Auto Loan Refinancing

When Should You Refinance Your Car Loan – 3 Situations When You Should Refinance

If you financed your car, chances are you could save some money by refinancing your loan. By doing so, you could lower your interest rate, monthly payment, or both.

But not everyone is a good fit for car loan refinancing. Read on to learn how car loan refinancing works and the three scenarios where it makes the most sense to do it.

What happens when you refinance your car loan?

“Auto loan refinancing works much like refinancing your mortgage,” says Korey Adekoya, business development manager at Shabana Motors.

“Essentially, you are replacing your current car loan with a new one with different terms. Usually, you will be working with a new lender too.” If all goes well, you’ll replace your original car loan with one from the new lender.

How does it work to refinance a car?

When you contact the lender to refinance, they’ll do most of the same things the original lender did when you first bought the car. They’ll run a credit check on you and request supporting documents to verify your employment and income.

Do you want to lower your monthly payments? Do you want to change the length of your loan? There are many motivations for refinancing, but you need to determine your goal and understand what needs to be done to meet that goal.”

Next, they’ll evaluate how much you currently owe and how much the car is worth. If you’re underwater — meaning your loan is higher than the value of the car — you may not get better

But if the value of the car is higher than your remaining balance, you might get a better deal.

Once the refinance goes through, the new lender will cut a check to the original lender to pay off the loan. Then, you’ll start making payments to the new lender. In the meantime, the original lender will sign over the title of the vehicle to the new lender.

When should you refinance a car loan?

The idea of getting a lower interest rate or monthly payment is appealing to just about anyone. But wishful thinking doesn’t mean you’ll qualify.

“One thing to consider before you refinance your auto loan is to determine your goal,” says Adekoya.

“Do you want to lower your monthly payments? Do you want to change the length of your loan? There are many motivations for refinancing, but you need to determine your goal and understand what needs to be done to meet that goal.”

Here are three scenarios in which you should consider refinancing your auto loan.

1. Your credit has improved dramatically

There are many reasons why your credit may have been less than stellar when you first bought your car. If you’ve made big improvements since then, you’ll look a lot less risky to lenders and might qualify for a lower interest rate.

Keep in mind, however, that some negative items on your credit report may be a deal-breaker to some refinancing lenders.

For example, consistent late payments, collection accounts, and bankruptcy might make it hard to qualify, even if you’ve been using credit more responsibly lately.

2. Your income has increased

One of the big factors lenders consider when you apply for a loan is your debt-to-income ratio. This number is your monthly debt payments divided by your monthly gross income. If it’s high, you could be considered a default risk and get a higher interest rate.

If you manage to increase your income — or pay off debt — your debt-to-income ratio could be good enough to qualify for a lower interest rate.

3. You want to remove a cosigner

If you had someone cosign your original loan to help you get approved, now might be a good time to try to get them off it. Cosigning a loan can have a negative impact on the cosigner’s credit and put them at financial risk if you default.

If your credit is good enough to get approved on your own, refinancing may be worth it to let the cosigner out of his or her commitment, even if you don’t qualify for a better interest rate or lower monthly payment.

How do you refinance a car loan with bad credit?

If your credit hasn’t improved since you first bought your car, that doesn’t mean all is lost. You might not get approved for a lower interest rate, but you may still be able to get a lower monthly payment. That’s because refinancing can also be a great way to extend your loan term.

For example, say you have two years left on a five-year loan, but your monthly payments are getting hard to manage. Depending on your financial profile and the value of the vehicle, you could refinance with, say, a four-year loan.

You’ll end up paying more in interest if you do this, but that may be worth getting some relief on the payments.

How to refinance your car loan

Once you decide to refinance your car loan, the next step is to shop around for lenders with the best rates. You’re not restricted to brick-and-mortar banks anymore, either. Online lenders like LightStream and Prosper offer competitive rates and terms.

FAQ on car loan refinance

Why should you refinance your car?

When you can replace your existing loan at a lower rate, it’s best to refinance as early as possible. Refinancing your auto loan could help lower your monthly payments by lengthening the term of your repayment. Or it could help you save money through a lower interest rate.

How long should I wait to refinance my car?

Wait at least 60-90 days from getting your original loan to refinance. It typically takes this long for the title on your vehicle to transfer properly, a process that will need to be completed before any lender will consider your application. Refinancing this early typically only works out for those with great credit.

Do I have to put money down to refinance a car?

Most lenders only consider refinancing if you owe from $7,500 to $30,000, provided your car is less than 5 years old and worth at least what you owe. If you owe more than the car is worth, you may need to pay the difference in order to refinance.

Does refinancing hurt your credit?

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 scores because most scoring models take into account the age of the credit accounts on your credit reports. The longer your credit history, the better.

Can you negotiate refinance rates?

Refinancing often makes sense if you can redo the loan at a lower interest rate, but it costs money to refinance. Depending on how sharp your negotiating skills are, cutting loan processing fees and closing costs is where you can save money.

Compare those two lenders with other top auto lenders to see what kind of rates you might qualify for. You can even use SuperMoney’s auto loan offer engine to get prequalified for a new auto loan without the hard credit checks you’d get if you apply with multiple lenders.

The more research you do on your options, the more likely it is that you’ll get the best deal you can get.