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.
When To Refinance Your Auto Loan
What happens when you refinance a car? Refinancing your auto loan may lead to a lower monthly payment, a shorter term or both. Your outcome depends on a wide range of factors, including the value of your vehicle, how much you owe on your current loan and your credit standing. If any of these factors have changed since you bought your car, you owe it to yourself to find out why refinancing might be a good idea.
When Is It Smart To Refinance Your Car Loan
Times, when you should consider refinancing your car, include various situations. Consider the following:
Consider Your Credit score
Has your gone up significantly in the recent past? If you find that your rating is drastically higher than when you initially took out your car loan, you will likely get a better rate if you refinance.
Can You Get a Lower Interest Rate?
Did you get your vehicle when interest rates were really high? It happens to countless households across the country. Many chose to refinance their vehicle when interest rates lower.
Where Do You Stand Financially?
If you have recently come across difficult times situations like unexpected expenses or even a decrease in income, you could find yourself unable to make regular payments. Instead of having a poor payment history on your credit, refinancing can make things more affordable.
On the other hand, if you have gotten a pay increase which you can substantiate with pay stubs, it can be wise to look into refinancing, too. This means that your income-to-debt ratio has improved and you will better qualify for a loan arrangement.
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When Should I Refinance My Car Loan
The best time to refinance your car loan is when it can save you money in the long term, but it may also help if youre hoping to catch a break on your monthly payments. Here are a few situations where it may make sense to refinance:
- Refinance car loan rates have gone down: Most car loan interest rates fluctuate based on the prime rate and other considerations. If you purchased your car a while ago, its possible that car loan rates have decreased since then.
- Youve improved your credit score: Even if market rates havent changed, improving your credit score may be enough to get a lower rate. The better your credit, the more favorable loan terms youll receive. If youve improved your credit score since signing for your initial loan, you may qualify for better loan terms.
- You got your initial loan from the dealer: Dealers tend to charge higher rates than banks and credit unions. If you took out your initial loan through dealer-arranged financing, refinancing directly with a lender could get you a lower rate.
- You need lower monthly payments: In some cases, refinancing a car loan may be your ticket to a more affordable payment, with or without a lower interest rate. If your budget is tight and you need to reduce your car payment, you could refinance your loan to a longer term . Keep in mind, though, that while you will pay less per month with this strategy, you can expect to pay more over the life of the longer loan.
Interest Rates Have Dropped Since You Took Out Your Original Auto Loan
Interest rates change regularly, so theres a possibility that rates have fallen since you took out your original auto loan. Even a drop of 2 or 3 percentage points may result in significant savings over the life of your loan.
Lets say your original auto loan was for $25,000,with a 7% interest rate and loan term of 60 months. If you keep this loan,youll end up paying a total of $29,702 on the loan. After a year of paymentson this loan, your balance is now $21,000. If you were to refinance and get aloan for $21,000 for the remaining 48 months with a lower interest rate of 5%,youd end up paying a total of $23,214 on your refinance loan. Combined withthe $4,000 you paid on the previous loan, youd have paid a total of $27,214 tofinance your car $2,488 less than if you had kept your original loan.
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Understand How Your Credit Will Be Impacted
Virtually every time you apply for credit, the hard inquiry will reduce your credit score by a few points. If you then open a new loan account, itll lower the average age of your accounts, which can also lower your credit score.
That said, both of these 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 youve applied for a lot of other credit accounts recently or you dont have a long credit history, refinancing is unlikely to make much of a difference.
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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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.
Check Out Your Refinancing Options
You’ll want to shop around tofind a lender that offers low rates, few fees, and an easy online process. Credit unions typically offer fewer fees, but banks may have more branch locations if you’d like to meet face-to-face with a lender. Starting your research online is a great way to begin the process.
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Your Income Has Increased
One of the big factors lenders consider when you apply for a loan is your debt-to-income ratio. This number is your monthly debt payments divided by your monthly gross income. If its high, you could be considered a default risk and get a higher interest rate.
If you manage to increase your income or pay off debt your debt-to-income ratio could be good enough to qualify for a lower interest rate.
Look Into Multiple Types Of Financing
When you first borrowed money to buy a car, it may have been through dealer-arranged financing. However, many banks, credit unions and online lenders offer direct financing to car buyers and owners.
In general, its best to start with the financial institutions you already work with. In some cases, you may qualify for a loyalty discount based on your existing relationship with the bank or credit union.
Dont stop there, though, even if the terms are excellent. Take some time to compare that quote with rate offers from other banks and lenders. This process can take some time, but the more options you compare, the higher your chances will be of getting the best auto loan terms available to you.
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Understanding The Pros And Cons Of Refinancing Your Car
In every situation, it is up to you to determine which scenario is best for your needs.
Work with your lender to request a quote. Gather information about the costs involved in the process. Then, consider both the pros and cons of refinancing your car.
Could it help you save money or make your debt easier to repay over the long term?
For many people, a car refinance offers a bit of freedom, enabling you to pay off other debts. It also gives you a fresh start with a new lender.
Theres no risk in obtaining a car refinance quote to find out how you could benefit.
What You’ll Learn: Everything You Need To Know When Refinancing A Car Loan
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Everything You Need to Know About Refinancing a Car Loan
There are times in life when the path to paying off your car can get a little bumpy. Refinancing your auto loan might help smooth the ride.
But before you decide to refinance, take note of the obstacles you may encounter. For starters, your new loan could have a higher interest rate than your old one. Or your lender may charge a penalty for paying off your original loan early. And if you extend your loan term, you may shell out more in interest over time.
Youll only enjoy the full benefits of refinancing if its the right option for you. Begin by asking yourself:
- Has my credit improved since taking out the original loan?
- Am I better off financially now than I was before?
- Are current interest rates lower?
A yes to any of these questions may mean the time is right to refinance. If you think refinancing is right for you, its time to get things rolling. Youll need your original loan info. That includes your current vehicle identification number, and the make, model, and mileage of your vehicle. You will also need personal documents, like proof of insurance and employment.
Next, youll want to shop for a lender. Credit unions are great choices because they typically offer lower rates and fewer fees than traditional banks.
Once your new loan begins, you can start making payments. Be sure to pay your bill on time every month to establish healthy money habits and boost your credit.
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What Do You Need To Auto Refinance
Since it isnt much different than making a car purchase, chances are you already have most of the information you need. However, before you take the leap, be certain that you are eligible to refinance your car. Consider whether you have defaulted on the lease or are in good standing. Be sure that your and working situation are stable and viable for refinancing. Provided you are eligible for the new loan, the next step is getting your documents together.
Tax information is a common request, so bring your most recent filing records. Additionally, three months of pay stubs from your employer are necessary as well. Plan ahead and bring your banking details. Often, people go with a void cheque to speed up the process and eliminate the chance of errors. You will also need relevant identification. Both a government-issued photo ID and a second identification are required. A drivers licence and a passport are both suitable options. Additionally, be sure to have all the necessary details for your vehicle. Registration documents work well for this purpose.
Ensuring that you have all the essential documentation is not only important, but it is also a great way to speed up the process and develop a better rapport with the lender. Preparing ahead of time gives you a good opportunity to highlight all reasons for refinancing in an organized manner.
When Should You Refinance Your Car Loan
When it comes to refinancing a car loan, timing is everything. One way to determine when it’s the right time to refinance is to answer these three questions.
- Has your credit improved? If your credit score is higher now than it was when you took out the original loan, you may be eligible for a better interest rate.
- Are interest rates lower now? If car loan rates have decreased since you took out your original loan, it may be a good opportunity to save.
- Are your finances in a better place? If your income is higher now than it was when you took out the original loan, you may be able to lower your interest rate and shorten the loan term to save big on interest.
- Have you lost income? If your financial situation has changed due to job loss, lower wages, etc., refinancing could be a way to lower your monthly car payments and save money each month.
If you answered yes to any of those questions, it might be the right time for you to refinance.
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Watch Out For Negative Equity
The difference between the value of property and the amount you still owe is called equity. You might have difficulty refinancing your car if it’s worth less than what you owe on it, which is called negative equity. For example, if your car’s book value is $3,000 and you owe $1,700, your car has $1,300 in equity. But if you owe $5,000 on that car, you have negative equity of $2,000. A lender is more likely to take a security interest in property that’s worth what it lends you, because if it has to repossess the car and sell it, it’s more likely to get most of its money. Some lenders, however, will refinance car loans even if the car has negative equity, but only up to a certain percentage.
Youre Looking To Change Your Monthly Payments
There was a change in your financial situation and your car payment is straining your budget. Refinancing at a lower interest rate for a longer term can lower your monthly payment and make it a bit more manageable. Keep in mind, as your vehicle decreases in value, you may owe more on the loan than the car is actually worth. Although it might be tempting to refinance for a longer term, even with a lower interest rate, you may be paying more in interest over the life of the loan. Do the math for an accurate picture. On the flip side, if youre income has increased, perhaps you can afford a higher payment. If you can find a lower interest rate and can refinance and shorten your term, even if your monthly payment increases, you will be saving in overall interest.
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Set Goals And Expectations
Before you can compare options and find a loan that is right for you, you need to establish your underlying goals.
Goals and expectations are important because you want to select a loan best suited to your needs.
Here are a few reasons to invest in an auto refinance. Which one fits your intentions?
Want a lower interest rate
A lower interest rate means you will pay less for the purchase.
For example, your credit may have been poor when you first obtained your loan. With better credit now, you may qualify for a more affordable loan.
If you want to save money overall, look for a lower interest rate.
Need lower monthly payments
Perhaps your budget would balance a bit easier with lower monthly payments.
To achieve this goal, you may need to extend the length of the loan. Doing so will cost you a bit more , but lightens the load of monthly payments.
In this case, look for a longer term loan for your car.
Want a shorter term for your loan
If you cannot find a lower interest rate, but want to keep your costs lower, look for a lender with a shorter term offer. This can help you save money.
This is also an option when you just want a new lender.
Keep in mind any loan you obtain to refinance your car should meet your goals and be an improvement from your existing auto loan. If this is not the case, move on to another lender or skip refinancing.
Dont refinance just to refinance be sure it is financially beneficial to you.
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You Want To Establish A New Loan
You should have a good credit score if you plan to refinance. However, many people can use a new loan to help rebuild their credit score.
For example, if you missed a few payments on the loan early on and qualify for a lower monthly payment now, refinancing makes it easier for you to make your new payments. Over time, you could see your credit score increase.
Most car refinancing lenders will check your credit score. If you know what it is, ask your lender upfront if they can work with you before they pull your score. In this case, they can steer you away from applying for a loan if they do not think you will qualify for it.