Auto Loan Refinancing

Learn How & When a New Loan Can Lower Your Car Payments

Auto loan refinancing involves taking a new loan in order to pay off the balance of your original auto loan. Most people opt to refinance their auto loans to save money. With a low-interest auto loan, you may be able to reduce the monthly payments and increase your savings. In most cases, the new loan will be the remaining balance on the current auto loan.

Some lenders may allow you to take cash out when refinancing. However, you should be careful when doing this because without much equity in your car, taking cash out may increase your risk of owing more than what your car is worth.

Auto Loan Refinancing Options

When refinancing your car loan, your first priority should be to secure a low-interest rate. Over time, cars depreciate in value as the cost of repairs and maintenance rises. For this reason, you should aim to pay as little as possible in the form of interest on your car loan.

Apart from saving money, an auto refinance may enable you to adjust the payment period. A longer repayment period will reduce your monthly costs.

There are two main types of auto refinancing, and they include:

TRADITIONAL

Does skipping your auto loan repayment by 60 days and lowering your monthly payment seem like a good idea? If you are approved for traditional refinancing and receive a lower interest rate, you will save thousands of dollars. That’s money that you can use to build a nest egg.

Ideal candidates:

If you determine that auto refinance is a good option for your financial situation, you may be a good candidate for traditional auto finance loan if:

  • The interest rate on your loan has declined
  • Your current loan is from a car dealership
  • Your credit score has improved.

Example:

Louis purchased his car two years ago for $25,000, and he received an auto loan at 12 percent APR (annual percentage rate). He was given a 60 months loan term. He also recently paid off his credit card debt. His credit score has also jumped by 60 points. By applying for a traditional auto refinance loan through his bank, Louis received a 5 percent interest rate on his new loan with a loan term of 60 months. He has seen his monthly payment drop by over $200 per month.

OR

CASHBACK

Get cashback and tap into the value of your car by refinancing your auto loan. This type of loan gives you the flexibility to use the extra finances as you wish. For instance, you can use it to pay off other high-interest obligations like payday loans or credit cards, or you can use it to make large purchases for your home.

Ideal candidates:

Most people wonder whether a cash back auto refinance is a good idea. When it comes to auto refinance products, it mainly depends on the terms of the loan, your economic needs, and the loan interest rate. The main benefits of a cash back auto refinance loan include lower monthly payments, lower interest rates, and cheap cash that you can use for other expenses.

Most lenders advise consumers to be certain that a cashback refinance is right for them and to evaluate the risks involved. Keep in mind that failing to repay your cashback auto loan may lead to car repossession by your financier. To qualify for such type of loan, most lenders will require that you have enough equity in your car.

Example:

Helen purchased her brand new car in 2014 for $19,000 with an interest rate of 2.9 percent and a loan term of 60 months. In the last four years, Helen has paid her loan on time, and she now has a balance of $8,000. Currently, the car can qualify for a $14,000 loan amount and $6,000 equity.

Last summer, Helen fell and injured her collar bone. Her medical bills accumulated, so she decided to borrow $11,000 from her car equity to cover the medical expenses. After refinancing her auto loan, her new loan balance is $11,000 and an interest rate of 1.9 percent with a loan term of 60 months.

How to Refinance

Vehicle refinancing has several benefits and can help you save hundreds and thousands of dollars. Unlike refinancing your home, the auto refinancing process is quick and easy. Below are the steps you should take to make your auto loan refinance successful.

Step 1

Gather Your Documents

Find the most recent payment documents from your current auto loan and ensure that you know the following:

  • The remaining balance and your monthly payments
  • The loan term
  • The current interest rate
  • The customer service number of your current auto loan financier

Look into the original auto loan contract and make sure that there are no pre-payment penalties. In case you have misplaced your original contract, you can contact the customer service department and request for information on your original contract. They can even email you a copy of the initial agreement.

You will also need the following documents before you can complete your auto loan refinance application:

  • Your driver’s license
  • Your social security number
  • Your vehicle identification number

EXPERT TIP

While auto loan refinance is a pretty easy and straightforward process, you may feel like you have limited options if you have poor credit. However, depending on your financial situation, you can still qualify for an auto refinance loan with better terms than your current loan.

Step 2

Collect documents that prove your employment and income

Lenders want to make sure that you’re able to repay your auto loan. To do this, you will want to gather the following information:

  • Occupation
  • Proof of employment
  • Employment status
  • Employer name
  • Office phone number
  • Previous employer information
  • Rent or monthly mortgage payment
  • A statement of your monthly income and all your income sources

EXPERT TIP

When it comes to income, lenders typically look at two main factors: the source of your income and the amount you earn. If you’re employed, you will have to produce payment stubs from the previous month. In case you’re refinancing at the beginning of the year, you can provide a W-2 from the previous year. If you work as a freelancer and you receive 1099s from the companies you work for, your lenders will want to see your tax returns.

If you have a side job or another source of income, remember to tell your lender. This may help you to qualify you for a loan or improve the terms of your auto loan. Ensure that you inquire whether your lender may need any paperwork to be signed by an auditor. Additionally, if you have income from legal settlements, child support, rentals, and Social Security or any other source, you should take proof.

Step 3

Get your vehicle information

Because your car will serve as collateral for your auto loan, your lender will need some information about your vehicle for them to determine its value and whether it’s enough to cover your loan in case you default. Your lender will need to know the car model, the year of manufacture, and the VIN (vehicle identification number) so that they can estimate its value. This information can be found in your vehicle’s registration card. Other details that your lender will need to know regarding your car include:

  • Loan balance and term
  • Your current lender
  • The payoff amount
  • The vehicle market value
  • Interest rate

In most cases, lenders don’t refinance loans if a car has high mileage. This is one of the hard-and-fast rules of most lenders. While the mile limit will vary between lenders, the reason why most lenders are hesitant to refinance an auto loan on a high mileage car is because such a car may pose an additional risk. If your car has several miles on it, your lender may wonder whether your car will outlast the loan. In such a case, the financier won’t have collateral on the loan.

Step 4

Review your credit history and score

Your credit history and score will greatly determine whether a lender will do business with you. Lenders use your credit history to determine the auto loan rate you will receive. You are more likely to get a lower interest rate with good credit. Check your credit and see where it stands. You can check your credit score for free on AnnualCreditReport.com and see if you have any problems like missed or late payments. Make early corrections to your credit report to avoid delaying the refinancing process.

Step 5

Apply and compare multiple offers

It is always good to apply for your car loan refinancing from various companies in order to compare their interest rates. The application process is free and should not cost you anything. Warning; submit all your loan applications within a 15 day period because the same queries in this time window are treated as equal. Loan application made after 15 days is treated as another inquiry and can impact your credit score.

Step 6

Negotiate

Interest rate is sometimes negotiable on a car loan. By this stage, you have already compared a number of lenders and found one that offers a reasonable interest rate. You may be able to negotiate an even lower rate. Be on the lookout for promotions and special offers. Sometimes, automakers run low-interest financing options.

Compare the financing offered by dealerships to the rates and terms of the preapproval you received form a financial institution, be it a bank or a credit union. Avoid being led into a deal when you are not ready. Dealers can be flexible and be willing to work with you to get a better quote even with bad credit.

Step 7

Evaluate contracts and finalize your loan offer

Don’t make the mistake of driving your car home before evaluating the contract and finalizing the loan offer. Sometimes, the interest rates can change to an even higher rate after you take your car home. Don’t fall into the “yo-yo financing” trap. Many customers get too excited with a new car and might not realize that the contract is not finalized. Make sure that the dealer strongly emphasizes that the car is being delivered subject to final approval with a written notice confirming the delivery terms.

Tips for Refinancing When You Have Bad Credit

Fix credit discrepancies

You should order your credit report at least once a year to make sure that there are no errors in the report. Ensure that you address any errors on your credit report by contacting both the credit bureau and the organization that reported the credit to the bureau. Both are responsible for correcting information on your credit report. You can file a dispute to any of the three major credit reporting bureaus online.

The amount of time it takes to fix credit errors depends on the severity of the negative information in your credit report. Therefore, it is advisable to deal with the problem early to avoid affecting the refinancing process. Work with a federally regulated credit repair company to get assistance in repairing your credit.

Make payments on-time

Your score is likely to improve when you make timely payments and limit your general debt. Lenders have different payment history requirements. Remember that payment history is the most significant component in your credit score. Many lenders are keenly interested in your ability to pay your credit bills on time because it shows how financially responsible you can be and if you can be able to handle any additional debt.

Pay down credit card debt

Debt can destroy your financial dreams. Being stuck in debt ties up your finances so you can’t do all the things you love doing. As long as you have debt, you don’t get to decide what to do with your money, the lenders do. They say how much and when to pay them. Pay down your credit card debt and get out of the mercy of your lenders and boost your credit score. Remember that debt not only affects you financially but can also damage your work, health, and even your relationships.

Avoid large purchases

Your credit card utilization can affect your credit score. Therefore, making large purchases and maxing out your credit card is not recommended. Your loan application can easily be declined with a poor credit score.

Eliminate accounts in collections

The only way to increase your credit score is by having the collection account eliminated from your credit report. You can do this by asking the collection agency to validate the debt. Send them a debt validation letter. Make sure you mail it certified.

Ask questions

There’s no specific minimum credit score required by lenders for them to refinance your auto loan. Most lenders will typically consider the remaining loan balance, how many miles are on your car, and the state you live in. Therefore, there are several banks and credit unions out there that work with people with bad credit.

Benefits vs. Risks

Refinancing your auto loan has several advantages, but as with anything else that involves money, it’s always good to understand what you’re getting into. You can get excited due to the low monthly payment, but it is equally important to look at the fees and monthly interest rates. Before you apply for an auto loan refinance, check the following benefits and risks.

Benefits

Explanation

Lower interest rate

One of the main benefits of refinancing a car loan is that you will have an opportunity to lower your interest rate. In case you previously had a bad or no credit at all, refinancing your car loan after a few years could give you better offers. At this time, your credit score may have improved for you to qualify for a reduced interest rate. A lower interest rate will enable you to repay your loan much faster, and you may save more money when paying off your loan.

Lower monthly payment

By extending your loan term and/or lowering your monthly payment you’d be able to reduce your monthly payments for the remainder of the loan. Which sounds great to most people, but take caution because you could likely end up paying more for the car in the long run.

Remove the co-signer from your existing loan

Qualifying for an auto loan without good credit or a high income can be difficult. Therefore, most lenders may require a co-signer to be eligible for an auto loan. But your financial circumstances may change, and a co-signer may no longer be necessary. In such a situation, you can remove the co-signer from your auto loan.

An auto refinance is the best way to remove a co-signer from your auto loan. If you have increased your income or improved your credit score, or you have found a new financier with lower auto loan eligibility criteria, then you can refinance your auto loan with better rates.

Get a new loan repayment period

Refinancing your vehicle at a significantly lower interest rate may allow you to shorten the loan term while keeping the monthly payments the same. This will help you pay off the auto loan quickly, and you can save money in the long run. Therefore, if you’re worried that your car won’t last as long as your loan term or you want to pay your debts quickly, auto refinancing may be the best option for you.

Cash-out during an emergency

Do you have some equity in your car? In case of an emergency, you can benefit by cashing out when you refinance your auto loan. Your new lender will value your new auto loan based on the current value of your vehicle. Lenders use guidelines set by the National Automobile Dealers Association (NADA) to determine the value of a car. In case your lender finds that your car is worth more than you actually owe, then they may agree to pay off your auto loan and give you the difference in cash. However, while cashing out may be beneficial during an emergency, it may result in the extension of your loan term, which means additional costs.

Auto Loan Refinancing Alternatives

Auto refinancing isn’t the only way to lower your auto loan interest rate or save money when repaying your loan. Consider the following alternatives; one of them may be the right one for your situation.

Option #1

Home Equity Line of Credit (HELOC)

If you’re a homeowner and you’re wondering which is the best auto refinance alternative to help you pay off your car loan, a home equity line of credit or HELOC can be a good option. Mortgage lenders are always willing to give additional loans that are secured by the equity in your house.

BENEFITS

  • A HELOC loan will have more flexible payment terms.
  • Depending on your situation, you can transfer your HELOC to a fixed-rate product.
  • HELOC loans don’t carry extra costs.
  • Because HELOC loans are secured with collateral, lenders are often willing to grant these types of loans and offer low-interest rates.
  • While many personal loans are not tax-deductible, HELOC loans fall into the mortgage category of payments with tax-deductible interest on the Federal income tax statements.
  • Some of these loans have caps on the variable interest rate, which means that the variable interest rate won’t spring out of control.

NEGATIVES

  • By taking a HELOC loan, you will be putting your home on the line, which means that you may lose it if you’re unable to make payments.
  • Borrowing against your home equity may lead to an extended loan term even with a better interest rate.
  • HELOC loans have closing costs that range between 2 to 5 percent of the loan amount.
  • HELOC loans have a number of penalties; for instance, they have a minimum borrowing amount and penalties if you decide to pay off the loan.
  • Although equity home loans usually have a fixed interest rate, HELOCs have adjustable rates that will rise and fall depending on the market interest rates.
Option #2

Peer-to-Peer Loan

Peer-to-Peer auto loans aren’t a new thing. Before credit cards, people looking for small and short-term loans could get them from relatives or close friends. However, banks and credit cards changed all this. But with the advent of the internet, a new type of financing has appeared: peer-to-peer lending.

P2P loans match an individual borrower with an individual lender. Visit a P2P lending site like Prosper.com or Lending Club and fill out the online application form. If you qualify for an auto loan, you will gain access to potential lenders, along with their interest rates and terms for taking out a loan. When you find a lender that suits your needs, you can finalize the process and get the money to pay off your auto loan.

BENEFITS

    • You can find lenders even with a poor credit score.
    • Peer-to-peer loans are unsecured, which means that the lender cannot repossess your car in case you fail to pay on time.
    • These loans don’t have pre-payment penalties
    • They have lower interest rates
    • P2P loan sites have acceptable terms for both parties, and there is no middle man to dictate the interest rate and terms of the loan.

NEGATIVES

    • You may face an extremely high-interest rate if you have bad credit.
    • While the loans are unsecured, defaulting from paying your loan will affect your credit rating and score.
    • P2P loans have borrowing limits.
Option #3

Trade-in Your Vehicle

If your financial situation has suddenly changed and keeping up with your auto loan repayment has become difficult, you will have to make some tough decisions. In such a case, you can trade-in your car instead of having it repossessed. Having your car repossessed can affect your credit score. However, if you trade-in your car, you may be able to buy a less-expensive car that fits your budget.

BENEFITS

  • Trading in your car is a fast, easy, and convenient process.
  • If you have equity in your car, you can use it as a down payment for your new car.
  • Lower interest rates
  • Lower monthly payments
  • You have a tax advantage. Most states require you to pay the tax on the difference between the price of your new car and what you get after trade-in.

NEGATIVES

  • You will receive less than what you would get if you sold the car yourself.
  • If you’re trading in a car with negative equity, you will have to roll over your debt.
  • With negative equity in your new car, you will pay more for your new car loan.
  • You will take a longer time before you can reach positive equity in your new vehicle.
Option #4

Put Your Vehicle Up For Sale

If you have an existing auto loan that you have to pay off and you feel that you cannot afford to pay any longer, you can get out of your current stressful situation without damaging your credit by selling your car. If the value of your car exceeds that of your loan balance, then you won’t have a problem selling it. However, if the auto loan balance is more than the market value of your car, you may find yourself upside down on your loan.

New cars have a high depreciation rate. In fact, Debt.org estimates that a car loses 20 percent of its value the minute it is driven off the lot. This means that a $30,000 vehicle will be worth $24,000 even before you reach home from the car dealership. Therefore, people who get an auto loan to purchase a car often find themselves with negative equity or upside down on their auto loan. This means that they owe more than the car is worth.

To get as much as possible from your car, sell it privately. Although selling your car yourself will take some work, you will save a lot of money on interest. Additionally, you may get a higher price for your car than selling to a third party. You can post your car for sale on Facebook Marketplace, Craigslist, eBay or other platforms. After selling your car, you will still have to pay the balance you owe.

BENEFITS

  • You will finally get yourself out of your current situation.
  • You can start afresh.
  • In some cases, you can make a profit if you sell a car that is worth more than you owe.

NEGATIVES

  • In order to sell your car quickly, you may have to sell to a dealership for less than what your car is worth.
  • You will be required to pay the loan balance after selling your car.

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