No matter where you live and what you do, owning a car is almost a must. The problem is that when you estimate all expenses for your vehicle like fuel costs, insurance premiums, repairs and maintenance and monthly payments for your car loan. These can add up to a hefty sum. If you are struggling to keep up with the bills and would prefer some extra financial flexibility, it might be a good idea to educate yourself more on how to refinance an auto loan. When done properly, such a measure helps you breathe easier every time a new bill arrives. So let’s take a look at what you should do in order to make that happen.
Auto Loan Refinancing: What Does It All Mean?
The basic concept of the process we are suggesting is simple: you take another loan for which you use to pay off your current car loan. The collateral is your vehicle. This can potentially lower your monthly payment in two ways depending on the new loan terms: first, if it is taken for a longer period of time, and second, if you have managed to negotiate better an interest rate. There is, of course, the implied risk of losing your car, if you fail to keep up with the payment terms. But either way, if you must resort to such a measure, you are already struggling and thus this risk would still exist. Refinancing an auto loan is something more and more people do these days, especially when the economic landscape in their country becomes shaky. The system works fairly well, and in certain cases, you can do it even when you have bad credit.
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When and Why You Should Refinance Your Car Loans
As we mentioned, the most common reason why people decide to refinance their car loans is that they’re struggling financially. But, there are several other factors that may motivate you to make this decision, including:
- To improve your bad credit history
- Your lender has just increased their rates
- Interest rates on your loans are lowered
- Your overall financial situation has improved and you would like to get rid of your loans quickly and under the best possible terms
Any of these instances, or a combination of them, could be a good enough reason for you to refinance your car loan. Note that even though auto loan lenders frequently give you enough money to cover your dues on the current loan, there are circumstances in which you can get cash as well. If this is the direction you need to take, make sure to ask the companies you are considering working with for the options they provide.
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When to Hold Off on Refinancing
You have already seen that refinancing comes with some considerable benefits, but there are also drawbacks to consider before you rush into anything. Think twice before you take out a new loan if:
- Most of your current loan is already paid off
- The car you own is old or has been on the road for a long time (i.e. a vehicle which is older than 7 years or with more than 75,000 miles on it)
- You plan on taking another loan soon
- Prepayment penalties, pre-computed interest, and refinancing fees outweigh the potential benefits
- You have poor credit which will result in unfavorable conditions on your new loan
According to recently published statistics, in 2019, the total car debt of Americans measures at 1.1 trillion USD – a staggering figure. The average amount taken out for a new car is $31,099, which results in a $515 monthly payment. Assess your current financial situation carefully before you decide to pile on this incredible amount of debt.
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How Your Credit History Plays a Role
Does your credit history matter when you refinance your car loans? The short answer is yes. In fact, your current credit score is the most important factor that lenders consider when they are making you an offer. The worse your score, the more money you will have to pay. Chances are that if you have managed to make payments on a steady and regular basis for the past 6 to 12 months, your score may have improved and you will be eligible for lower rates.
In case you have failed to make timely payments and your credit has gone in the gutter, it is highly advisable that you rethink the way you manage your finances. Set a goal to improve your credit score before you apply to refinance your car loan. We know it can be challenging, but it is the sensible thing to do and can help you gain financial wisdom for the future.
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Can Refinancing Hurt Your Credit History?
The act of refinancing a car loan in itself should not reflect your credit score in a bad way. There are inherent risks involved, however, and it is best to be aware of those before it is too late.
Timeliness of Payments
As you already know very well, your credit is heavily dependent on the regularity with which you make payments. Missing or being late on paying even one of them can have a pretty negative impact – one that it will take a lot more effort to fix than may seem fair. Then, you’ll need to think about how refinancing works: your new lender pays off your debt to your previous lender. The process from application to approval to the actual transfer of the money takes time. If you are already approaching the next payment date once you’re approved for refinancing, you might think everything is okay when it fact it is not. Due to the physical time necessary for the transfer of the funds, you may technically fall behind on that one crucial payment and damage your credit. In order to avoid such blunders and hiccups, make sure that you communicate the schedule with your new lender thoroughly and make the necessary arrangements in any situation.
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Taking a New Loan
Another negative effect that refinancing may have on your credit score stems from the fact that you are practically taking a new loan, thus causing the average age of your accounts to decrease. That is why it would be unwise to go on a refinancing rampage – a single vehicle at a time should be the limit. Wait for your score to recover before you refinance another car loan or your home loan, for example. Resisting the temptation to do it all at once will save you money and a lot of headaches.
Bringing Car Payments Down: What to Do
The road to bringing down your car payments is a simple step-by-step process, once you have decided that you are definitely going to refinance your car loan. Here are the basic steps which you should take:
- Review the terms on your current car loan
- Check your credit score
- Research current loan terms and rates
- Contact lenders
These steps will help you determine whether or not taking out a new loan will be a feasible and productive thing to do for you. After you contact several dealers, you’ll be able to pick up the best offer on the table.
US Auto Loan Rates: Facts to Know
As of this year (i.e. 2019), the average interest rate for a car loan in the US is 4.21% for a 60-month lending period. In individual cases, however, the annual percentage rate (a.k.a. APR) can vary from as low as 3% to as high as 10% based on a number of factors, including but not limited to:
- Credit score
- Age of the vehicle purchased
- Length term of the loan itself
Consumers with a credit score of 760 and above are considered prime candidates for a loan and respectively for refinancing car loans. They pay the lowest rates. The general rule of thumb is that the longer the lending period, the higher the APR.
APR vs. Interest Rates
The contract you sign for your car loan will list two loan rates – your Annual Percentage Rate and the interest rate. The former is the higher number and represents the total rate necessary to finance your vehicle, e.g. monthly interest rates and any other fees that need to be paid. The latter is the lower number and it signifies the cost of borrowing per year minus fees and interest accumulated prior to the day of your first payment.
Both rates will result in you paying the same amount of money for the total duration of the loan term. The distinction between the two is simple enough too. The reason lenders give you both is because they want you to better understand the conditions of your loan. While the Annual Percentage Rate is the total cost of financing (or refinancing) your vehicle, the interest rate is just the cost of borrowing the money.
Banks vs. Credit Unions
Making the decision to refinance auto loans at a bank or a credit union can trouble people who are planning on refinancing car loans, and chances are you may be wondering the same. You should know that even though banks on their majority offer APR ranging from 2% to 3%, there can be many differences determined by risk policies that a particular financial institution has. Banks that are risk-averse will not give loans to individuals with a credit score below the mid-600s, while those that have no problem with risk-taking might be willing to consider people with questionable creditworthiness. However, know that the latter receive much higher interest rates – in some extreme cases as high as 25%. Before you go to a bank to refinance a loan of any type, check if they have rules and regulations about the minimal amount of money to be taken out, the mileage and the age of the car too.
As for the credit unions, terms are a little bit different. They are usually much more favorable when it comes to initial loans, as well as loan terms when refinancing. They are more flexible when it comes to the payment schedule, their rates are lower than those of banks and some of them don’t even have a minimum loan amount. The trick is that they operate only with members, and their membership requirements are restricted by location, profession, social status, etc. Also, not all unions offer the same set of services. It is, however, advisable to check your eligibility with a credit union before you go to the bank.
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Will You Need to Pay for Anything?
The majority of auto loans that are available in the US market at the current moment do not include prepayment penalties. As for the refinancing process itself, it generally should not include starting fees. Basically, it means that you will not have to part with cash in order to refinance an auto loan, just with the time you invest in the researching and application processes.
Pro tip: If while filling out the application you decide to check off automatic payment, you will most likely qualify for a lower APR. So you can not only spare yourself from additional expenses while refinancing but also save some money.
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A Common Mistake When “Saving Money”
There are two main reasons why people choose refinancing car loans: first, because they cannot keep up with their monthly payments (see above), and second because they are looking for a better deal from a financial point of view.
If you opt to extend your loan term period, you will not be able to save money. Even though you will be paying less on a month-to-month basis, you will end up with more expenses throughout the whole life of your loan due to the interest accumulated. This fact is directly linked to another risk: becoming “upside-down” on your loan. This means that you will be paying more than your vehicle is worth. Thus, you will be hurting your financial situation in the long-run, rather than improving it.
Some people opt for such an outcome when they are trying to deal with short-term financial troubles, relying on a future financial turn of events. However, we highly recommend avoiding this and instead opt for another, more viable option.
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Refinancing If You’re Already “Upside Down” on Your Loan
Such an option does exist, but the process is complicated. Provided that your credit score is good, you might be eligible to refinance if you’re already upside down on your loan. However, it will also depend on the total worth of your automobile at the present moment, as well as the amount of money you want to borrow. Remember, when refinancing, your car is the collateral, so the lender should deem it worth it to secure the loan they are giving you. That is the so-called loan-to-value ratio, to put it in formal professional terms.
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How Long Does It Take to Refinance Your Auto Loans?
There is no universal or simple answer to this question. It all depends on your individual circumstances. Let’s say, for example, that everything on your end of the table is in order. Then, the length of this procedure often is up to the lender’s standard procedures and the kind of service you are planning to use. Once the process has started you can expect to have your new loan in a period that ranges between 3 days and 4 weeks.
The FastTrack, or FastRefi, as it is also sometimes referred to, is a service designed for those customers that are in a great hurry to get their loans refinanced. If you are one of those people, ask your lender in advance whether they offer such an option because it is not universally applied by all banks and unions out there. Naturally, lenders choose to offer FastTrack in order to attract more customers, but also to prevent the original auto loan lender from providing you with incentives (i.e., better terms) just so that you will stay with them.
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Tell Us More
Are you considering refinancing your auto loan? If yes, what is the reason behind your decision? If no, did we manage to tip the scales for you with this article? Let us know in the comments section below!
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