Buying a car is a big decision. For many people, it’s one of the largest purchases they will make aside from buying their home. While it can be challenging to choose the right car to buy and take out a loan for the initial purchase, refinancing a car loan can be an even greater mystery since it’s not something you do often! Here are some questions you should be asking if you are in the market for a refinance.
Key questions to ask when refinancing a car
- How often should I refinance?
- When should I refinance my car?
- How does a car refinancing work?
- How will it impact my credit score?
- What are the pros and cons of replacing my initial loan with a new one?
- How do I find the right lender to help me with auto loan refinancing?
How often should I refinance and when should I do it?
Refinancing your car loan can save you money on interest if you do it right. If you first got your auto loan when you had bad credit and you’re working on improving it, you might be wondering how often you can refinance a car loan? There’s no legal limit on how many times you can refinance a car but there are pros and cons that you should weigh carefully and lenders may not approve you over and over.
You may also wonder how long should you wait to refinance a car as your credit score goes up? The short answer: it depends. Although many lenders might not have any restrictions on when you can refinance your auto loan, others might not feel comfortable refinancing a brand new auto loan. “At LendingClub, the minimum is 90 days,” says Alia Dudum, a spokesperson for LendingClub. She adds, “This is usually to confirm that you’re making on-time payments, so stay on top of those payments if you’re hoping to refinance in the near future.”
How does car refinancing work?
When you refinance a car loan, you’re replacing the original auto loan with a new one. If your credit or financial profile has improved since you were approved for the original auto loan, you might be able to qualify for a lower interest rate with an auto refinance loan.
The process of refinancing a car loan is similar to the auto loan application process when you first bought the vehicle. Several factors are reviewed, including the value of your vehicle, your income, and your credit score.
“When you apply, a lender will look at your credit profile, as well as the make, model, trim, and mileage of your car to determine your rate,” says Dudum.
Once the auto loan is processed, it will cut a check to the original lender to pay off the loan, and they’ll receive the title to the car in return.
Refinancing with even a small interest rate decrease can make a difference. For example, say you bought a truck with a six-year $30,000 auto loan at 5.99% APR. Over the course of your auto loan term, you’ll pay $5,787 in interest.
If, however, you manage to refinance your loan to one with a 5.25% APR, you’d save $749.
That might not seem like a lot over the course of six years, but it’s money you wouldn’t have otherwise, so why not do it?
When does it make sense to refinance a car loan?
There are three main scenarios where it makes sense to refinance your car loan.
“Has your credit score increased since you took out the loan?, If so, you may qualify for a lower rate than you did when you first bought the car—which means savings in your pocket.”
If your credit has improved
“Has your credit score increased since you took out the loan?” asks Dudum. “If so, you may qualify for a lower rate than you did when you first bought the car—which means savings in your pocket.”
Interest rates have dropped
Even if your credit score has not changed, you may still qualify for lower rates if interest rates, in general, have dropped since you financed your car. Check what rates you qualify for without hurting your credit score using SupeMoney’s free loan comparison tools.
You need to lower your monthly loan payment
“Refinancing at a lower rate can lower your interest bill,” says Dudum. But not everyone can qualify for lower interest rates. Dudum adds, “You can also refinance to lengthen your auto loan’s term and reduce your monthly payment.”
This is a great option if money is tight. It will mean more interest paid over the life of the auto loan, but that higher overall cost might be worth having a little more wiggle room now. It’s important to consider this option carefully in light of your current financial situation and long-term goals.
There are also several risks to replacing your original loan with a new one.
Will refinancing your auto loan impact your credit score?
Yes, applying for a new loan will have an impact on your credit score. In the short term, it can ding your credit score by a few points. However, if you make regular and on-time payments it can help improve your credit score. Note that credit bureaus will consider inquiries that fall in a typical shopping period as just one inquiry. For FICO scores calculated from older versions of the scoring formula, this shopping period is any 14-day span. In other words, you have a two-week window to “shop around” and apply to multiple lenders and it will only count as one credit inquiry.
How to refinance an upside-down auto loan
You are going to struggle to find a lender, if you try to refinance a car that is worth less than its market value. A car that is worth less than the loan used to finance it is known as being “upside-down” or “underwater” on your loan. An upside-down auto loan is hard to sell and to refinance. If during the “upside-down” phase of repayment you try to refinance, the lender may require an up-front cash payment to make up for the difference.
What are the pros and cons of refinancing?
If you’re on a tight budget or you see a better interest rate advertised, refinancing a car loan can be very attractive. Althought you can save a lot of money with an auto refinance, it is important to take a close look to make sure you will benefit from refinancing. Refinancing has pros and cons, and the best choice will depend on your personal circumstances.
Here is a list of the benefits and the drawbacks to consider when refinancing an auto loan.
- Reduce your interest rate.
- Lower your monthly payment.
- Tap into your auto equity
- Some lenders charge origination fees.
- Your current lender may charge prepayment fees.
- A refinance can increase the cost of your auto loan.
How do you find the right car loan refinancing lender?
“Auto dealers can mark up interest rates, charging as much as 3% more than the APR you could’ve qualified for with another lender,” says Dudum. That’s why it’s essential to shop around to compare interest rates.
Auto dealers can mark up your interest rate, charging as much as 3% more than the APR you could’ve qualified for with another lender,”
Some lenders will allow you to get pre-approved for a car loan refinance without running a hard credit check. Use SuperMoney’s auto loan offer engine to see what kind of rates you could qualify for with your credit history.
Remember that credit unions sometimes offer lower interest rates on mortgages and auto loans but offer a limited selection of loan products. Banks, however, can offer a wide variety of loan products, but their interest rates are sometimes higher.
The more time you put into researching auto lenders, the more likely you’ll be able to get the best interest rate when you refinance your car loan. And if your credit scores continues to improve, keep checking back on the pre-approvals and offers on your favorite lender’s website. You might see another opportunity to refinance in the future.
FAQ on Refinancing your Car Loan
Is the only benefit to obtain a lower interest rate?
Getting a lower interest rate on your new car loan is the biggest possible advantage of refinancing since it will help you save on the overall amount of money you will pay for your car. Refinancing your car loan could also help lower your monthly loan payments by lengthening the term of your repayment, but remember this will lead to a higher overall cost. You may want to find other ways to meet your monthly payments (ex. reduce other expenses) rather than extend the term of your loan by refinancing. Be sure to consider the benefits and potential drawbacks carefully.
How does refinancing a car loan affect your credit?
Every time you apply for credit to refinance a car loan, the lenders will run a hard check on your credit report. If you can qualify for lower interest rates or you want to lower your monthly payments with a longer loan term, it might be worth the small ding to your credit.
Refinancing multiple times in a short period, however, can multiply the negative impact on your credit report and it can take longer to rebound. Remember hard inquiries stay on your credit report for 24 months.
So, if you’re looking to borrow again in the future, lenders might see the multiple credit inquiries and view you as too risky.
How long should I wait to refinance my car?
Wait at least 60-90 days from getting your original car loan to refinance. It typically takes this long for the title on your vehicle to transfer properly, a process you need to be complete before any lender will consider your application. This will also give you time to check credit scores and work to improve them if needed. Typically, refinancing your auto loan will only save you money if you have a good to excellent credit score since lenders reserve the best rates for borrowers with great credit.
Why do lenders want me to refinance?
There may be times when advertisers reach out to encourage you to pre-qualify for auto loans. Your financial institution wants to keep you happy, but they also want to make money. They do this by lending and charging interest to their customers. By offering to refinance your loan, they are gaining another potential interest-paying customer.
Your existing lender might encourage you to refinance to prevent you from seeking out a lower rate elsewhere, if interest rates have changed or if they can see that your personal credit situation has improved. By offering the best rates, banks are able to keep their account holders’ business, potentially help you save money, and ensure a positive experience to promote future business.
Does refinancing hurt your credit score?
When you refinance a loan, you are closing out an old loan account and replacing it with a new one. This can affect your credit score because, among many factors, most scoring models take into account the age of the credit accounts on your credit reports. The longer your credit history, the better.
In addition, if the credit bureaus see too many hits to your credit in a short amount of time, your score may be impacted.
What are the fees involved when refinancing a car loan?
Fees vary depending on several factors, such as your lender and your credit profile. Here are some of the most auto refinance fees.
- Transfer Fees. Typically, the only transfer fees associated with an auto refinance loan are fairly standard transfer of lienholder fees (usually $5 to $10) and state re-registration fees ($5 to $75). These estimated fees may vary by lender, state of residence, etc.
- Pre-Payment Penalties. An auto loan prepayment penalty is written into the terms of the loan agreement and stipulates a penalty or fee for paying off some or all of your loan amount early. Prepayment penalties help finance companies offset profits from lost interest payments when a loan is paid off before the scheduled repayment term ends. Not all lenders penalize borrowers who get ahead on their car payments or refinance, so be sure to review your loan information carefully to learn more or ask your banker directly about their policy and repayment terms.
- Termination fees. Some lenders may charge an early termination fee to cover the upfront costs that were initially waived when setting up the initial loan. Other terms you might see used for this fee include closing fees are closing fees or call provisions.
- Late payment fees. These are fees you will hopefully never have to worry about. However, it is still important to know what fees you will be charged if you are late in your payments.
Accurately estimating these fees will help you evaluate whether refinancing your loan could help you save enough money to be worth the time and paperwork involved. Be sure to evaluate your monthly savings under the new interest rate, and include any fees associated with the loan.
What else is required?
Each bank has specific auto refinancing requirements, so be sure to ask about the details and factors they consider. For example, if you have $7,500 or more remaining on your car loan ($8,000 if the loan was made in Minnesota) and the car is less than 10 years old with fewer than 125,000 miles on it, you may be eligible to refinance under certain auto loan offers. Many banks have links to auto loan calculators on their web site that can show you whether refinancing can save you money.
Ben Luthi is a personal finance writer and a credit cards expert who loves helping consumers and business owners make better financial decisions. His work has been featured in Time, MarketWatch, Yahoo! Finance, U.S. News & World Report, CNBC, Success Magazine, USA Today, The Huffington Post and many more.