Can You Refinance a Car Loan?

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An auto loan is a contractual agreement, where you are locked in for the term of the loan and agree to make certain payments every month. However, it is possible to get out of a car loan through a process called refinancing.

When you refinance a car loan, you are essentially trading in your current loan for a new one. Refinancing can help you secure lower interest rates, more affordable monthly payments, or different payment terms.

Refinancing a car loan can be a great option for some borrowers, but it all depends on your situation. In this auto loan refinancing guide, we’ll explain when it makes sense to refinance and when it doesn’t, and help you figure out if refinancing is the right option for you.

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Reasons to Refinance a Car Loan

There are many reasons why car owners refinance their debts. Whether you’re looking for lower payments or longer term, you can achieve both with a new loan. Here are some situations where this strategy might make sense:

Low Interest Rates

Car loan interest rates always fluctuate. If rates have fallen since you took out the loan, you may want to consider refinancing, which can help you pay less money over time. For example, if your initial $36,000 car loan came with an interest rate of 7 percent, even just one point lower, You can save $1,012 more than 60 months.

Your Credit Score Has Improved

Lenders use a variety of factors to calculate your auto loan interest rate, including your credit score. If your credit score has improved since the loan date, refinancing can help you get more favorable loan terms, which can reduce your monthly payments.

The Dealer Writes Your Loan

If you finance your car with the dealer where you bought it, you may end up paying more than necessary. Some of these companies charge higher interest rates than regular banks or online lenders and then pocket the profits. Refinancing a loan arranged by your dealer with a different lender can help you save money.

Your First Offer Wasn’t Good

Buying a car can be a very exciting experience, but it can also overshadow important parts of the buying process, such as choosing a good loan. If you accept the first loan offer a bank offers, it may be worth seeking out better terms, even if your financial and market situation doesn’t change.

You Need Lower Monthly Payments

Many car owners refinance their loans for more affordable payments. If your monthly budget is tight and reducing your monthly car payment would really help, refinancing can help you. Expect to pay more overall if you extend it past your original loan maturity date.

When to Avoid Refinancing

Refinancing your original vehicle loan is not always a good option. Here are some situations where refinancing might not be worth it:

You are Approaching Your Payment Date

If you’re close to paying off your loan, refinancing may not be a good idea. Since banks charge interest upfront, you’ll end up paying most of these fees up front. The longer you wait to refinance, the less money you’ll save. It may be a better financial decision to stick with your current lender and make monthly payments until you settle in full.

The Original “Reverse” Loan

Being upside down on your original loan means you owe the bank more money than your car is worth. This is also called negative equity, and it means you may have difficulty refinancing. Because your vehicle is collateral, most lenders will not approve a loan that exceeds its true market value. The only way to reverse negative equity is to make large lump sum payments, which reduce your loan balance.

Your Car Is Too Old

Most lenders will not refinance a loan if your car is too old or has high mileage. For example, if your car is more than 10 years old or if the odometer shows more than 100,000 miles, you may have trouble finding a lender willing to refinance.

Requirements vary by financial institution, so check with your agent what their requirements are to see if refinancing is still an option for you.

Interest Rates Increase

If interest rates are rising, you may want to wait before refinancing your debt. You may not be able to find a lender that can offer a lower interest rate than what you are currently paying. In this case, refinancing your loan makes little sense, even if your financial situation has improved.

The Costs Are Greater Than The Benefits

Refinancing usually isn’t free, so it’s important to research potential fees, such as prepayment penalties. Your bank may charge you a hefty amount to pay off your current car loan earlier than expected. Depending on how your lender wrote the contract, you may even be stuck with a bill for the entire amount of interest when due.

You Need Credit in the Near Future

Refinancing your car loan may cause your credit score to drop temporarily. Therefore, it may not be a good move if you are considering another big purchase. For example, if you plan to apply for a mortgage soon, you may want to hold off on refinancing your car loan so that your credit score will stay as high as possible.

Can You Refinance a Car Loan Anytime?

Every lender has different requirements when you can refinance a car loan. Many banks will not accept a refinance application if you have recently opened an existing car loan in the last few months. However, you may find another financial institution that will allow you to refinance at any time.

There is no best time to refinance your debt. If you can save money by getting another loan, you should start the process. Remember that most lenders have a requirement for when you can no longer apply for a refinance.

Who Qualifies to Refinance Auto Loans?

Each lender has its own eligibility requirements for refinancing. However, there are some common factors. Before you submit your application, speak with your lender to learn more about their specific criteria. You want to make sure you meet the basic loan eligibility requirements to refinance your current loan, which usually include:

  • Fixed source of income
  • Low debt to income ratio
  • Good credit score (minimum 670)
  • Proof of residence (rent agreement, mortgage statement, or utility bill)

Tips to Follow When Refinancing Your Car Loan

If you’re potentially saving money on your car loan, it’s worth considering refinancing. Here are some tips to keep in mind as you make your decision:

Have a look

Before you agree to a new loan, take some time to shop around. You will want to get several pre-approval letters to compare interest rates and terms from different lenders. Getting more than one quote is important, and with just a gentle inquiry on your credit report, your credit score won’t be affected.

Consider the Cost

Refinancing a car loan comes with fees that will ultimately impact your overall savings. Before you refinance, talk to your current lender about any fees you may have to pay, such as prepayment penalties.

You should also understand what fees your new lender will charge you, such as origination fees. If those costs end up being more than your savings, refinancing your car loan may not be worth it.

Understand Credit Impact

When you refinance a car loan, the bank will run a hard credit investigation. This action will reduce your credit score a few points, but that’s not the only factor at play here. Once you open a new loan, the average age of your credit accounts will drop, which can further lower your score.

Start with your Bank

We recommend that you start the refinancing process with your personal bank. There are advantages to working with a financial institution with which you already have a relationship. For example, you may be able to qualify for a lower interest rate and increase your chances of approval. Even if your credit score isn’t perfect, your bank may still be willing to work with you, especially if you have a strong financial history.

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