Auto Loan Refinancing Tips
Your Detailed Guide to Saving Money on Your Car Payments
Refinancing is an effective way for the right borrowers with current car loans to lower their monthly installments or the total interest they are required to pay to own their vehicle outright. With interest rates at an all-time low, a number of consumers are considering applying for refinancing so that they can reduce their payments. Just because you are not a finance major or an economics expert does not mean that determining whether or not an refinancing is right for you needs to be difficult. This detailed consumer guide offers all of the information you need.
What is Refinancing?
The first thing you need to do as a consumer is understand what makes a refinance different from a standard loan. When a borrower applies, the borrower is applying for a new loan to replace their existing one with their current lender. In most cases, the borrower applies with a new lender which, upon approval, will submit the previous lien holder with a payment in the amount of the quoted payoff. The borrower will no longer be obligated to pay the loan that has been paid off. Instead, it will be closed and the new loan will remain in force until it is paid off.
Why Do Many Finance Experts Believe Now Is a Great Time to Refinance?
Debt refinancing has become extremely popular in the world of finance where interest rates are extremely low and lenders are willing to lend to responsible borrowers with good to excellent credit ratings. Of all of the different types of debt refinancing that borrowers can choose from, auto refinancing has become the most practical option because the process is much easier than refinancing a mortgage or a home equity line of credit.
Unlike new home financing, auto refinancing does not require an appraisal and lenders give borrowers how much they need to payoff a current loan instead of looking at value. People who were forced into high APR loans because of the credit crisis are now able to benefit from the rebounding the market as the economy starts to get stable. By choosing the right specialty lender, borrowers who had no option but to take a high APR offer to buy their vehicle now have the option to keep their vehicle and get the lower interest rates that they deserved at the initial date of purchase.
When Does it Make Sense for Consumers to Refinance?
The idea of saving money can be enough to influence anyone to apply for refinancing. Before you start comparing all of the different lenders, their current rates, and the terms and conditions, it is a good idea to determine whether or not refinancing is right for you, as it is not the best option for everyone. In fact, not everyone will qualify based on the value of their vehicle, the age of their vehicle, or the status of their credit report. Here are some of the most common scenarios where refinancing might be the best option:
Your Credit Has Improved Since You Purchased Your Vehicle
Rebuilding your credit takes time, and sometimes you need a vehicle even though your credit score is low. If you had blemishes on your credit report when you purchased your vehicle, you probably had the intentions of accepting the sub-prime loans with hopes of improving your credit and lowering your interest within the next year. If you have successfully had defaults and other blemishes reported from your credit report and your score has improved significantly, refinancing is a great option for you to lower your expenditures.
Your Income Has Changed for the Good
If you have been looking forward to getting a raise or you have finally been put on as a full-time employee, you may want to consider refinancing. When you purchased your vehicle and financed the purchase through the dealer, there is a good chance that your dealer submitted your application for financing through to subprime lenders willing to take on more risk because of your low income. While subprime lenders do approve individuals with lower incomes, they also charge higher interest to account for the extra risk they are taking on. If your gross monthly income has gone up or you have been with the same company for 12 months or more, you may be able to work with a prime lender to get a more competitive interest rate.
Market Interest Rates Have Dropped
You are at the mercy of the market and the current interest rates when you are financing a vehicle purchase. If lenders do not have money to lend, interest rates tend to be higher. If lenders have money to lend and the demand for loans is lower, interest rates drop. When rates in the marketplace are obviously lower than they were at the time you made your vehicle purchase, refinancing may be a great option.
You Have a High Interest Loan that is Affecting Your Ability to Obtain other Financing
Aside from the fact that you can lower your monthly installments by lowering interest rates, there are other reasons why borrowers with high interest loans should consider refinancing. If you are interested in purchasing a second car, a home, or even a boat, the lender will consider your gross income and the amount of all of your debt obligations. If your high APR loan is driving your debt-to-income ratio up, refinancing is a practical solution that may qualify you for other types of financing.
Reducing Your Payments to Handle Other Debts
It is very easy to get behind on your bills, especially when you have high APR loans. If you have a decent credit score and you qualify, refinancing is a great option for you to lower your monthly payment so that you can take care of other debts that have been neglected because your car payment is so high. You can lower monthly bills and get your finances back on track so that you are paying off both principal and interest when you are making your installments.
You Will Be Keeping Your Vehicle for the Term of the New Loan
If you want to lower your monthly payments, you must consider how long you will be keeping your car before you turn to refinancing. Refinancing is the right solution if you are sure that your car will meet your future needs for the new lending term. If you are applying for a 60 month term, you should be sure that the car will be sufficient for you for the next 5 years.
You Do Not Have a Pre-payment Penalty
Whenever you are considering refinancing, you should review the terms of your existing loan very closely before applying. Sometimes, refinancing is not in a practical option because of pre-payment penalties associated with the current loan. Many times, subprime lenders will build a pre-payment clause into the contract to ensure that they do not miss out on long-term profits. If you must pay a percentage of the interest balance left on the loan, you should assess how much this will cost you and compare this figure to the amount you are saving. If you do not have a pre-payment penalty clause built into the contract, you benefit from all of the savings of refinancing.
If you want to Lengthen or Even Shorten Your Repayment Schedule
Reviewing your repayment schedule can tell you if refinancing is a good option for you. You can choose a shorter or even longer term and eliminate your debt quicker or extend the terms.
Your Vehicle Meets Qualifications
Believe it or not, not all vehicles qualify. If you purchase your vehicle new from the dealer, chances are you can refinance, as long as the vehicle is a recent model. If you purchased your vehicle used, you must verify with lenders to ensure that the vehicle is not too old or that you do not owe too much to qualify.
You Want to Reduce the Amount of Interest Going to the Lender
Have you ever sat down and calculated just how much interest you will be going to your lender over the life of your loan? On a $16,000 5-year loan, the total interest paid to the lender at 21% is about $10,280 over the entire 60-month period. If you qualify for a 7%, 5-year obligation on the same amount, you would be spending a total of $3335 in interest. As you can see, you are spending almost $7000 less in interest so that you can keep more of your hard-earned money in your pocket.
How to Find Your Current Credit Score
Anyone considering refinancing should check their credit score before applying. Lenders, especially the prime lenders that offer the lowest and most competitive rates, will only refinance borrowers when they have a minimum credit score. Every time you apply for lending it is a hard hit on your credit score. This is why it is ideal for consumers to check their credit score and verify that they do qualify before they submit their application. While the requirements through each lender may vary, the average lender will require applicants to have a score of 555 or higher as a starting point.
If you are interested in finding your current credit score, there are a number of ways that you can pull up your score through each of the three credit bureaus and access detailed credit reports. While some of the credit report companies require an initial fee, some allow you to check your score once every year without a one-time fee. Here are three different options consumers have to check their credit report before applying for refinancing:
Annual Credit Report for Free
If you want to check your credit score through Experian, Equifax, and TransUnion for free, you can pull up your score real-time at AnnualCreditReport.com. By entering your personal information and verifying your identity, you can immediately view your score. You are not required to sign up for monthly paid-for monitoring services when you use this service.
Requesting Your Score Through the Bureau Directly
You also have the option to your credit score through all 3 credit bureaus for free if you create an account with Equifax and take advantage of the 30-day free trial offer. When you go to the Equifax website, you will be asked for your name, address, social security number, and then you will be directed to a secure page to verify your identity based on information that has been reported on your credit report. You will be asked to enter a credit card to be used once the free trial expires. Make sure to run your credit report, print your report, and then cancel the account before the 30-day trial is up to avoid being charged for monthly service.
Credit Karma Instant Credit Score
CreditKarma.com does not have any hidden fees and is always free. By entering your information at CreditKarma.com on the "Get Started" tab, you can see your credit report instantly for free and use the report to determine if your credit has improved enough to qualify for refinancing.
How to Estimate the Rates You Will Get Based on Your Credit Score
With so many different online tools that are available to consumers to make life easier, once you have your credit score, you can estimate how much you will pay for your new loan by using reputable refinance calculators. If you have a specific lender in mind, you can visit the lender's website and use their own calculators to determine how much you interest you will charged, what terms are available, and what your monthly installments will be based on the balance of your loan. It is a good idea to contact your current lender and ask for the current payoff before you start using calculators so that the estimates are as accurate as possible. You must also realize that these calculations are estimations and not guarantees.
Steps to Take to Determine the Rates You Will Get
1. Narrow Down the Lenders
Use the Internet to look up the current range of available rates. Compare all of the rates from the most reputable lenders and choose the top lenders with the most competitive rates before you are ready to use a refinance calculator.
2. Compare the Rates
Most lenders that refinance will show a range of the APR charged based on the length of the loan (12 months to 72 months), the age of the car, and the credit score of the applicant. You will need this information to determine how much you will be paying based on the new rates you receive on the new loan.
3. Calculate the Difference
Once you have the rates, the term, and you know your payoff, you can use the above calculator to find out what your monthly payment will be and how much interest you will accrue over the life of the loan. Doing this gives you an idea of whether or not refinancing is in your favor before you fill out an application and before the lender runs your credit to qualify you.
How Long Should the Average Person Refinance For?
As you are using a calculator, you might be debating which term you want to select for your new loan. If you are 12 months into a 72-month agreement and you are not concerned in shortening or extending your term, you should select a 60-month plan, as long as the APR on a 60-month agreement is lower. If you take out a 48-month loan initially and you are 12 months into your contract, your goals for refinancing may be to lower your monthly payment and extend the term. A term is not one-size-fits-all and here are some things that you should consider before you determine your term:
- Interest rates are determined by several factors, and term is one factor that is considered. Rates for longer terms are typically higher than those for shorter terms. Because rates are higher for older vehicles, it is typically the best option for individuals with older model years to select shorter terms (eg: 36 months is better than 48 months or 60 months).
- If your goal is to lower the total interest you are being charged over the life of the loan, selecting the shortest term that you can afford is most practical because more of your payment will go towards principal and your interest will be lower.
- If your goal is to lower your monthly payment to catch up on other debts, you should consider a longer term as long as the difference in APR is not dramatic.
- Only select a term that is shorter than the length you intend on keeping your car. If making 1 car payment is hard then making 2 might be near impossible. And if you fail to make payments that might spike the interest rates charged by other lenders.
Should I Make Extra Payments on My Existing Loan or Refinance?
A common question that many borrowers ask is whether making extra payments or refinancing the loan is the better option. The answer to this common question is not as cut and dry as some people would think.
When Extra Payments Are Best
In some cases, some borrowers might find that making extra contributions over the amount that is due each month may be a better option. Circumstances that might not call for refinancing include when: your credit score is too low, your vehicle model is too old, current interest rates are not lower than your old rates, or your pre-payment penalty does not make refinancing a feasible option.
In some cases pre-payment penalties can be minimized by paying aggressively on the loan, but leaving a small amount to remain until the pre-payment penalty period expires.
When Refinancing is Best
Refinancing is better than making higher monthly payments in several scenarios. Interest accumulates on a daily basis. If you can lower your rate, less of the money you are charged will go towards interest and more will go towards principal if you choose refinancing over making extra payments. This is only practical when there is no pre-payment penalty or the penalty is lower than the savings in interest.
Another scenario where refinancing is the better option is when you have a compound interest loan. Understanding the difference between the two are very important. Simple interest loan lenders will divide interest charges evenly throughout the repayment schedule so each payment you make includes the same amount of interest. If you have a compound interest loan, interest payments are more heavy during the beginning of the repayment schedule. This means that less of your payment is going towards your principal during the first few years. By shifting to a lower APR simple interest agreement, you can reduce the amount of money that is going to interest.
Tips on How to Get a Quick Approval
If you have determined that refinancing is the best option for you, you need to learn how to apply for a loan so that you can get approved quickly. Believe it or not, clerical errors could be the difference between saving thousands of Dollars within the next 5 years. Here are some tips that borrowers can use:
- Be sure to include the same names as the names that are on your current loan when you are apply. If you leave out one of the names or you use the wrong spelling, the lender may not be able to find your current loan and the application will automatically be rejected.
- Include your current car loan account number on your application to prevent underwriting errors that may lead to a denial.
- Be sure that your payoff balance is high enough to qualify with the lender. Almost every lender in the industry requires the borrower to have a balance of $7500 or more.
- Check how your car will be valued and see how much the lender will lend compared to the value of the car. Most lenders will refinance between 100% and 115% of the vehicle's value. Prime lenders may only approve applications if the value of the vehicle is higher than the balance of the current loan. If you do not verify that your car has retained its value, you may be wasting your time applying.
- Provide accurate vehicle information to ensure that the Loan to Value ratio is accurate. Just one typo can lead to a drop in value that does not qualify you. Also include the VIN, the year, make, model, and sub model in the application.
This guide should help you determine whether or not you are a good candidate for refinancing. While it is the answer for many borrowers who want to lower their APR and their monthly installments, not everyone will qualify based on lender requirements and guidelines. Consider the balance of your loan, your current credit score, the interest rates that are being offered by lenders based on the market conditions, and how much you can save, and make an educated decision. Lowering your payments and keeping money to yourself to earn interest can truly change your future financial situation if you make a wise decision that has been well thought out, and if you use all of the resources available on the Internet to your advantage.
