Refinancing Your Auto Loan

Sometimes the situation calls for us to take what we can get when we need it. And sometimes that means getting a car loan for less than the best deal around.

If that’s the case, have you considered refinancing your auto loan? Refinancing your car loan save you big money on the monthly payment as well as the total interest charges over the life of the loan.

Refinancing an auto loan is much like refinancing a home loan. You get a new loan at a lower interest rate to pay off the principal of the original loan. But unlike refinancing a home, refinancing a car loan won’t come with cost-prohibitive closing costs - most car loans charge no closing costs at all.


Here are scenarios where you may be able to save money by refinancing an auto loan:

• You bought a vehicle with less-than-perfect credit and let the dealer arrange financing, and you accepted an auto loan interest rate that really wasn’t a good deal. Or it was a horrible deal. Even if your credit hasn’t improved by very much, you may find that another lender will give you a better rate if you check around.

• Your credit score is much better now than it was when you financed your auto. You may have had a higher debt load at the time of the auto purchase, or your credit history wasn’t very well established. You’ve taken steps to improve your credit and have a good chance to qualify for a better deal on a refinance.

• You always had great credit, but you financed your vehicle when interest rates were higher. Interest rates have dropped over the past couple of years, so you may be able to get an even better interest rate if your original loan was obtained before the economic downturn.

• You just recently financed a vehicle but know that your credit history negatively affected your interest rate. Aim to work on your credit so you can get a better rate down the road.

Here’s a few pointers on refinancing an auto loan:

• Check for your best available rate with your financial institution, other banks, and online lending networks (for example, LendingTree). Your credit card issuer is likely to offer auto loans as well.

• Do all your credit shopping within a couple weeks time period to avoid multiple credit inquiries on your credit report, which can hurt your credit score and sabotage your attempt at getting a better interest rate on the refinance.

• Refinance for the same amount of time - or at least close to the same amount of time - that’s left on your current loan. If your current loan will be paid off in three years, refinance with a loan term of 36 months. This will help you avoid dragging out your payments and interest charges, and saves you money in the long run.

• Lenders have rules about the age and type of vehicle they will do a refinance for. They typically require that the auto be less than seven years old and have less than 70,000 miles on the odometer. They also may only refinance personal use vehicles, and not commercial fleet vehicles, RVs, motorcycles, boats, etc.

• Lenders also have loan amount restrictions. Many lenders will not do a refinance for less than $7500 so that the interest charges are profitable for them. But the maximum refinance varies widely by lender - I’ve seen maxes from $30,000 to as high as $100,000! Each lender has their own rules, so check around.

• Getting extra cash when you refinance - tapping into some of your car’s equity - may or may not be allowed by your new lender. In general, most lenders do not allow the refinance to be for an amount that is higher than the pay-off amount. But if you owe less than your car is worth, it may be possible to access some of that equity. Again, each lender has their own rules, so ask around to find the loan you want.

• If you can’t get a refinance due to your car’s age, the pay-off loan amount, or the mileage, then the next option may be to obtain a personal loan, though these tend to have significantly higher rates than an auto loan so it may not be worth doing; the rates for personal loans tend to run in line with a good credit card rate. More information on personal loans in an upcoming article.

And one more consideration if you refinance your current auto loan for a better rate...
Maybe you can easily afford to pay your current monthly payment, but you find that a refinance significantly drops the amount of your payment. Why not continue to pay the amount you were used to? It will pay your loan off faster, and you can always choose to pay only the required payment if you have a financially difficult month. Just make sure that any amount over the monthly payment goes directly towards paying down principal.



Sources:
www.lendingtree.com
Capital One
Wells-Fargo
Chase Bank