Auto Refinance

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When should you refinance your auto loan?

When you want to get a better rate

Really, there is no time like the present.  Sometimes, you just don’t get the best deal when you first finance your car.  If your current car loan interest rate is well above what the current advertised interest rate is, it may make sense to explore getting an auto refinance.  By going from a high interest rate loan to a lower interest rate loan, you can quickly save money on your monthly payments.  Always look back at copies of documents you’ve signed to see the original interest rate on your loan and, if it is higher than current market rates, find a lender that can offer better terms than you are currently saddled with.

When you want to move your loan to your primary bank or credit union

In many cases, it is beneficial to move your auto loan to the bank/credit union where you do most of your business as it makes it easier to work with the loan by setting up automatic payments straight from your bank account to your auto loan.  Also, if issues arise with payment not being applied to your loan, working within the 4 walls of one institution makes it that much easier.

When you want to change the length of your loan

With an auto refinance, you can update the loan term to lengthen or shorten it depending on your monetary situation.  For instance, if you are looking to lower your monthly payments, you may want to extend the length of your loan to make the monthly payments easier to make.  Of course, you could also go the other way and shorten your length of your loan term if you want to save money in interest over the course of your loan.  Plus, a shorter term vehicle loan will usually come with a rate discount that will save you additional cash.

When your credit score has improved

If you got your original car loan with bad credit, you may have seen your credit score steadily improve through making on-time payments.  This, coupled with the fact that you have lowered your car loan balance over time, lowering the LTV ratio, making the loan more manageable to a new lender.  As your credit has improved, you may start to qualify for much better rates than you did at the time of your old loan.  With a new, lower rate, you may be able to lower your monthly auto payments significantly, shorten your loan term or some combination of both.

Frequently Asked Questions

Refinancing a home mortgage is common, but is auto loan refinancing worth it? If you do it right, you can save more than enough money by refinancing your car loan to make it worth your time and effort. Not only can you potentially lower your monthly payments, but you may also be able to reduce the interest rate and change the length of the loan. Auto loan refinancing is also an opportunity to take your current car loan to a financial institution that you already have a relationship with.

What is auto loan refinancing?

Auto loan refinancing is replacing your current loan with a new one from another lender, most likely with a lower interest rate.  In most instances, the new loan amount will be the balance left on your current loan, however some lenders do allow you to take cash out when you refinance, but this is generally looked down upon due to the lack of equity in a car loan.

Should you refinance your auto loan?

If you are interested in saving money on your current auto loan, it may make sense to consider refinancing your car loan.  Typically, consumers can lower their interest rate by an average of 2.4% and their monthly loan payments by more than $50 through auto refinancing.  Even though interest rates are going up slowly, you can still find plenty of ways to save money via auto loan refinancing. 

How Do You Compare Auto Loans?

The main factor when comparing auto loans should be the total cost through the life of the loan.  This includes all of the interest that you have to pay.  Take the amount of the loan, the interest rate and length of the loan to determine the monthly payments, and then use the number of months in the loan term to determine the cost.  Ideally, you will want to have the shortest auto loan possible that you can feasibly afford the monthly payments on.  These shorter loans usually have lower interest rates and lower prices, but you also run lower risk of owing more for your vehicle than it is worth (being upside-down).

Where to get an Auto Loan Refinance?

Traditionally, you can refinance an auto loan at most of the same places you can get an auto loan i.e. national banks, both online and brick and mortar, community and regional banks (especially good when running promotions with rate discounts), and credit unions.  According to TransUnion, credit unions account for most of the auto loans that are refinanced and typically provide lower interest rates to their member than other financial institutions.  Another avenue you can look at is to your current financial institution where you have a relationship via savings accounts, mortgages or credit cards.  These institutions are typically more motivated to make you a good car refinance offer to stay with them as a preferred customer.  

What will car refinancing cost me?

Most auto loans carry no prepayment penalty and no startup fees.  The true investment is your time to go through the application.  There are a few car loans that have prepayment penalties that are there to urge you not to refinance your loan, so you may need to wait months or years before you can officially refinance.  

Can you refinance your car with bad credit?

It may be possible to refinance your car with bad credit, but it’s not easy.  If you have made 6-12 months of on-time payments, a lender may be able to work with you.  The key to this will be to apply to multiple lenders because most lenders have different credit score requirements based on their risk tolerance.  If your credit is declining from when you took out your original car loan, you may have more to lose in getting an auto loan refinance unless you really need to get lower monthly payments through extending your loan term.  Getting a new loan with bad credit can be difficult, as each lender will pull a credit report inquiry that has the potential to adversely affect your credit score a few more points further.

If your car is almost paid off, can you still refinance?

Usually, it does not make any sense to refinance if you are nearing the end of your car loan.  Payments made in the last year or so of your loan go mostly to the principal and not the interest, so any savings you may get from refinancing at a lower rate would be super small and usually not worth the effort.  Especially with potential lender fees due to the lack of profit your lender would make on the refinance. 

Can you refinance when you’re upside-down on your current loan?

If you have good credit, you may be able to refinance to stop being upside-down on your car loan.  This is highly dependent on your loan-to-value ratio or LTV.  Depending on what your car is worth and how much you are looking to borrow, you may need to make a cash payment to get the LTV in your favor.  There are also changes you can make to the loan term by shortening the term of your new loan to reduce the overall interest you’d pay over the life of the loan. 

What are the final steps of completing an auto refinance?

You need to make sure that all of the proceeds of the new loan are used to pay off the full balance of the old loan.  Auto loan refinancing requires the vehicle’s title to be transferred from the original lender to the new lender that is doing your auto refinance.  Finally, you will need to verify that you have the car insurance that is required by the institution that has your new auto loan.  Lenders require various limits and deductibles, but the insurance required by lenders is legally required in most states.  

What if you can’t make your monthly car payments?

Communication is key if you are going to miss your monthly car payment.  Many times a lender will be able to defer payments for a short while or find another solution that works for you.  While deferring payments, interest will still accrue which you may need to make up for in an extra car payment, but in reality the lender is as invested as you to not default on the loan.  

Who is the best lender to refinance with?

While LowerMyBills doesn’t recommend one specific lender, we do have a good list below of some of the best lenders for auto refinancing that we have found.  It is important to apply to multiple lenders, however, so you can truly find the best rates and best loan terms that fit your unique situation.  

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