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What is auto loan refinancing?
May 22, 2023
Verified by
Jessica Parker
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If you have owned your car for a year or more, you may have noticed that lenders advertise better interest rates than you pay. Lower interest rates allow you to save money on your monthly payments. To get a lower rate, you need to refinance your car loan or, in other words, get a new loan for your car.
Before refinancing an auto loan, it is important to understand the process and compare rates before you apply. If you have good credit, especially if your credit has improved since your first loan, refinancing may be a good option. If you have a negative interest rate because of initial financing with a dealer, you may also be able to get better rates, even if you do not have very good credit.
What is car refinancing?
When you refinance your car, you take out a new loan to pay off the previous one. This can potentially lower your interest rate, lower your monthly payments and allow you to pay off your debt faster. It depends on your creditworthiness and the amount and rate for which you qualify.
How can you save money by refinancing your car loan?
There are several ways to save money when refinancing your car loan.
Reduce the interest rate
Depending on your credit score and vehicle equity, you may be able to get a lower interest rate from a new lender. With a lower interest rate, the cost of the loan will be lower over its term. This could save you hundreds or even thousands.
Lower monthly payments
Refinancing your car loan can reduce your monthly payments. You can reduce payments through a better interest rate or by extending the term of the loan. However, if you extend the term of the loan, the total cost of the loan may increase because you will pay more interest.
When does it make sense to refinance an auto loan?
Refinancing your car loan may be a good idea if your credit rating has improved since you took out your current loan. If you are only a few months away from the full maturity of the loan, it may not be worth refinancing. On the other hand, if you have several years left, you could save a lot of money by refinancing your car loan.
You can get pre-qualified with lenders to see if you can get a lower rate or a shorter term. Before you begin the pre-qualification process, a car loan refinance calculator can help you determine whether refinancing will save you money and how much you could save.
What might prevent you from refinancing your car loan?
There are some circumstances that might prevent you from refinancing an auto loan or that might indicate that it is not the best option. It is advisable not to do so if
- The car's mileage exceeds 100,000 km or the vehicle is more than 10 years old.
- You no longer have leeway on your auto loan.
- If you pay off the loan early, you may incur prepayment penalties.
- You are almost finished paying off your loan and a refinance means paying more interest.
- You have already refinanced your auto loan recently.
- Your credit score is too low to qualify.
- Refinancing means a higher rate because of rising market rates or other factors.
Make sure that the fees you will be charged when you pay off your old loan and take out a new one do not exceed your savings. The fees you may have to pay are as follows:
- Early repayment fee. The early repayment fee is a penalty associated with fixed-term loans that are paid off early.
- Transaction fee. The current lender and the new lender may charge a transaction fee when refinancing the current auto loan. Try to get these fees waived.
- Registration fees. Registration fees are imposed by the state as a regulatory measure to cover the cost of maintaining state roads. Some states may require re-registration after refinancing.
- Title transfer fee. You must pay this fee when you transfer title to a car from one lender or owner to another. The cost can range from $5 to $165, depending on the state and county where the vehicle is registered and other factors, such as the model year.
How do you refinance an auto loan?
Understanding the process of refinancing an auto loan is as important as knowing its benefits. Here are the four steps in refinancing an auto loan.
- Check your credit score and credit report. The auto loan rate you get will depend on your credit score. Ideally, you should have a credit score above 670.
- Compare rates and apply to different lenders in advance to avoid affecting your credit several times.
- Apply online, by phone or in person and check the terms and conditions before signing.
- Use the funds from the new car loan to pay off your current loan, but continue to pay it off until you have verified that it is completely paid off.
Refinancing your car loan can help you save money over the life of the loan. This option is worth considering if interest rates are lower or if your credit has improved. However, if you need to extend the term of the loan to reduce your monthly payments through refinancing, it is best to consider other options.
