Car Insurance

What To Know When Refinancing A Car

By Peter Mondrose Peter Mondrose is the Head of Insurance Content at Bankovia. He received his degree in Economics in 1998 and a second degree in Journalism in 2004 from the University of Chicago. Most recently he served as Head of Content at QuoteYeti.com, and editor at BusinessPundit.com 9 minute read

Refinancing your car loan may cut your monthly payments, expedite your debt repayment, and possibly save you hundreds of dollars if done correctly. A car loan has become standard practice for many Americans, allowing them to acquire a vehicle without having to come up with thousands of dollars in cash upfront. There were more than 86% of new automobiles on the road in 2019 that was financed, according to Experian.

Car owners may find themselves considering refinancing their auto loan before they have paid off their vehicle due to extended payments periods. Refinancing your car loan can speed up the repayment process and save you money both in the short term and in the long run.

Refinancing a vehicle loan involves a number of considerations, including why you would want to do so, and where to begin when dealing with your own loan.

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What does refinancing an auto loan imply?

Replacing a current vehicle loan with a new one with better conditions is the most basic definition of auto loan refinancing. Auto loan refinancing is a terrific method to cut monthly payments, save money on interest and reduce the length of the repayment period or remove a cosigner from the agreement at the same time.

To refinance your car loan, you must have a good credit rating in order to get the best deal. This might be a refinance from your present lender or from another. Your new loan will have its own conditions, monthly payment, and due date when you refinance your automobile.

The advantages of renegotiating your car loan

Refinancing is an option for certain borrowers who want to get rid of a co-borrower or lower their monthly automobile payments. Refinancing, on the other hand, has the ability to lower your APR. It’s easy to forget that you’re paying interest on your loan every year, but APR stands for the annual percentage rate.

Even if you continue to make the same monthly payments, decreasing your interest rate will save you money in the long run. When it comes to getting out of debt, this strategy can sometimes be more effective than the original loan conditions. To illustrate, here’s an example.

For example, let’s say you want to buy a $25,000 automobile and take out a six-year auto loan with a 6.5% interest rate. That loan’s monthly payment is $420. $30,258 for a new automobile with 72 scheduled installments is a total interest payment to your lender of a little over $5,000.

Suppose that after a year, you opt to refinance your outstanding vehicle loan amount rather than pay it in full. You’ve already paid $1,538 in interest over the course of the last 12 months. A total of $21,478 is still owed on your loan. If you stick with your initial loan, you’ll end up paying a total of $3,737 in financing costs over the course of another 60 months.

As an alternative, you can qualify for a 3 percent APR interest rate reduction by choosing a 60-month refinancing loan (which means your automobile will be paid off at the same time). Because of this, you will spend $386 less every month. Your new refinance loan will cost you $23,156 over the following 60 months. Only $1,678 of the sum is interesting.

When it makes sense to refinance your car loan

There are occasions when a car loan refinances makes the most sense, based on your unique situation and the reasons for refinancing. Consider the following reasons why you might wish to shop around for a new auto loan.

Your credit score has improved

You should anticipate your credit score to rise over time if you maintain good financial habits. When this happens, you may be able to get a better deal on your auto loan than you did when you first purchased it. Your credit score and/or unfavorable things on your credit record may have improved since taking out the car loan, so you may be able to save money by refinancing the loan.

Your LTV is low enough

LTV, or the loan-to-value ratio, is a common way to think about automobile loans. Taking into consideration what a financed car is worth at any given time compared to how much is still due, this computation is used. In order to refinance the loan, you’ll need to meet a particular level of LTV. Why? Because lenders aren’t interested because there isn’t enough equity to make the loan attractive enough. As a result, it might be difficult to secure the lowest possible interest rates on a used automobile loan because of this.

Lenders will begin to examine your refinance loan request after your loan-to-value ratio (LTV) is approximately 85 percent. When this happens, you may be eligible for a new loan and save money over the course of the loan. In order to avoid any confusion, it’s important to know that each lender has a different LTV limit, and it may even change depending on your credit history and income level.

Interest rates have dropped

There are several variables that affect the interest rates you are given on your car loan, including your credit score, the length of your loan, and even the price of your vehicle. Economic issues might also have an impact. Changes in the federal funds rate have the potential to have a significant impact.

Refinancing your auto loan may make sense if interest rates have decreased considerably since you purchased it and the market has changed. Even if your credit hasn’t changed significantly, this is an easy approach to cutting your APR.

You can get (or want) a lower monthly payment

An auto loan commits you to a specified number of monthly payments over a predetermined length of time. At some time, you may find yourself struggling to keep up with the monthly payments or needing a little extra wiggle space in your monthly budget. If you don’t pay on time, you might end up defaulting on your loan. You’re stuck.

At this stage, refinancing may be a viable alternative. When you refinance your mortgage with a longer-term, you can decrease your monthly payment by spreading the remaining debt over a longer period of time. A greater payment is good if your circumstances improve and you can afford it. When you need to cut your monthly payment, refinancing provides you the option to do so.

A reduced monthly payment may help fulfill your short-term financial objectives, but it might end up costing you more in the long run. To avoid paying more in finance costs by the time your automobile is paid off, it is best to have the interest rate on your loan cut at the same time as the length of your loan.

Let go of your co-borrower now.

If you couldn’t get a loan on your own, or if you bought the car with another person, you may have needed a cosigner to guarantee the loan. You may, however, come to the conclusion that you no longer want (or need) to hold that co-borrower responsible for the debt. Your lender must allow for co-borrower release before you can do this. Typically, you must be able to qualify for the new loan using just your own credit and income.

Refinancing may be the only method to remove your co-borrower from your vehicle loan if your lender does not provide this choice. As long as you are financially solid and have repaired your credit, refinancing allows you to take on the entire loan alone. Co-borrowers are no longer bound by the loan and are free to walk away, whether they’re a child’s mother or an old friend’s boyfriend.

If you acquired the car jointly with someone else, such as an ex-spouse, you can also use a refinancing loan. Refinancing may be an option if your lender refuses to simply release the other party from the loan if you’re going through a divorce and have debt problems.

Refinancing a car loan: Here are some important considerations

If you’re thinking about refinancing your car loan, there are a few things to keep in mind. To get the best prices and prevent additional difficulty, you need to be aware of these things.

There may be penalties and fees involved

Prepayment penalties may be imposed in rare situations by your lender. It’s possible that you’ll end up paying more than you bargained for if this penalty is incorporated into your loan conditions. The fine language of your contract should be carefully studied to see if and how much a prepayment penalty is imposed.

When you refinance with a new lender, you may be charged an origination fee. Refinancing isn’t always a terrible option, but it’s vital to take these expenses into account and perform some arithmetic. Make certain that paying a charge and refinancing will save you money in the long run.

Your car may be too old

In order to get a refinancing loan from most lenders, you’ll need to fulfill certain car standards. The age of the automobile is usually one of these requirements, which has an effect on both the present value and the expected longevity of the vehicle.

Your lender is more concerned about the safety of their money if your automobile is more than a few years old. As a result, if your car is too old, you may not be able to get a refinancing loan. Even though each lender has its own set of guidelines, you should expect this car age barrier to fall somewhere around the 10-year level.

You might have too many miles

You may not be able to get a refinance if your automobile has been driven excessively, regardless of its age. Around 125,000 miles is the maximum that some lenders will allow. To refinance, your automobile must have less than that amount of equity.

Nowadays, it’s not that uncommon to see a car with more than 125,000 miles on the odometer. However, as your automobile ages, its value decreases. As a result, refinancing lenders are sometimes hesitant to engage with borrowers whose vehicles have accrued an excessive amount of mileage in an effort to reduce their own risk.

You haven’t owned your car for long enough

The amount of times you may refinance your car loan depends on whether or not you fulfill the vehicle and personal standards. Even if you’ve been paying your existing debt for a specific length of time, you’ll likely be unable to refinance.

Check to see whether the lender you’re considering requires that you have paid your present loan for a particular number of months before they’ll consider you for refinancing. Before applying for another loan, you may wish to wait a year or so to build up a good payment history and better demonstrate your creditworthiness.

Choosing a new car loan provider: What you need to know

It’s time to look for a new lender if you’re considering refinancing your existing vehicle loan. If you’re in need of a new car loan, here are some helpful tips:

  • Start with what you already have. If you’re looking for a new lender, you may be right around the corner. Start by looking around at your existing bank or credit union, or apply for a loan from a different financial institution in your area. If you already have a relationship with the bank, you may be able to get better rates and more customized service. If you don’t know where to start when it comes to getting a loan, the company’s representatives might be a valuable resource.
  • Compare prices by using aggregators. There are a plethora of outstanding internet platforms that link borrowers with the correct lenders nowadays. ‘ Aggregators allow you to shop around for the lowest rates and conditions from numerous lenders at once, saving both time and energy because you only have to submit your information once.

What credit score do I need to refinance my car?

There are refinancing lenders who will at least evaluate candidates regardless of their credit history. In order to acquire the best possible refinancing rates and repayment conditions, though, you’ll need to have a good credit score. To get the best rates, you’ll need a credit score of at least 700. Many refinance lenders need a credit score of at least 600 to be eligible for a new mortgage.

Bottom Line

The finance needed to acquire a used or new automobile is provided through auto loans, which are an essential element of the car-buying process for many people. In the long run, refinancing vehicle loans can save borrowers money by providing them with lower interest rates or a new repayment window with better terms.

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