Everything You Need to Know About Refinancing Your Car Loan

How does refinancing a car work?

Refinancing simply means taking a loan to pay off the original loan. If you replace your current loan taken to purchase a car with a new one to pay it off monthly, it is refinancing.

  • It is beneficial as it lowers the interest rate and monthly payment.

  • It gives ownership of the car to some extent.

  • If you maintain a good credit score, you can save some money by cracking a good deal.

  • The application for refinancing can hurt your credit score.

  • Make payments on the new loan on time to protect your credit score.

Ideal situations for refinancing a car

There are a few situations that can work on your side when you refinance a car.

  • Improvement in credit score: When you take a loan and make timely payments, it significantly improves your credit score. The excellent crest score can help you get a better deal.

  • Lowering monthly payment: Refinancing at a lower interest rate can only be helpful in a situation where you are left with no money while paying other debts. It also means that despite having lower payments for long terms, you pay more interest.

  •  Low-interest rates: Refinancing can help when you pay more interest on the current loan and rates significantly decrease.

What do I need to refinance my car?

Refinancing a car is not a straightforward process because only some cars or vehicles are eligible for refinancing. Some criteria must be fulfilled to refinance a car.

Current loan requirements

  • Six months paid, six months left: The time of your current loan is the primary criteria every lender looks for. They generally look for at least six months of payment to ensure your payment history and at least six months left on the loan to make enough profit by earning interest.

  • Outstanding amount matters: The minimum loan amount varies from lender to lender, but typically, amounts ranging from $3,000 to $7,500 delight the lender. Lenders would like to offer loans for higher amounts to make more money.

Car interests the lender.

  • Mileage and model year: The lender won’t consider refinancing an old, broken car. Lenders most often approve a vehicle that has covered 100,000–150,000 miles. Lenders prefer cars that are not more than 8 to 10 years old. 

  • Type of car: The lender has no interest in refinancing discontinued brands or those who generally have issues. They don’t finance cars that are being used for commercial purposes. Also, lenders don’t prefer vehicles that are significantly damaged due to accidents or other incidents.

  • Loan-to-value ratio: The ratio determines the percentage of car ownership. A higher loan-to-value ratio means you own more loans than the value of a car, and in such cases, the lender may refuse to refinance the car. Lenders look for loan-to-value below 125%, and the lower the ratio, the better interest rates you get.

Credit requirements

  • Credit score: The credit score is the primary factor that determines the approval of a loan. If you have a good credit score, you can get a loan at better interest rates. Lenders require at least a 600 score for refinancing. 

  • Debt-to-income ratio: The debt-to-income ratio shows the ability of a person to manage his finances. A lender looks for a ratio below 36%, and a refinancing ratio could range from 36% to 49%. However, it should be at most 50%.

How do I refinance a car?

Refinancing a car is a matter of money, and it is essential to consider all aspects before opting for it. Refinancing a car involves a few processes. But before starting to refinance, decide whether it is right for you and whether you fit right in the situations mentioned above.

  1. Reviewing your current loan: This is the crucial step in refinancing, in which you examine the monthly payment of your existing loan, the number of months left in the repayment, the interest you pay on the loan, etc. To gather the following information, log in to your account.

  2. Estimating your car value: It is good to find out the current value of your car. If you find that the present value of your car is less than the amount of the loan, you won’t be able to refinance the car. As new models are launched each year, the value of old cars depreciates. It lowers the resale value of your car, and you might find it difficult to refinance the car.

  3. Understanding your credit: By determining your credit and credit score, you can easily find out whether you are eligible to refinance your car or not. It is advisable to make your payments on time to keep your credit score favorable for the lender. With a good credit score, you can even open doors to low-interest rates. Even with a low credit score, you can get approval to refinance a car.

  4. Gathering documents at one palace: Prepare yourself before applying for the loan. The information may vary from lender to lender, but most of them require the following:

    1. Driver licence

    2. Vehicle registration

    3. Insurance proof

    4. Vehicle identification number

    5. Employment proof

    6. Social Security Number

    7. Statement of loan payoff amount of the current loan from the lender

  5. Comparing lenders and rates: It is advisable to scrutinize several lenders who offer pre-qualification with soft credit checks. You get to know the loan offers, rates, and payment estimates. This will ensure whether refinancing will help you or not. This will also help you choose the best option for refinancing.

  6. Applying: The final process of refinancing ends with applying for the same. After estimating the loans and rates offered by various lenders and choosing one, apply for the final process. Your lender will either pay off your old loan or provide funds to do it on your own.

Things to remember while refinancing a car

  • Consider the objective: The purpose behind refinancing may vary. If you cannot pay your monthly payments, you must consider refinancing with lower rates. It is also preferred when you want to save money. 

  • Compare lenders: Apart from your current lender, always compare the deals offered by auto finance companies, online lenders, banks, and credit unions. This will help you with the best deal in your hands. 

When you inquire about auto loan refinances, it is considered a hard check, which may lead to a drop in your credit score. However, suppose you submit all the applications within 14 to 15 days. In that case, this may limit the decrease in your credit score and help you explore other options, too. 

  • Fees for early payment: Some lenders charge a prepayment penalty. If you pay off your current car loan from refinancing, you may pay penalties for early settlement. Therefore, consider it before refinancing. 

How hard is it to refinance a car?

Refinancing a car is not a hard-end process; instead, it is a straightforward process. All you need is a good credit score, a good value of your car, and proof of your payment history to ensure the lender knows about your creditworthiness, and you are good to go further with the process.

Does refinancing a car hurt your credit?

Yes, refinancing means applying for a new loan. It means inquiries from multiple lenders. The inquiry for refinancing a car is considered a hard inquiry. Hence, it can lower your credit score by some points. The lenders also check your creditworthiness, which can also hurt your credit score.

What credit score is needed to refinance a car?

The credit score is the primary factor that determines the approval of a loan. If you have a good credit score, you can get a loan at better interest rates. Lenders require at least a 600 score for refinancing.

Is there a downside to refinancing a car?

  • The idea behind refinancing is to grab the opportunity of low interest rates in the market. Still, sometimes, you may end up paying more interest with the increase in the loan tenure.

  • When you apply for a new loan, you are subject to additional charges. Regarding refinancing, you also pay the lender fees, title fees, and closing fees. You may even pay the penalty for closing the debt before the date.

  • Cars are depreciating assets, and when you refinance a car, you risk your finances by putting it in the wrong asset.

How long does it usually take to refinance a car?

If you purchase a new car, it takes around 60 to 90 days to refinance it. It is the minimum time to transfer the car title to your name. You can apply for refinancing after the title is transferred to your name.

Final words

Refinancing is an excellent way to save money when you get a loan at low interest rates and have a good credit score. The process can eventually lower your credit score by a few points, but it is temporary. Before deciding to refinance a car, you must consider a few things, like your current credit score, the car’s age and mileage, the value of the vehicle, and your ability to pay the loan. Refinancing may help you pay a low amount if you struggle to pay high monthly debts.

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06 Nov, 2023

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