An auto refinance can offer car owners attractive benefits, like a lower monthly payment or reduced cost of ownership.
However, there are a few things you need to know about a car refinance.
First, not all lenders offer auto refinancing. Once you find one that does, you’ll need to go through several steps to make it possible.
What is most important is to know what you want and what to expect. Next, find a lender able of helping you make it happen.
- What Happens When You Refinance A Car
- 4 Car Refinance Steps
- Why Should I Refinance My Car?
- When You May Not Benefit From An Auto Refinance
What Happens When You Refinance A Car?
Car refinancing is a bit like home loan refinancing, but it tends to be a much faster and more streamlined process.
The goal is to obtain a new loan – usually from a new lender – to pay off the existing loan. It will give you new terms and could help you save money, making your car payment more affordable.
There are various factors that determine what happens when you refinance a car. Generally, it comes down to the following:
Your credit score
The better your credit score, the lower the interest rate and more accessible refinancing will be to you. If your credit score has increased significantly since you obtained your first loan, consider refinancing.
Available refinancing options
Lenders will provide refinancing options for vehicles of value. The value of your car plays a role in how much if at all, the lender will consider refinancing your current loan.
Your goals and expectations
Just because you can refinance may not mean it is ideal. You’ll want to consider the benefits that apply to you such as whether you want to lower your monthly payment, consolidate debt, or reduce the overall cost of buying the car.
As you consider what happens when you refinance a car, keep these factors in mind.
4 Car Refinance Steps
To determine if refinancing your auto loan is the best choice for you, work through these four steps. Your goal here is to find the best offers available to determine whether refinancing provides a financial benefit to you.
1. 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.
As stated above, goals and expectations are important because you want to select a loan best suited to your needs. Different car refinance offers provide varying benefits depending on your financial situation – no two people’s needs are the exact same.
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 (depending on the terms) 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.
Don’t refinance just to refinance — be sure it is financially beneficial to you.
2. Locate the Ideal Auto Refinance Loan
Now that you have set clear expectations, you need to find lenders with the features you desire.
By far the most important step to take here is to simply tell your lender what you are looking for in an auto refinance.
- I want a lower auto loan interest rate.
- I want a lower auto loan monthly payment.
- I want to reduce my auto loan term.
Many lenders have more than one type of car refinance loan to offer. This enables you to get a customized auto refinance to meet your goals and objectives.
Consider the details of any refinancing offer you receive. It is important to remember not all deals or lenders offer the same features. You will need to verify the following to best compare car refinance options.
What is the interest rate on the loan?
Request a quote for an interest rate for the auto refinance loan available to you. This should be based on your credit score and qualifications. A generic rate listed on the lender’s website is not specific to you.
Ask the lender if they will lock in the rate for you for a few days so you can compare your options.
Is there a prepayment or pay off penalty?
Avoid loans with a requirement to pay a fee if you pay off the loan early. This way, you have the ability to add a bit more to your monthly payment each month. In doing so, you will save money on interest and pay off your car sooner.
Also, ask that if you do make extra payments if the lender will apply this directly to the principal. Any extra payments applied to the principal helps to ensure the loan’s balance goes down faster.
What fees or out of pocket expenses apply to the refinancing process?
If refinancing is going to save you only $1,000, and your fees are $1,100, it is not worth refinancing. Learn about applicable fees in advance.
All loans have some fees. The cost to obtain the loan including administration fees is common. These fees include loan recording costs and title fees. They can be about five percent of the total amount you borrow to refinance the loan.
Obtain a fee estimate. You want to be sure fees are less than any savings you’ll receive on the loan.
What is the loan length?
Again, a lower interest rate over a longer period of time may seem like a good deal. However, it needs to remain affordable for you.
Most car loans are for under five years (though some options may be available for older cars). Choosing a longer loan term can reduce your monthly payment significantly. However, it also spreads out the amount of time for interest to build up – costing you more. A shorter term loan saves you money, but you will have a higher monthly payment.
Finding the balance here is important. Work with your lender to compare several options. Generally, you want to pay off the car in the shortest amount of time possible but still stay comfortably within your budget.
Lenders will limit the length of the loan based on the age of the vehicle. If the vehicle is older, the loan’s length may not be very long simply because the value of the car will depreciate significantly after a certain point.
From the lender’s standpoint, the vehicle’s value cannot be less than the value of the loan.
What is the new monthly payment?
Be sure you know what is expected of you in terms of when and how to make payments, as well as the total monthly payment due. Most importantly, complete a budget. Ensure the new monthly payment fits your budget.
Are there any upfront costs or down payments required?
Some auto refinance deals require you to make a down payment or pay cash for fees at the time of obtaining the refinanced loan.
Do you trust the lender?
It is equally important to choose a car refinance deal that will benefit you financially as it is to work with a lender you trust with the transaction.
3. Know Your Car’s Value
Some lenders require an appraisal on the vehicle. This is like a “background” check on your car.
Before a lender can offer you an auto refinance, they need to learn the following:
- The make, model, and features of the car
- The current condition of the car
- Any significant damage or changes that would reduce its safety or its value
- The current value of the vehicle
- Who owns the vehicle
- The payoff amount – this is available from your current lender
This information allows the lender to verify the value of the car using a variety of resources. The goal is to understand the vehicles worth right now as well as what it is likely to be worth over the next few years.
If you do not agree with the value of the car, talk to your lender. You may be able to choose an appraisal of the vehicle to value the car.
For example, if you have an older car that’s been restored it is likely to be worth more than what the book value listing. At the same time, you may have customizations and features added to the vehicle improving its worth.
Your lender will value the car based on what other people would pay for it if they bought it today, not necessarily considering what you’ve put into it aftermarket.
4. Understand Your Credit Score and Credit History
Creditworthiness goes a long way in auto refinancing.
Lenders will need to pull a credit report and determine if you are a safe credit risk. Doing so gives the lender the ability to offer a lower interest rate or more flexible terms.
Most often, lenders will approve a car refinance for those who have a credit score over 660, though this depends significantly on the lender itself.
With your credit information and confidence, the vehicle’s value is enough to cover the loan amount, the lender will then approve the loan.
When this information checks out, the lender sends the loan to underwriting for approval. Most of the time, it can be approved fairly quickly.
Once the lender gathers all necessary information about your credit history and the car, and you approve a specific type of loan, the refinancing process takes place. You’ll verify the details, then the lender will process the loan application for you.
Understanding The Steps For What Happens When You Refinance A Car
The underlying goal throughout the car refinance process is to ensure you have established expectations and understand your options.
For the lender you choose, their primary objective is to certify you are a good risk, and in the end, offer you a competitive auto refinance product.
Although it appears several steps are involved in auto refinancing, oftentimes the process does not take long, and once complete, you will be in a new car loan.
Why Should I Refinance My Car?
If you are thinking about refinancing your car but are not too sure if it is the right move for you, consider a few key scenarios. These examples can give you some insight into when it makes sense to refinance.
Interest Rates Are Falling
Right now, interest rates across the board are low. If you bought a car a few years ago, your rates could be one to three percent higher. By using a debt refinancing calculator, you can see the difference.
For example, if you could cut down the interest on your loan by two percent, you could save thousands of dollars over the lifetime of your loan.
Interest rates change all of the time, but if there’s a significant difference between available rates today and what you are paying, consider auto refinancing.
You Want to Buy a Car You Are Leasing
Another key reason to refinance an auto loan is to turn a leased vehicle into an owned vehicle.
Car leases can be costly over time, especially if you find yourself facing high fees for being over the mileage limits. If it is time for you to consider your options – such as paying fees to the dealership or buying the car – invest in buying it.
You can refinance the loan when your lease expires, sometimes earlier. When you do, you can obtain new terms and, at the end of those terms, you will own the car.
You Have a Dealer Loan
In some situations, a loan from a dealership is the easiest option, and it tends to be the most accessible option as you are looking at cars on the lot.
However, the dealership and finance team is not interested or incentivized to help you to save money. Many people walk away from these loans with high debt and high interest rates. If you have a dealer loan, consider the options for auto refinancing. It could immediately save you money.
Your Financial Situation Has Changed
In the case you are struggling to make your monthly payment, auto financing is beneficial.
You certainly don’t want to see your credit score fall because you cannot make your payment. Many people can refinance their car loans into new, longer-term loans that help you avoid dips in credit score.
Auto refinancing can get you a lower monthly payment, but also provide you with the ability to avoid late payments, missed payments, or damage to your budget.
You Want to Consolidate Some Debt
If you have a loan on your vehicle but have worked to pay it down, your vehicle now has some built up equity in it. This is the amount of value you have in the car compared to the amount of debt you have on the car.
For example, the car may be worth $15,000, but you owe only $4,000 on it. This gives you about $10,000 to $11,000 in equity. You may be able to consolidate your existing high-interest rate debt (such as credit cards) into a new loan. When you do this, you can trade out some of your high-interest rates for a low-cost auto loan.
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.
When You May Not Benefit From An Auto Refinance
A well-qualified financial institution is not going to encourage you to refinance the loan unless there is some benefit to you.
For example, if you are paying on your loan, and even close to paying it off, but you could get a lower interest rate, it may not be worth the added cost and fees to refinance.
In some cases, the fees to refinance the loan are more than the savings. Your lender will provide you with these details including your potential savings.
Additionally, if you aren’t eligible for a low-interest rate because of your current credit score, you may want to avoid auto refinancing. If you don’t qualify initially, you shouldn’t create a credit inquiry on your credit report.