Refinancing your auto loan can seem complicated, but with some research and preparation, it can end up saving you money. This comprehensive guide covers everything you need to know about the auto loan refinancing process.
What is Auto Loan Refinancing?
Auto loan refinancing simply means replacing your existing auto loan with a new one, ideally with better interest rates and terms that reduce your long-term costs.
You take out the new loan to pay off the old one, transferring the debt to a different lender. Your old loan is closed and you begin making payments on the new refinanced loan.
When to Consider Refinancing Your Auto Loan
There are two main scenarios when refinancing your auto loan could make good financial sense:
- You can get a lower interest rate: Even a small interest rate drop of 1-2% can save you hundreds over the loan term. Run the numbers to see potential savings.
- You’re having trouble making payments: Refinancing could lower your monthly payment and make it more affordable. Just be careful about extending the loan term too long.
Specific situations where a refi could help:
- Your credit score has improved since you got your existing loan
- Interest rates in general have dropped
- You originally got dealer financing, which typically has higher rates
- You want to reduce your monthly payment amount
Refinancing Process Step-By-Step
If you determine refinancing could benefit you, here is the basic process:
1. Research and Compare Loan Offers
Shop around and compare offers from at least 3 different lenders. Online lenders usually offer the most competitive rates. Focus on the APR, loan term length, and any fees.
2. Check Eligibility Requirements
Make sure you meet the lender’s requirements for loan amount, credit score, existing loan status, vehicle mileage limits, etc. before formally applying.
3. Formally Apply for Your New Loan
Submit your application and all required documents to the lender. This will include a hard credit check. Most have easy online applications.
4. Get Approved and Finalize New Loan Details
If approved, you will finalize all the specifics like loan amount, APR, monthly payments, etc. Read everything carefully before signing.
5. Pay Off and Close Old Auto Loan
Once approved, the new lender pays off your old loan balance. Stop making payments on old loan once confirmation received to avoid double payments.
Refinancing Auto Loan Costs/Fees
Refinancing itself doesn’t directly charge you as a borrower. But here are costs to expect:
Interest charges – Since you take out a whole new loan, you reset the interest charges. Try to get the lowest APR possible.
Origination fees – Some lenders charge 1-5% of the loan amount as an upfront fee. Shop around for options with no origination fee.
Title transfer fees – You may have small DMV costs to transfer the vehicle title into the new lender’s name.
Income tax – If the original loan had tax-deductible interest and the new one doesn’t, it could have tax implications.
Refinancing Auto Loan Requirements
While specific requirements vary by lender, here are typical standards to qualify for an auto refinance loan:
- Credit Score – A minimum score of around 600 is usually required, but 720+ scores get the best rates
- Loan Balance – Most lenders require a remaining balance between $5,000 and $50,000
- Time Remaining – Expect to have had the loan at least 6 months and have more than 6 months left
- Vehicle Mileage – Many lenders limit mileage to 100,000 miles or less
- Vehicle Age – Vehicles older than 6-10 years often don’t qualify
- Debt-to-Income Ratio – Having total monthly debts under 50% of income helps approval odds
Pros and Cons of Refinancing an Auto Loan
Here are some potential advantages and disadvantages to weigh:
- Lower monthly payment
- Pay off the loan faster
- Reduce interest charges over loan term
- Improve strained budget with more affordable payment
- Take advantage of better credit to get great rates
- Application fees and lender costs
- Slight ding to credit score from hard check
- Risk of extending loan term too long
- Potential prepayment penalties with some lenders
- Tax implications if deductible interest changes
So in most cases there are significant financial benefits, but crunch the numbers for your situation and weigh the pros and cons before deciding.
Alternatives to Refinancing Your Auto Loan
If refinancing isn’t the right fit, here are a couple alternatives to consider:
Auto Loan Modification – Your existing lender formally reworks the terms of your current loan. This avoids fees and credit checks of a totally new loan.
Voluntary Vehicle Surrender – As a last resort if unable to pay, you can voluntarily hand over the vehicle keys to the lender. This skips forced repossession.
Tips for Successfully Refinancing Your Auto Loan
Follow these tips to ensure the process goes smoothly:
- Shop around with multiple lenders and compare all terms, not just interest rates
- Thoroughly check eligibility requirements before applying to avoid wasted hard credit checks
- Read every document carefully before signing to understand all new loan specifics
- Don’t halt payments on old loan until new lender 100% confirms payoff status in writing
- Sign up for automatic payments on the new loan to prevent ever missing payments
- If struggling with payments, reach out to lender right away before issue snowballs
While refinancing your auto loan may sound complicated, this guide covers everything you need to navigate the process successfully. The key is understanding your goals, comparing all offers thoroughly, and crunching the numbers to maximize savings.
If you can lower your rate or monthly payment via refinancing while keeping risk low, it can positively improve your long-term financial position. But make sure you weigh all pros, cons and alternatives before jumping in. Follow the tips above and you’ll be in great shape to make the best decision for your situation.
Frequently Asked Questions
Still have some lingering questions? Here are answers to some of the most common queries around auto loan refinancing:
How much can I lower my monthly payment?
It depends on your loan specifics and new rate, but many people reduce their payment by $50-200 per month via refinancing. Crunch the numbers carefully based on offers.
Does refinancing a car loan hurt your credit?
It may cause a small drop from the hard credit check and opening a new account, but is unlikely to cause major lasting damage, especially if it helps improve difficult payments.
How soon can you refinance an auto loan?
Most lenders require you to be at least 6 months into your existing loan with over 6 months remaining. Some allow 3 months, but less than that is rare.
Is refinancing my car worth it if I have bad credit?
If your score has actually improved since you got your current loan, refinancing could be worthwhile to capitalize on better rates. But if it’s the same or worse, there likely won’t be benefits.
Can I add negative equity from my trade-in to a refinanced loan?
Some lenders allow you to roll in negative equity, but it depends. Expect higher rates and scrutiny of the vehicle value if doing this.
Does refinancing an auto loan reset the terms?
Yes, with a new lender your monthly payment schedule and interest calculations basically start over. The clock resets in a sense, which is why focusing on total interest paid over the loan term matters.
In another related article, How to Get the Best Auto Loan Rate and Save Thousands