You’ve taken out a loan to purchase your car, and after a year or 2, you’re wondering if it may be worthwhile to refinance the loan. A car refinancing loan is a loan you take to pay off your existing car loan, and refinancing is usually done through a different company.
What is auto loan refinancing?
Refinancing your auto loan involves replacing your old auto loan with a new one from a new lender (or from your existing lender, if it’s willing to offer you a refi). Your new lender agrees to pay off your old auto loan, and in exchange, you make monthly payments to the new lender on your new loan.
The application process for an auto loan refinancing is very similar to that of a new auto loan: the lender will need some personal and financial details in order to decide whether it can approve your loan and at what rate and terms.
Am I likely to qualify for refinancing at a lower interest rate?
An auto loan refi is worth considering in these circumstances:
- If you think your credit has improved since you purchased your car, then you will likely be able to negotiate a better rate.
- If you purchased your car at a time when interest rates were generally higher than they are today – and your credit hasn’t gotten any worse – again, you should be able to secure a better rate.
- If, for whatever reason, you can’t keep up with your monthly payments, then refinancing can give you more time to pay off your auto loan.
What are the disadvantages of refinancing?
Presuming you’re in a position to secure a better rate, then the only real disadvantages of applying for an auto loan refi are the time taken to complete the application, and the fact your credit score could take a temporary hit.
The time factor is really not a disadvantage if you consider the savings you could eventually make from refinancing to a lower interest rate. The time spent completing the application also depends on the lender; as many lenders allow you to complete the entire process online, and some even promise to approve you instantly (within a few minutes) and to lock in your rate for up to 30 days.
Can I refinance my car loan with bad credit?
As for credit score, this depends on whether the lender makes a soft query (which shouldn’t affect your credit), or a hard query (which will cause a short-term decrease in your credit score). When applying, you may want to ask your lender whether they are going to make a hard query on your credit. Having said that, the short-term reduction in your credit score should only be of concern if you are on the border between what is considered “good” (670-739) and “very good” (740+) or fair (580-669) and good (670+), or if you are planning on applying for other loans in the short term.
What are the requirements to refinance an auto loan?
As long as your new auto loan gives you a lower rate than the old loan, the only real risk is not being able to meet the monthly payment. Aside from that, there are the time and credit factors mentioned above. A common mistake made by many borrowers is to apply for a loan without doing any research or preparation work beforehand. If you take the time to learn your credit score (which you can request for free from each of the 3 major credit agencies once each year), and to check out the current rates, then the rewards will come and that time will have been well spent.
How much can you save?
The amount you can save with an auto loan refinance can be calculated by taking the remaining value on your loan and comparing your old APR (interest rate plus any additional fees) to your new APR. For example, if you took out a 72-month loan 3 years ago for an amount of $25,000 and an APR of 8%, you would be looking at monthly payments of $375 each month for the next 3 years in order to pay off the loan. But with a good credit score you could now secure an APR of as low as 1.99%, which translates to monthly payments of $354. Therefore, you would save $21 each month, and $756 over the remainder of the life of the loan.
Here are the top 5 loan marketplaces that can connect you with lenders for auto refinancing loans:
RateGenius is a middleman that connects you with relevant lending companies. It offers a streamlined application process and boasts a network of 150 lending institutions, giving you a good chance of finding the auto refinancing loan that suits your current situation.
LendingTree is a marketplace where you can set your parameters and then receive a list of relevant loan providers. One of the perks of LendingTree is that you fill out one application and can then review multiple loan options.
My Auto Loan
MyAutoLoan is a lending marketplace that lets customers find the right loan solution for their auto purchasing or refinancing needs. The company has developed proprietary technology that can help them easily and effectively match lenders to borrowers based on their needs.
SuperMoney is an online marketplace that lets users easily compare and qualify for multiple auto lenders in one form. This platform connects users with great deals for auto purchase loans, refinancing, leasing and even title loans.
Auto Approve is a loan aggregator specializing in auto loan refinancing for all types of vehicles, including boats and ATVs. Auto Approve can frequently get you a better auto loan refinancing deal than you could access yourself.
Is Refinancing Your Auto Loan Always a Good Option?
While there are many benefits of refinancing your car loan, it’s not always the best option. If you find yourself in a situation in which your credit score has improved or you want reduced monthly payments, refinancing your auto loan is definitely a good option for you.
However, there are certain situations in which it’s not a good idea to refinance:
- You’re not making ends meet. If you’re in financial trouble, you’ll be considered a high-risk borrower, and lenders will either not approve you, or approve you at a very high-interest rate. In this case, it’s not worth refinancing because you can end up paying more every month.
- Your car is too old or too new. Lenders don’t like offering loans for older cars or new cars that are less than 1 year old. The logic for both is similar: At the point that you’re seeking to refinance, the car has depreciated in value, and you will owe more than it’s actually worth. And because it’s not worth as much as it used to be, a refinancing loan is likely to have a higher interest rate than you’re already paying.
- Your current loan has prepayment penalties. Check the terms of your current auto loan—some come with prepayment penalties, which means that if you refinance, you’ll have to pay the penalty. In some cases, it might still be financially worthwhile, but in other cases, not.
Not Sure if Auto Refinancing Is For You?
If you’re not sure whether you’re in the right position to refinance your auto loan, speaking to a credit counselor is a good idea. Someone who has nothing to lose or gain by your refinancing, and who can direct you on the most financially expedient route.
If your credit counselor reviews your finances and says that an auto refinancing loan is indeed a good option, you now have your work cut out for you in deciding which lender to use. You can start with the above 5 marketplaces since they are known for being reputable and connecting customers with legitimate lenders. In the borrowing and lending business, there’s a lot of scammers and schemers out there, so it’s important to go with companies you can trust.