consumers great refinancing options with extremely low even zero percent interest rates in an effort to attract business.
Before you rush off to refinance, though, be sure to consider the following key factors to ensure that its the right decision for you. And remember: If you have recently become unemployed or experienced a similar reduction in income, you may have a challenging time refinancing your car loan. Because refinancing often involves an up-front cost to save you money in the long run, its generally better to consider refinancing your loan only if you are otherwise financially stable.
Car Loan Rates By Credit Score
The table below shows the average auto loan rate for new- and used-car loans based on credit scores, according to Experian data from the second quarter of 2020.
As you can see, having a good credit score will give you a lower interest rate on your loan than an average or lower credit score. And having poor credit means youll pay high interest rates.
A few extra percentage points may not seem like a big deal but when that percentage is applied to the thousands of dollars that car loans typically amount to, it adds up quickly.
Heres how this plays out in reality. Lets say two borrowers one a prime borrower and the other subprime want to finance $10,000 for a used car. They both have a 60-month loan term. The subprime borrower is offered a 17.78% rate the average for borrowers in this range in the second quarter of 2020, according to Experian. The prime borrower is offered the average 6.05% rate.
Over time, the subprime borrower will pay back $15,164, or $5,164 in interest. The prime borrower will pay about $1,614 in interest, for a total cost of $11,614. Thats a difference of $3,550 in interest paid and in this case, it all came down to credit scores.
Taking steps to improve your credit could increase your chances of getting approved for a loan with better terms, keeping more money in your pocket in the long run.
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When Should You Refinance Your Car Loan
Refinancing your car loan makes sense:
If your credit has improved. When you bought your car, maybe your credit history wasnt great. But now, if youve been making consistent, on-time payments, your credit has probably improved and you may qualify for a lower interest rate.
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If a car dealer marked up your interest rate. When you got your existing loan, the car dealer might have charged you a higher interest rate than you could have qualified for elsewhere. This often happens to shoppers who didnt check their credit score or what rate they might qualify for before buying a car.
If you cant keep up with payments. By refinancing, you can extend the length of the loan, which will lower your payments. But dont take this step lightly. If you extend the term of the loan, youll pay more in interest. However, its better than damaging your credit by missing payments or facing repossession.
When interest rates drop. Interest rates fall for a variety of reasons: a changing economic climate, increased competition in the marketplace and regulatory changes. If rates are lower now than when you first got a car loan, refinancing could help you pay off your loan sooner or save you money on interest.
When Should You Refinance A Car Loan
Here are a few reasons to considering refinancing your auto loan:
- Your credit score has improved since you took out the loan. Even if your credit score is less than stellar, having a slightly better score than when you first took out your auto loan helps.
- You want to add or remove a cosigner. Adding a personal loan cosigner with better credit than yours can help lower your rate. Or you may be ready to remove the cosigner you needed when you first got the loan.
- You want a lower monthly payment. Whether your budget is tight or something unexpected happened , refinancing an auto loan can help get you more affordable payments.
- You realized you didnt get the best rate. If you got your loan at the dealer, chances are you are paying more interest than some of the auto refinance options out there.
- There are lower interest rates available. When shopping around for the best place to refinance an auto loan with bad credit, you may have come across much better rates than what youre currently paying. Even a small difference can make a big dent in what youll need to pay throughout the lifetime of your loan.
There are times when refinancing doesnt make sense. For example, if your car loan is upside downmeaning your vehicle is worth less than what you currently owemost lenders wont approve your refinance loan.
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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.
Interest Rates Are Going Down
If interest rates are dropping, you may be eligible for a lower interest rate than you were able to secure with your original car loan. In March 2020, the Federal Reserve cut rates in response to the coronavirus pandemic. So now may be a great time to refinance your car loan and save some more of your hard-earned cash.
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Guide To Refinancing A Car: How It Works
Find out how to refinance a car and when its the right time to do so. A higher credit score typically translates into lower interest rates.
Decrease Car Payment. If refinancing your auto loan brings your interest rate down, it could mean your monthly payment will also go down. Improved Credit Score.
Calculate your auto loan refinance & apply for a low rate auto loan online. Do I need to be a Mountain America Credit Union member to get my auto loan What is auto loan refinancing?Do I need to be a Mountain America Credit Union member to get my auto loan refinanced?
Your Credit Score Has Increased
Your credit score may have been lower when you took out your original car loan than what it is today. If youve earned a substantially higher credit score in the year or so after you took out your car loan, you may want refinance. Chances are youll be able to lock down a car loan with a much better interest rate.
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