When Will You Be Able to Refinance?
Your car loan isn't something you'll have to pay for the rest of your life. It's a good idea to double-check that you're not paying more than you should if you borrow money to buy a car. It's critical to understand how to refinance into a better loan because you might be able to save money.
When Can You Refinance Your Home?
Before refinancing your auto loan, there is no requirement that you wait a certain amount of time. You need to meet all of the new loan's requirements to refinance. You can refinance as soon as you buy—even before you make your first monthly payment. Just make sure you get a better deal, and that refinancing does not result in you paying more for your vehicle.
Important: You may not be able to refinance until you get proof from your state's Division of Motor Vehicles in some situations (DMV). Gathering registration information may take some time.
Refinancing Requirements
You'll need the following items to refinance an existing loan:
- A new auto loan with better terms or pricing than your current one
- Information about your existing loans, such as your current lender, account number, and loan balance
- Details about your car, such as the make, model, year, and VIN
- Pay stubs or tax filings that demonstrate your ability to repay
Refinancing is the best way to save money on interest.
One of the main reasons for refinancing a loan is to be able to borrow money at a reduced interest rate. After factoring in all of your financing charges, that lower rate means you'll pay less for your car. Because the interest rate is factored into the computation of your monthly payment, your needed payment should also decrease. As a result, keeping track of your monthly cash flow becomes much easier.
If you can replace your existing loan with one with a lower rate, refinance as soon as possible. Most vehicle loans are amortizing, which means you make a fixed monthly payment that includes interest fees.
You pay down your debt over time, but you pay the majority of your interest costs at the start of the loan—so bring that rate down as soon as possible to start saving money. Use an amortisation calculator to figure out how much money you can save by refinancing.
Monthly Payments That Are Lower?
Lower monthly payments can result from refinancing, but this isn't necessarily a good thing. You may save money if you accomplish lower payments as a result of a lower interest rate (as long as you refinance near the beginning of your loan period). However, if you wait a few years before refinancing, the interest cycle and amortization process are restarted, and you will have to pay interest for several more years.
Despite the cheaper monthly payments, this could wind up costing more.
You might be able to secure a better loan if your credit scores have improved since you took out your first loan. You could qualify for a lesser interest rate, a low fixed rate, or even the removal of a cosigner from the loan.
When you pay your loans on time, your credit improves (or when negative items fall off your credit reports after seven years or more). These timely payments can improve your credit scores, allowing you to expand your borrowing alternatives.
Even a year can make a difference, so it's worth checking to see if your ratings have improved to the point where you are now eligible for a better loan.
Avoid these blunders.
It's enticing to refinance, but it's all too easy to spend more money than you need to. Avoid the most typical errors, especially if your car loan is only a few years old.
Extending it
You will normally pay extra for your car if you take out a longer-term loan. While it may be tempting to upgrade from a 48-month to a 72-month loan, you will normally pay higher interest over the course of the loan. Longer terms offer cheaper payments, which might help when cash flow is tight. However, the overall cost of a long-term loan is higher (which seems illogical given the smaller monthly payment). An amortization table, once again, may show you how your interest charges mount up over time.
Turning the Tables
Extending the term of your loan can result in a negative equity situation. In other words, you can owe more on your vehicle than it is worth. You'd have to make a check to your lender or continue making payments on an automobile you don't use anymore to get rid of it.
Even if your car breaks down and is rendered inoperable, you must continue making payments to avoid damaging your credit. It's best to pay off loans promptly so you can sell (and possibly buy a new, less expensive car) if the necessity arises.
Penalties for Failure to Pay
Prepayment penalties still exist, and if you pay off a loan before the term is out, you may have to pay a fee. Check to see if paying off your current debt early will save you money. Penalties can eat up any savings you make from a lower interest rate.
Refinancing After a Long Wait
Waiting can cost you money if you check the figures and decide to refinance. New automobiles get the best rates, and some lenders won't refinance loans for cars that are more than a specific age (seven years, for example).
If you refinance right after buying a car from a dealer and take advantage of dealer incentives, you might be able to get a "new car" rate. The interest rates on used automobile loans are usually higher than those on new car loans.
Payments that have gone unpaid
Keep an eye on the refinancing process, and don't assume it's over. You may believe that your current loan has been paid off and that you can stop making payments, but any lag in the process can result in a "missed" payment. Your credit score will be damaged as a result of missed payments and make it more difficult to refinance.
Important: Before you cease making payments, check with both lenders.
How to Refinance a Home
You must apply for a new loan with a new lender. In most circumstances, the procedure is pretty painless: your lenders coordinate the logistics, and all you have to do is submit an application.
To get ready, do the following:
- Find out everything you need to know about your current loan. The information you require should be found on your lender's most recent statement.
- Obtain information about your vehicle (if you will not be driving it). It's helpful to have your VIN, make, model, and year on hand.
- Make sure you have proof of income on hand so that lenders can confirm your ability to pay back your new loan. A few recent paystubs should be enough, but double-check with your new lender for more information.
Submit your application and any required papers and any lender queries. Many lenders can make a decision on your application on the same day or within a few days.
Where Should You Refinance?
Any loan with reasonable rates and fees is worth considering. Many borrowers choose to use a local bank or small credit union. Those institutions are more likely to offer low-interest rates and be more lenient with loan size and credit concerns. Another useful source is online lenders. Everything can be taken care of whenever and wherever it is most convenient for you, and you can get great deals online.
Tip: Get quotes from at least three lenders and complete your shopping in a matter of weeks.
When a lender makes a credit inquiry, your credit score drops marginally. Having a lot of inquiries can become an issue over time, but you won't be penalized if you complete all of your applications within 14 to 30 days.
Most Commonly Asked Questions (FAQs)
Is it feasible to refinance a car loan even if your credit is bad?
You may be able to refinance a car loan with bad credit, but refinancing may not be beneficial if your credit is worse today than it was when you took out the original loan. If your credit score has declined, a lender is unlikely to offer you better terms on a refinance.
How many times may a car loan be refinanced?
You have the option to refinance your car loan as many times as you like as long as you can find a lender prepared to do so. On the other hand, refinancing multiple times in a short period of time may be viewed as a red flag by lenders.
What is the cost of refinancing a car loan?
The lender charge and the title fee are the two main fees of refinancing an automobile loan. Lender fees are usually around $10, while title fees can go as high as $75.
