Refinance a car loan is a new loan to repay the existing balance. These loans are usually secured by a vehicle and paid over fixed monthly payments, which can be as long as a few years.
Refinance a car loan your auto refinance loan could save you money. It could lower your monthly payments and allow you to free up cash for other financial obligations.
Even if you are unable to find a better rate, there may be another loan that offers a longer repayment term. This could result in lower monthly payments, but it might increase the total interest cost over its life.
If you are still unsure whether can you refinance a car loan your car loan is the right choice, continue reading to find out when it makes the most sense.
When should you refinance your car?
The outcome of a decision like auto refinance a car loan is dependent on many factors. You might want to consider the following:
Interest rates have dropped since you took out your original auto loan
Rates frequently change, so rates may have dropped since you initially took out an auto loan. A drop of 2 to 3 percentage points could result in substantial savings over the loan’s life.
Let’s assume your original auto loan was $25,000 with a 7% interest rate and a loan term of 60 months. You’ll pay $29,702 total if you keep the loan. Your balance now stands at $20,673 after a year of making payments on the loan. Refinance a car loan would allow you to get a loan of $20,673 over the remaining 48 months at a lower interest rate of 5.5%. You’d pay $22,852 total on your refinance a car loan. You would have been born $2522 less if you had kept the original loan. This is in addition to the $4,327 you already owe on loan.
Your financial situation has improved
Lenders may consider a variety of factors when determining your auto loan rate. This includes your credit scores and your debt-to-income ratio (DTI). This is calculated by taking your monthly income and your monthly debt payments.
So improving your credit score and decreasing your DTI can help you get a how to refinance a car loan with better terms.
The best offer didn’t come the first time.
Shopping around for better terms may be worthwhile, even if interest rates aren’t dropping or your financial situation isn’t improving significantly. You may have been offered a loan at 7%, but other lenders offered lower rates.
This is especially true if your original loan was from a dealer. Dealers sometimes offer higher interest rates to make more money.
Having trouble paying your bills
You may be unable to get a lower interest rate, but it is worth looking for a loan with a longer repayment term to reduce your monthly car payment.
You may be able to negotiate a shorter repayment term if you cannot find the right loan. Keep in mind, however, that the Interest you pay is more expensive if you spend more time repaying your loan than you pay it back. You will pay more interest overall if your loan has a longer term.
When should you hold off on refinancing?
Although refinance a car loan your car can help you save money, it is not always the best choice. If any of these situations apply to you, delaying refinancing may be a good idea.
You have paid most of the original loan amount.
Interest is usually front-loaded. This means that you have to pay more upfront. You may not be able to save as much Interest if you delay refinance a car loan.
Your car is old or has a significant amount of miles on it
Cars appreciate quickly, so refinances are unlikely to be possible within the first few years. Some lenders may not refinance a car loan vehicles with a high mileage or age limit. Some banks won’t finance cars over seven or 90,000-125,000 miles.
The costs outweigh any benefits.
Refinance a car loan fees can be costly prepayments penalties may apply if you repay your existing auto loan sooner than expected with your refinance a car loan. There may be additional Interest to add to the principal.
Worse, you may have to pay all the Interest on loans such as loans with precomputed Interest.
Refinance a car loan fees are also possible. Refinance prices can include state re-registration and lien holder fees. These fees are not very expensive, but it’s worth checking if you can afford them before refinancing.
Looking to apply for additional credit shortly
Your credit could be negatively affected by auto refinance. You may not want to refinance a car loan your auto loan if you are considering applying for a mortgage or a credit card that you like. This will keep your credit scores high and increase your chances of getting approved.
Next steps
Refinance a car loan may save you Interest and extend your loan payments. However, you should only consider it if the circumstances warrant it.
Shopping around for a loan with more favourable terms may be worthwhile if interest rates are lower than usual or your financial situation is improving. Refinance a car loan may be possible even if your credit score hasn’t improved. To learn more about refinance a car loan, see our How to Refinance a Car Loan article.
Auto debt and financing during the coronavirus crisis
You may have concerns about your ability in market to make your payments on your auto loan if your finances have been affected by COVID-19. You may be considering refinance a car loan to reduce your financial burden and take advantage of lower interest rates.
Many lenders have offered relief measures that may be of assistance. Our guide explains the various assistance programs auto lenders offer to help borrowers. You can also compare the different auto loan financing options available on Credit Karma to understand better what is out there and whether it makes sense.
4 Things to Consider Before refinancing
The process of refinance a car loan can help make owning an automobile more affordable, but it could result in you paying more over the long term. Before you decide to refinance, be aware of the following four essential points:
How to shop around and compare Lenders
Alongside the current lending institution, examine the options offered by auto finance firms, online lenders, and traditional credit unions and banks. This will help you secure the most competitive rate.
Remember that applying for refinance a car loan is an inquiry that is hard to spot in your credit file, which can result in your credit score falling by a few percentage points. If you file all applications within a specific timeframe, the application will be counted as a single request.
The period is usually between 14 to 45 days. This reduces the negative effect on your credit score and lets you look at the many options you’d like.
What fees might you have to pay
Specific lenders have a fee for prepayment in the contract for car loans to prevent making payments on the loan early. Make sure you know whether your current loan comes with prepayment penalties, as they can erode any savings you earn through refinance a car loan.
Based on the lender, you could also be required to cover an application cost, registration fees, or the cost of transferring your title. If you are refinance a car loan, certain states may also need you to renew your registration for your car. The amount of the fees will depend on the location you reside in.
The value of your car
Before contacting any lender, you should research to determine the value your vehicle is worth. It is typically determined by the car’s make, model, year, year of manufacture and mileage. Go through the National Automobile Manufacturers Association’s (NADA) Guides or commercial websites, such as Consumer Reports, Edmunds and Kelley Blue Book (KBB).
If you are aware of the value of your vehicle, it is then possible to decide if you want to refinance a car loan or if it is better to sell or trade it. A lender must also consider the car’s value before deciding whether to approve your refinance a car loan application. If your value is not sufficient, it won’t be able to qualify.
Read also: WHICH IS A BETTER BRAND: TECNO OR INFINIX?
Refinancing Requirements
Every lender has its refinance a car loan guidelines, so be sure to ask as many questions as possible when you are shopping around. Get all the details you can before submitting your application. The main requirements for lenders comprise:
How Much Owe and the history of your car
The possibility of refinancing will depend on the amount you’re still owing on your car loan, the car’s condition and the car’s mileage. Specific lenders will not refinance older vehicles or those with high mileage, and most will not refinance a loan for a car with a salvage title.
Ratio of Loan-to-Value
Before applying for a refinance, you must know your vehicle’s value-to-loan (LTV) proportion. The lender will also consider this ratio to determine the loan’s eligibility and terms.
This is because your vehicle is the collateral to the loan, and the actual value can be lower than the amount you purchased it for. The lender may ask for an upfront payment from you to reduce the loan amount to ensure that the amount you owe isn’t higher than what your vehicle is worth.
Tip to calculate your LTV, you must divide the amount of loan you have at present by the value of your car and the resultant percentage is called the LTV.
Credit History
Your credit report and score are essential in determining if you can refinance or how much your costs for borrowing will be. A more excellent credit score will reduce the risk of borrowing from a lender and help you get a lower interest rate.
Pros of refinancing your car loan
You can pay less in interest.
If you had a low or no credit history when you bought your car, and your credit has improved since then, it is possible to get lower interest rates. This is particularly true if you’ve been on time with your payments for six to twelve months. Additionally, the interest rate generally may have decreased, or you may have taken a lower rate than what you would be eligible for to secure a better price on the vehicle itself.
No matter what, it is possible to reduce your current rate by 1 per cent or more and save enough on interest over the course that the loan will justify refinancing
You can reduce your monthly payments.
Refinancing could lower the monthly car payments too high to fit into your financial budget. Lower prices can make paying off any more expensive debts easier. This can also assist you in times of financial stress, such as an unexpected drop in income.
Refinancing your loan to a lower rate can lower your monthly payment some and may aid in keeping you from being behind on your income. However, to experience a substantial reduction in your costs, you’ll have to extend the duration of the loan, which is likely to require you to pay more interest throughout your loan.
You can pay your loan off earlier.
If you’ve seen an increase in your income following the purchase of your vehicle, it is possible to refinance your loan for an earlier term with a lower interest rate so that you can pay it off faster. You could opt to pay more on your current car loan, but refinancing may aid in redirecting more of those dollars to the principal, saving further.
You can tap the equity in your car.
If you need money, you might be able to borrow it through a cash-out refinance auto loan with the car’s equity (the value of your vehicle less the amount you are obligated to pay). For instance, if your vehicle is worth $20,000 and there is $10,000 left to pay off, you can obtain a refinance loan of $15,000 and then take the $5,000 as cash. There are some limitations and negatives to refinancing cash-outs. You should consider this method only for emergencies or if you have a plan of action for using the cash to pay off debts with higher interest.
Cons of refinancing a car loan
Refinancing borrowers typically have lower interest rates, pay no fees, and can get debt free quicker — but won’t guarantee results.
You could pay more in interest.
If you refinance your loan to an extended loan term to lower your monthly payment, however, you could pay more due to the additional interest you have to pay. Even a lower rate may not be enough to offset the costs of paying interest for a year or two.
You may need to pay the charges.
Check with your current lender to determine if you’ll be liable for the prepayment penalty if you pay your loan early. State laws may impose fees for re-registering your vehicle and transferring the title. Your refinance lender may charge you for an application, but most lenders don’t. Then compare the amount you pay in costs with the amount you’ll get from refinancing.
You could wind up upside down.
Refinancing your loan to extend the term or taking cash from your equity may cause you to be owed more than the value of your car refinance rate is worth and is referred to by the term upside down with your loan. Should you choose to trade or sell your vehicle, you will be required to pay the lender the difference, which could be several thousand dollars.
How to evaluate if refinancing your car is a good idea for you
- Have a specific goal. Are you looking to reduce the number of your monthly payments, receive cash in case of an emergency, or pay off your loan earlier? Understanding what you wish to achieve can be helpful when you apply for refinance or keep track of your numbers.
- Find refinance loan deals.Explore a range of lenders to discover the rate of interest you are eligible for based on various conditions.
- Run the numbers. Please make use of our auto refinance calculator to evaluate your current loan to refinance loan options and to determine how this will impact the amount you pay each month. It also lets you know the cost of refinancing or even saves you money in the end in addition to interest.
It’s always wise to consider the benefits and drawbacks of refinancing your car prior. Even if you intend to obtain an emergency loan, it’s essential to take the time to read through it carefully and be aware of the total amount you’re signing up for.
Conclusion
The most important reason to consider refinancing is that you may be eligible for a lower interest cost and save money over the long term. Calculate the numbers and make sure that you’ll be able to get the savings you’re hoping for. It’s possible to benefit by asking for a modification of your car loan with the lender if you feel your car payments are spreading your budget beyond the limits or if you are facing financial difficulties.
Think about how long you’ll need to pay for a loan before deciding to refinance. Your savings could not be as significant or worth it depending on where you are on the repayment plan. Make use of a calculator for refinancing a car loan to determine how much refinancing will help you save.
