Refinancing Can Ding Your Credit Score
If you need your credit score in tiptop shape for any reason, you may want to consider holding off on refinancing your auto loan. When you apply for a new loan, lenders will conduct a credit inquiry, which can take some points off your credit report.
If youâre just straddling the line between âgood creditâ and âgreat credit,â the process of refinancing your loan might keep you from that better score. However, as with all loans, making your payments in full and on time is good for your credit score, so taking a small hit to your credit score may be worth it in the long run, if it helps you avoid missing any payments or defaulting on a loan.
Itâs also worth noting that if you shop around with a few lenders, it wonât necessarily harm your credit score anymore than if you just applied with one. If multiple auto lenders conduct hard inquiries within a certain time frame, it will only count as a single inquiry, and the damage to your credit score will stay minimal.
Cons Of Refinancing An Auto Loan
- Paying more in interest: If you extend the term of your loan, you will end up paying more interest over the life of the loan. Use our auto loan calculators to help you determine if you will end up saving enough money overall for refinancing to be a good choice.
- Paying a higher rate: Freeing up cash fast may sometimes be the only reason for pursuing a refinance. But be careful of higher interest rates. Many lenders charge higher rates on older vehicles, starting anywhere from 5-10 years old. If your car is older, you may be surprised the interest rate you qualify for now compared to when you first financed the vehicle.
Its important to consider all of your options and do your research before deciding you are ready to refinance. Shop around for interest rates so you can be sure you are getting a good deal that will help you save money. Also consider the length of the loan, and try keep it as short as you are able to with your budget. Try to find the shortest loan term combined with the lowest interest rate to ensure you are getting the best deal possible on your auto loan refinance.
Refinance and save with Robins Financial to drive home your savings. To find out how much you could save, give us a call or request an appointment at any of our branches. If youre ready to refinance, apply online today.
Trade In Or Sell Your Car
You can also cut your losses and eat whatever negative equity youve accumulated. You can try to trade your car in, and the negative equity will likely roll over to your next car loan, or you could sell your car. This will likely be at a loss, but it could be a huge step toward paying off the remaining balance.
None of these are great options. Your best bet to is to avoid negative equity in the first place, or, barring that, pay off your loan as quickly as possible. Having an upside down car loan is a drain on your finances, and refinancing isnt the easy solution here. Instead, learn from this mistake, and dont let it happen with your next car.
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If I Shop Around For Rates Will That Hurt My Score More
A common misconception is if you shop around for rates and have your credit pulled multiple times, this will hurt your credit score beyond doing just a single application.
This is not true. The credit scoring agencies of both FICO and Vantage are aware this is happening, and they encourage borrowers to shop around. Making multiple hard inquiries within a few weeks span will behave as one single credit pull as far as your score is concerned.
If You Want A Lower Interest Rate Or Better Terms On Your Auto Loan Along With Some Cash In Hand A Cash
Cash-out refinancing means that you refinance for more than what you currently owe on your car. The amount you can borrow is based, in part, on the equity you have in the vehicle. If youre approved for a cash-out refinance, it can allow you to get new loan terms and some money in your pocket for other expenses or an emergency.
Lets take a look at how cash-out refinancing of an auto loan works compared to traditional refinancing, as well as some things to consider before you decide to go this route.
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Refinance Your Car Loan
If you have a good credit score and haven’t yet missed a car payment, but fear you may do so, refinancing your car loan could be an option. Refinancing isn’t done through a dealership but rather directly with lenders. If you’re approved for an auto loan refinance, the new lender will pay off your existing loan and take title to the car from the original lender. Ideally, you want to refinance to a loan with a lower interest rate, lower monthly payments or both, which can make the debt more manageable.
Refinancing won’t work for everyone, though. If you owe more on your car than it’s worth or if your car loan includes a prepayment penalty, refinancing probably won’t save you any money. If your car is over five years old or your credit score is lower than it was when you got the original loan, you may not qualify for a refi.
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Qualifying To Refinance A Car Loan
If you have equity in your car, the next step is figuring out if you qualify for refinancing. Every lender is going to vary in their requirements, but these are the usual refinancing requirements:
- Your car has fewer than 100,000 miles
- Your car is less than 10 years old
- Your credit score is good, or has improved since the start of your loan
- Your loan is at least a year old
- You’re current on payments with a good payment history
- Your loan amount isnt too high or too low
If you, your vehicle, and your loan qualify for refinancing, you may be able to get that equity in the form of cash.
Once you find a lender that can refinance your auto loan, you sign the new loan contract and the lender sends the payoff check to your old lender. If you refinance a car with equity , you can choose to receive that equity in the form of a check. The amount of the check will be the difference between your cars actual cash value and the payoff amount.
However, if you take the equity in cash, you no longer have equity in your vehicle, and you once again risk being underwater on your loan. Additionally, if you need to immediately trade the car in for another one, you wont have any equity to put toward your next auto loan.
Is It A Good Idea To Refinance A Car
One of the best reasons to refinance a car loan is if you have an opportunity to reduce your interest rate. 1 With a lower interest rate, you will be able to pay off your loan faster or lower your monthly payment while paying it off at the same pace. 2 In either case, youll pay less over the life of the loan.
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Refinance A Car Meaning And Process
When you buy a property and finance its purchase, the lender usually takes a security interest in the property. That is, the property is the collateral for the loan. If you stop making your payments, the lender can take the property to satisfy the debt. Refinancing is the process by which you can get a new lender to loan you enough money to pay off the old loan. The old lender releases the lien on the title, and the new lender takes a security interest on the vehicle.
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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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.
Best Place To Refinance A Car
Many banks have vehicle refinancing loans. Shop around for the best rates you can find and make sure to speak with the bank directly about the terms of a refinance loan. Find out what your new interest, your new payments and your new term will be and decide if the refinance will actually help you. While a much lower payment may seem attractive in the short term, if the new loan would go five years longer than your current loan, it may be smarter in the long run to keep the loan you have.
References
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Youre Increasing Your Debt
With a cash-out refinance, you take on more debt because youre borrowing more than what you currently owe on your original auto loan. If youre already struggling to make your car loan payments, increasing your debt could put you at greater risk of defaulting on your new cash-out refinance loan and having your vehicle repossessed.
Why Refinancing Can Lower Your Credit Score
When you apply for credit, the lender typically checks your credit. That causes a;hard inquiry to be noted on your credit, which can cause a temporary dip in your score. The effect of a hard inquiry typically disappears in six months.
Car loan inquiries typically are bundled as a single inquiry if they’re done in a compact time frame. For that reason, it’s smart to do your loan rate-shopping relatively quickly. VantageScore gives you a rolling 14-day period; FICO gives you 45 days.
A car loan refinance also might hurt your credit by reducing the average age of your accounts. Thats because your original car loan will be paid off early and replaced by a new auto loan.;But thats a relatively small element among the factors that affect your credit score.
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Can You Refinance With The Same Lender
- If you have made your payments on time and your credit is in good standing, it may be possible to refinance with your current lender. To see if you qualify contact your lender.
- Consider your options. If you are unable to refinance with your current lender, shop around and compare quotes to make sure they line up with why you want to refinance.
Consequences Of Defaulting On A Car Loan
Defaulting on a car loan can have serious consequences for your finances that can last for years. Ultimately, defaulting can make it harder to get approved for credit, such as mortgage loans or credit cards.
A late payment can negatively affect your credit score. Because payment history is the biggest factor in , accounting for 35% of your FICO® Score , a single missed car payment can have a serious negative effect on your credit score. A delinquency on your loan payments will stay on your credit report for seven years.
Your car could be repossessed. When you get an auto loan, the car serves as collateral for the loan, meaning the lender can take the car if you’re delinquent. Depending on your state’s laws and the terms of your loan agreement, a lender may be able to repossess your car as soon as you miss one loan payment, and they may not have to give you any warning. More commonly, though, lenders will contact you seeking the missed payments before they take the drastic step of repossessing the car.
After repossessing a car, the lender typically sells it at auction to recoup the money you owe on the loan. If the sale doesn’t net enough money to pay off your loan, however, the lender may turn to you for the rest of the money or even sue you to get it.
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Be Proactive If Your Loan Cosigner Dies
In the unfortunate event that your loan cosigner passes away, immediately review your loan agreement to see what are the clauses stipulated in the contract. Dont hesitate to contact the lender to discuss your available options. This will put you in better control of the situation. Avoiding the issue will only delay the inevitable and could put you at a disadvantage later on.
Cons Of A Car Refinance
Refinancing is a process with costs attached to it. Before you agree to any type of offer, read through the information and know what you can expect to pay for this benefit.
Here are a few of the disadvantages associated with a car refinance.
The Cost of Refinancing
Like with most types of loans, some financial institutions charge closing costs and other fees to refinance. In some cases, these fees can add up.
When searching for a lender, find out about applicable car refinance fees. Youll find that some, especially credit unions, charge no fees.
Your lender should provide you with a breakdown of the costs. Be sure that any planned savings are actually more than the cost to refinance.
The Length Adds More Costs
There is more time for interest to apply to the debt if the car refinance has a longer loan length. As a direct result, you end up paying more for the loan than if you stuck with the current lender.
The longer the loan term, the more expensive the car refinance. However, this may still be beneficial if you need a lower monthly payment due to financial strain. In this case, paying a bit more over a few years may be better than trying to juggle a high monthly payment.
You Are Securing Your Debt
When you consolidate debt with a car refinance, the debt is linked to the vehicle. If you default on the car loan, they can force the sale of the car to repay the debt.
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Will My Car Or House Get Repossessed When My Cosigner Dies
If you have a car loan or a mortgage, you might be worried that you might lose your car or your house in case your cosigner dies. If you are making all your payments on time, this is really not something you should worry about. At the end of the day, the lenders primary concern is that you are able to cover the monthly payments. If you are not making the payments or have defaulted on the loan, this is a different story.
Car loans and mortgages are secured loans, which means that even if your cosigner is still alive, you could lose your car or your house if you are not making any payments. This will also be the case if your cosigner dies. While the lender may try to recover the payment from the estate of the deceased cosigner, not being able to make the payments means losing your car or your house.
As discussed in the earlier section of this article, if the loan agreement has an automatic default clause, you might be required to pay the loan balance immediately. In case you are unable to do so or unable to refinance the loan, some lenders could repossess your property.
