Is Auto Loan Refinancing Right for You?

Refinancing your auto loan means replacing your existing loan with a new one from a different lender. Your current loan gets paid off by the new lender and you start making monthly payments, hopefully, smaller ones, on the new loan.

If you think your credit has improved since you bought your car, you should look into auto loan refinancing. There’s a good chance you can lower your interest rate and end up with a smaller monthly payment. You might also be able to shave some time off the loan, or go the other way and extend the term of the loan if you’re having trouble making your monthly payment.

What’s the catch? There isn’t much of one: It takes some time, and your credit profile might take a slight hit when you apply for the new loan. However, know two important things:

  1. Most auto loans don’t have a prepayment penalty so refinancing won’t cost you anything.
  2. Submitting an application for refinancing has no application fees, and the funds become available quickly, often within a day.

Why you might want to refinance

The prospect of paying less interest or lowering your monthly payments are the main reasons to consider refinancing. Let’s say your current auto loan has a 10% interest rate, and you’ve been making payments for a year or so. Chances are, your credit has improved and you could now qualify for a lower interest rate, which could lower your monthly payments. If you simply went to your current lender and asked it to lower your rate, it would probably say no. After all, you signed a contract at a certain interest rate and the lender wants its money.

Lucky for you, in today’s competitive market, plenty of other lenders are eager to get your business. When you refinance, you simply go to another bank, credit union or online lender and show it how much you still owe, called the balance of the loan. It pays off your existing balance and creates a new loan; and you start sending your monthly payments to the new lender.

If you meet the requirements, refinancing your car loan for a smaller payment could allow you to put more into savings, investing or a home improvement project. Or you may be able to pay off your car sooner. All of these options are better than pouring your money down the drain by paying more interest than you need to on a car loan.

When refinancing your car loan makes sense

Refinancing your auto loan could be the right move for reasons other than your improved credit. Even if you’re satisfied with your current loan, it doesn’t hurt to see if you can save money on interest. It makes sense if:

Interest rates have dropped. Interest rates fall for a variety of reasons: a changing economic climate, increased competition in the banking industry, even regulatory changes. If interest rates are lower now than when you first got your car loan, refinancing is likely to lower your rate and could help you pay the loan off sooner. Or, it could save you money on interest. It only takes a few minutes to apply for refinancing and see if a new lender — a bank, credit union or online lender — will offer you a lower interest rate.

A car dealer marked up your interest rate. When you got your existing loan, the car dealer might have charged you a higher interest rate than you could have qualified for somewhere else. This often happens to shoppers who don’t check their credit score before buying a car. They are persuaded to take the dealership’s loan because they didn’t shop around for the best interest rates. But you can undo the damage by refinancing and getting a new loan at a lower interest rate.

You can’t keep up with payments. Maybe you got overexcited at the dealership and bought a car that’s really too expensive for you. You might be struggling to keep up with payments. Or maybe you’re facing unexpected financial challenges because of a job change or other circumstances. By refinancing your car loan, you can take more time to pay it off, and this will lower your payments. You should think carefully before taking this course of action: If you extend the loan term, you’ll pay more in interest over the life of the loan. That’s not optimal — but it’s better than damaging your credit by missing payments.

Refinancing your auto loan

Whether you can’t manage the monthly payments or your credit has improved, there are plenty of reasons to consider a refinance. While there are different motivations for replacing your current loan, it is important to understand the outcomes of an auto refinance. Here are some of the benefits that could help you save.

Lower your monthly payments

If you are struggling to make your monthly payments, you may consider a refinance. A refi can increase the term of your loan, giving you more time to pay off the note. This extension can help you better manage other monthly expenses by lowering your car payments.

Reduce the length of your loan

Some borrowers look to shorten their loan term to help pay off the vehicle faster. While this increases your monthly payment, it can decrease the overall interest you pay which saves you money down the line.

Decrease your interest rate

If your credit score has improved since you purchased your vehicle, it might be time to shop around for a new interest rate. A lower rate can reduce your total interest charge which can help you pay off the vehicle faster. A good rule of thumb is to seek rates in the low single digits.

Let the Travis Credit Union be your resource for buying or refinancing your vehicle. We offer great low rates for auto loan purchases or refinancing. We also offer quick loan processing, an easy online loan application, and other great options when financing your auto loan. Visit Livauto.com/autorefinance to learn how you can start saving today.

The Credit Benefits Of Auto Loan Refinancing

Refinancing Your Auto Loan May Impact Your Credit Score.

Auto loan refinancing can have many benefits for your short and long-term financial outlook. But if you keep a close eye on your credit profile, you might be wondering how refinancing is going to affect your credit score.

The truth is, refinancing any loan will invariably have minor, short-term impacts on your credit. They can vary based on your situation. For someone with a long, well-established credit history, these impacts will be minor; however, for someone with little to no credit history, these factors will make a much bigger impact.

Still, in the long run, auto refinancing will generally help your credit as it simultaneously closes out a loan and adds a loan approval to your credit report.

Let’s take a look at three ways an auto loan refinance can affect your credit profile:

1. CREDIT INQUIRIES

The first way refinancing can impact your score is the hard credit inquiries that will appear on your credit report. When a lender checks your credit report to evaluate how risky it would be to lend you money, that shows up as what is called a “hard” inquiry. Typically, these will impact your score by a small amount, typically by five to 10 points. And while they will stay on your credit report for several years, their impact on your actual score will dissipate after several months.

A number of hard inquiries from various types of lenders could be a red flag for prospective lenders. Groups of hard inquiries suggest you were desperate to open new credit, at some point, for some reason. Having too many hard inquiries in too short a period of time could hurt your ability to get good interest rates, or even get approved for a loan at all.

That being said, those same lenders usually understand that when you’re shopping for financing for a big-ticket item such as a home or auto loan, you are likely to get quotes from several sources to get the best rate. Most credit score models will group all hard inquiries made within a 14-day period together as a single unit. While they will be listed individually on your report, they will only affect your score once. For that reason alone, it is important to ask for quotes only after you have finished your research and you are ready to refinance.

2. YOUR CREDIT HISTORY

Another way an auto loan refinance impacts your credit is by altering your repayment history. As you make regular payments on time, your score improves. This demonstrates that you are a reliable person who takes credit obligations seriously.

When you refinance, you are wiping that payment history clean and starting from scratch with a new loan. Because some models will take older loan payment histories into account, but others don’t, your best bet is to just anticipate that this will impact your credit score and plan accordingly.

3. YOUR CREDIT UTILIZATION

Your credit utilization is the total amount you owe your creditors compared to your total available credit. Generally speaking, if your credit utilization is below 30%, you’re in good shape. Any more than that and your score will take a hit.

When you refinance a loan, depending on the new terms, you are changing your credit utilization. If you take out a loan for more than the original — to get cash out, for example — then you are increasing your utilization rate. If you take out a loan for less, you might be lowering your overall total utilization rate. While this shouldn’t be the primary deciding factor when it comes to refinancing, it can have an impact on your score.

You might see a short-term dip in your credit score after refinancing your auto loan, but the effect is typically negligible, and the potential benefits — including a lower payment amount and a lower interest rate — may far outweigh any negatives.

How does a car refinance loan work?

Whether your goal is to lower your monthly car payments or reduce the total interest you pay on your car loan, it’s important you understand how refinancing your car loan works.

Refinancing your car loan is replacing your current auto lender with another lender. This involves changing the name of the company that is listed on your car’s title, which is a document that details proof of official ownership. That means you will make payments to the new lender until your loan is paid off.

Before checking your rate for a car refinance loan check to make sure that when you obtain a quote it won’t be a hard inquiry on your credit report. This can impact 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. You won’t need to have your car appraised the way you do when you refinance a home. Lenders will look at the value of your vehicle relative to how much you owe on the vehicle, called your Loan-to-Value ratio.

What else lenders will look for

Lenders will also look at how many payments you have left on your current auto loan to understand if refinancing is worthwhile for both parties. Typically, you need a minimum of a few months to show on-time payment history but after that, the more recent your current loan is the more potential refinancing will have to save you money. The way that many auto loans work is that the majority of the interest is paid during the beginning of the loan. Check the amortization schedule of your current loan to see what percentage of your payments are interest payments.
Once you get your rate, you should evaluate if the rate or terms offered to meet your financial goals. You should also make sure that you understand any additional fees or prepayment penalties so you can understand the total cost of the loans you’re comparing.

The process

Once you select your lender there are certain documents you need to refinance your car loan. For example your insurance and registration cards.

Once everything is verified and approved, you may be asked to complete a Power of Attorney (POA) form so your car title can be transferred from your previous lender to your new lender. A POA shows that you have authorized the title transfer to the new lender.

Your current lender will then pay off your previous lender. When you receive confirmation that your refinance is complete, your new lender will be responsible for your loan. You’ll make payments directly to them and contact them for any questions or concerns.

Depending on how fast you can submit your documents, many lenders will take between a few days to a few weeks to complete the refinance.

Want to check your rate to see how much you could save with a car refinance loan through Lending Club? Check your rate with no impact to your credit score.