Auto LoansAuto Refinance

Auto Loan Refinance: Frequently Asked Questions

Refinancing your auto loan could help you get lower monthly payments, change the amount of time you have to make payments or save you money on interest charges.

No matter your goal, with auto loan refinancing, your new loan pays off the previous one. You may be able to get more favorable terms if your credit situation has improved since you got your original car loan. Or perhaps you worked with a dealership to get financing the first time around and didn’t negotiate your interest rate.

If you are unhappy with your current loan payment or terms, or your loan servicer, it’s time to crunch the numbers to find out if refinancing your auto loan is the right move.

How does auto refinancing work?

When you refinance your current auto loan, your new lender will pay off the balance of your original loan. To secure the new loan, you’ll need to qualify, much like you did for your original auto loan.

Your credit scores, payment history and debt-to-income ratio help a potential lender decide how much interest it will charge you. If you can qualify for a loan with a lower interest rate, you could save money over the life of your auto loan. It may also lower your monthly bill, assuming you stay at the same or longer term.

There’s just one catch to a longer term: By extending your refinanced auto loan, you will lower your monthly payment, but it will take longer to pay off your loan, which may put you at a financial disadvantage.

Can refinancing an auto loan lower my monthly payments?

You can lower your monthly payments if you decide to refinance your loan and qualify for a lower interest rate. You may have to agree to a longer term to get a significant reduction in your payment, depending on how much of an interest rate reduction you can get. A longer loan term can potentially increase the total amount of interest you’ll pay over the life of the loan.

Choosing a new car loan with a longer term also increases the chance that you’ll eventually owe more money than the car is worth. Being “upside down” on your loan puts you at financial risk in other ways. It can make it difficult or even impossible to sell your vehicle when you need to buy something more reliable.

If you decide to refinance to get more affordable monthly payments, but doing so lengthens the term of your loan, consider increasing the amount you pay each month as soon as you are financially able to do so. Contact your lender to confirm that extra payments will go toward paying down the principal of your loan.

Can I get a lower auto rate if my credit score has improved?

While it’s true that having a good credit score will help you get a lower interest rate on your auto loan, there are several factors that go into getting a better interest rate.

Qualifying for refinancing, like qualifying for your original loan, requires a decent credit score, solid employment history, and a debt-to-income ratio below the lender’s required threshold. If you fall short in one of those categories, you may be able to get by with just two of the three, depending on which lender you choose.

You may have originally worked with a dealership to get your loan, but didn’t understand that dealer-sourced auto loans may cost more than they would at a bank, credit union or online lender. In this case, you may be able to get a lower interest rate even if your credit score is the same or only slightly better.

If your credit score has risen above 760, which is considered “very good” by auto lenders, it’s worth the time and trouble to investigate your refinance options. Average auto loan rates for those with the best credit (classified as FICO credit scores off 720+) was 5.33% in the first quarter of 2019, according to LendingTree.

Can I refinance my auto loan with bad credit?

Bad credit doesn’t automatically exclude you from the potential financial advantages of refinancing. It depends on the amount of money a lender would be willing to lend you. Since the loan is secured with the vehicle, having a car that’s worth more than you owe is an advantage.

If you are upside down on your car loan and you have bad credit, you’ll find it particularly challenging to refinance your auto loan with better terms. In this case, you could pay down your existing loan with cash to bring the debt in line with the value of your car. There are some other ways to get out of an upside down car loan.

Some online lenders specialize in refinancing auto loans with bad credit, even if you’ve been through bankruptcy. When investigating this option, pay close attention to fees and interest rates to make sure your new loan is a better deal than your original one.

Can I remove a cosigner by refinancing my auto loan?

You may have been required to include a cosigner when you applied for your original loan to make up for a low credit score. Your cosigner bears equal legal responsibility for the debt, so they may want to be removed from the loan at some point.

There are several ways to remove a cosigner from your loan and refinancing is one. If you can qualify for a new loan under just your name, your new lender will pay off the original loan, which releases the cosigner from their responsibility to pay back the loan if you stop making payments.

You could also check with your lender to find out if they are willing to release the cosigner based on your current credit status and payment history. Some lenders will do so without refinancing the loan.

When is auto loan refinancing a bad idea?

There are several instances when refinancing may hurt you, not help you:

Prepayment penalties. Check with your current lender to make sure you won’t be penalized for paying off your current loan early. If you’ll be charged a prepayment penalty or extra fees, that information is specified in your contract. Often, this type of penalty cancels out any financial benefit you may gain by refinancing your auto loan.

Upside down loan. If you owe more money on your car than it’s worth, refinancing your auto loan may be a bad idea. As we mentioned earlier, it may be difficult to qualify for a loan with better terms if you can’t secure the full amount of the loan with the current value of your vehicle. You may be able to qualify if your credit is in good shape or if you are willing to pay down your current loan with cash to bring the debt in line with the amount of money a bank is willing to loan, however.

Lower credit score. One of the determining factors in auto loan interest rates is your credit score. If your credit health isn’t as good as it was when you got your original loan, you may not be able to qualify for a new loan with better terms easily. This is when prequalifying comes in handy. You may not have to agree to a hard pull of your credit file, but you can still get a good idea of the terms you may be able to qualify for thanks to a soft pull.

How soon can I refinance my existing auto loan?

There’s no time limit when refinancing a car loan. You can do so as soon as you can get approval for a new loan before you even make your first car payment. There are a few good reasons to wait, however.

When to wait. If you’d like to raise your credit score before seeking refinancing, it may be best to wait six months to a year so you can build a history of making on-time payments. If you shop around for the best rate within a 14-day period, you’ll have a single hard inquiry on your credit report, even if you fill out multiple applications. In some cases, a credit bureau may give you more than 14 days to rate shop. That hard inquiry will impact your FICO Score for 12 months.

Refinance right away. It makes the most sense to refinance right away if you realize the APR on your auto loan is higher than you would get through another lender because there are inaccuracies on your credit report that you can correct right away or because you took the first offer of financing from a dealership.

Be sure to compare rates to make sure you really are getting a better deal. Even if your new lender doesn’t charge any fees, you may have to pay a fee to your county or state for a new title with the name of your new lender.

Does the current value of my car matter?

Lenders rely on the value of your vehicle to secure your auto loan. If you default on your loan, the lender may take the vehicle and sell it to recoup the money it loaned you. If it’s worth less than what you owe, the bank eats the difference. That’s why many lenders cap the loan-to-value (LTV) ratio at 100%.

To get your car’s LTV ratio, the lender will divide the loan amount by the actual cash value (ACV). To learn more about your car’s ACV, you can use Kelley Blue Book or the National Automobile Dealers Association to estimate your vehicle’s value.

What credit score do I need to refinance?

While it’s smart to keep a close eye on your credit file and credit score, it’s also important to understand that many auto lenders use FICO Auto scores to help determine whether they’ll approve financing and set your interest rate. FICO Auto scores use the same types of information as other FICO scores. So, making payments on time, keeping credit card balances low, and limiting the number of new accounts you open in a short amount of time are important things you can do to help keep your credit scores healthy.

There’s no set minimum credit score for an auto loan, but the median score of all auto loan borrowers at time of origination has been above 650 since 2004, according to LendingTree. You are entitled by law to one free credit report from each of the three main credit reporting agencies (Experian, TransUnion and Equifax) once every 12 months at annualcreditreport.com. You should take advantage of this benefit and check each of your credit reports for inaccuracies. You won’t be able to get your FICO Auto Score for free, however.

Your FICO credit score should give you a good indication of what lenders may see when they pull your FICO Auto scores. FICO Auto scores have a range of 250 to 900. Like FICO credit scores, a higher score shows auto lenders that you present a lower risk.

According to the credit bureau Experian, a good FICO credit score falls in the 670 to 739 range. Those with scores in the 670 to 739 range present a low risk of default to lenders, as 8% of them are statistically likely to miss several loan payments.

If your credit score is above 740, it’s classified as very good. You have a better chance of getting great interest rates from lenders with a score between 740 and 799.

If you want to see what lenders see when they access your FICO Auto scores, you can visit myfico.com and purchase all 28 of your credit scores.

Are there other requirements for refinancing my car?

Lenders set their own limits about age and mileage and the amount of the loan when it comes to refinancing vehicles. For example, Bank of America only refinances cars less than 10 years old with fewer than 125,000 miles and balances of at least  $7,500 ($8,000 if your loan originated in Minnesota). Nationwide Bank will only refinance vehicles with at least $4,000 left on the original loan.

How much does it cost to refinance my auto loan?

Fees to refinance an auto loan depend on the lender you choose. Be sure to ask about origination fees, finance charges, funding fees, document fees and application fees when investigating your options. Title transfer fees may be as little as $7.20 or as much as $75.25, depending on your county or state.

When refinancing an auto loan, be especially careful to consider the total cost of the loan (including fees), not just the monthly payment. Remember, lenders aren’t legally required to offer you the best possible interest rate. So, it’s important to shop around, and even after you’ve chosen a lender to handle refinancing your car loan and been preapproved, try to negotiate a better interest rate.

Proceed with caution if you decide to extend your auto loan terms. You want to be able to drive your car for as long as you make payments, and increasing the term of your loan also increases the chances that your car won’t run for as long as you have to pay. Ideally, you’ll be able to get a lower interest rate on your refinanced auto loan so that you can keep the term the same and still enjoy a lower monthly payment.

How much can I save by refinancing?

Of course the exact amount of money you’ll save over the life of the loan depends entirely on the difference between your original annual percentage rate (APR) and your new APR and the term of your loan. APR is the amount of money, expressed as a percentage of your loan, that you’ll pay each year to borrow the total amount of your loan. APR includes the interest rate on the loan and any fees associated with borrowing the money.

The Truth in Lending Act (TILA) is a federal law that requires all lenders to show you the APR on your loan before you agree to the terms. When comparing loans, the APR helps you make the best possible decision for your financial situation.

Using a refinance calculator will help you see if you’re really coming out ahead with the new loan. You could even use it before you shop to see what APR you would need in order to save.

What steps do I need to take to refinance my auto loan?

If you’ve decided that refinancing is the right step for you, here’s what’s next.

1. Check your credit and review your current loan

Each of your credit reports has information about your financial obligations with companies that have extended you credit. It also includes records of your payments and information contained in public records, such as bankruptcy filings and judgments.

Correcting mistakes is simple and free. You can do so by accessing the website for the credit reporting agency. It may take up to 30 days for the credit reporting agency to investigate a mistake.

Your loan documents must contain your APR, the finance charges, the total amount financed and the total of your payments over the life of the loan according to TILA. If you don’t have a physical copy of your loan documents, you can contact your lender to get a copy.

You’ll also need to speak with your lender to get your loan payoff amount. This is the exact amount of money you’ll need to pay off the loan in full and get the title of the vehicle released.

2. Compare rates

The best way to get a better deal with your auto loan refinance is to compare several loan options by shopping around. Go to LendingTree and simply fill out the online form. You may be matched with up to five different loan offers from lenders based on your creditworthiness.

 

3. Pick a lender and apply

Potential lenders could include your bank, credit union or online lender. Don’t take the first offer you get, though. Many applicants overlook credit unions, which may have unadvertised auto refinancing programs available with great interest rates and low fees, assuming you meet their membership requirements.

Check with your current bank to find out if they offer special auto refinancing deals for existing customers. For example, current Chase personal checking account owners get a 0.25% interest rate discount when they choose to refinance their auto loan through Chase Bank.

Your current lender may offer in-house refinancing of a current loan. Be sure to talk with them to find out if you qualify for a lower interest rate. Don’t be discouraged if your current auto lender won’t refinance your loan. Capital One doesn’t offer refinancing if they are the original lender. LightStream, the online lending subsidiary of SunTrust Bank, also does not allow loan proceeds to go toward refinancing an existing loan.

If you get approved for your new loan, the lender will provide you with your APR, interest rate, applicable fees and your total loan amount. It’s up to you to decide whether to accept the terms.

If you decide to move forward, you’ll sign the appropriate documents and your new lender will pay off the balance of your auto loan. They’ll let you know the due date of your first payment. Be sure to let your previous lender know that you’ve secured a new loan and it should expect payment in full. Don’t forget to cancel autopay on your old loan and activate it on your new loan.

The bottom line: Is it worth it to refinance my auto loan?

Refinancing an auto loan isn’t the right move for everyone. If your loan includes prepayment penalties, you have significant credit challenges, or you owe more money on your car than it’s worth, proceed carefully or consider alternatives like selling or trading in the car and buying something more affordable. Even a small increase in your car payment can reduce the principal on your loan without having to refinance it.

Doing so will help reduce your total debt faster, allowing you to possibly qualify for refinancing later on or bring the amount you owe in line with your car’s value.

If you didn’t negotiate the terms of your original auto loan, or you’ve improved your credit score since you bought your car, shop around to find out if refinancing could save you money. A refinance calculator can help you see if the maths works in your favor.

The information in this article is accurate as of the date of publishing. 

 

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