Understanding the process of refinancing an auto loan and comparing rates before applying might help you save money and keep your car. Refinancing is a viable choice if you have good credit, especially if your credit score has increased since you first obtained the loan. If your current interest rate is high because you financed the car through the dealership, you may be eligible for lower rates even if your credit is less than perfect. This article explains how refinancing an auto loan works and its benefits. So, why not sit back and enjoy the ride?
What Is Refinancing an Auto Loan?
If you’re able to get approved for a new loan at lower interest rates, you might consider refinancing your auto loan. You may be able to reduce your monthly payment amount if your credit rating has increased since you first obtained your current loan. However, the stage of the loan’s lifecycle should be taken into account. It might not be worth it if you only have a few months left on your auto loan or if your credit score hasn’t changed much when you first applied for the loan.
Furthermore, you may not be eligible for better terms if you are refinancing your auto loan once or multiple times in the past. You can prequalify with lenders to find out if you are eligible for a better interest rate or a shorter repayment period. You can also determine if it will be cost-effective to refinance your car loan by using a refinancing auto loan calculator.
How Refinancing an Auto Loan Works
When you are Refinancing an auto loan, your current loan is replaced by a new one. Typically, this is done to save money overall by lowering your rate or to lower your monthly payment by extending your loan term. Your local bank, credit union, or car dealership should be your first stop when looking to Refinancing an auto loan. If you are accepted, your current loan will be repaid and you will enter into a new loan agreement with a different interest rate and repayment term. It is recommended that you take the following actions before applying for or searching for the finest auto loan refinance providers to ensure that you are prepared for the application process. Here are some tips on how refinancing an auto loan works:
#1. Review Your Current Auto Loan
Get the details of your loan in one place, including the name of your lender, the length of your loan, the APR, your monthly payment, and the total amount you’ll pay back. Auto refinancing companies will require this information right away, so having it ready before you start talking to them will save you time. You can use this data to determine how much you can save by using an auto loan calculator or comparison tool.
#2. Get a Copy of Your Credit Report
Check your credit report to see whether it has increased. If your credit score is high, you may be offered more favorable interest rates, which could lead to significant cost savings throughout the loan’s lifetime.
#3. Apply and Compare Offers
Finding the best auto refinance rates requires doing some research and comparing offers from several lenders. You should contact at least five different lenders so you can compare rates and terms.
#4. Pay Off Your Current Loan
Either you will get a check in the mail or your old lender will pay off your new debt. It is important to keep making payments on an existing loan until you can be sure the loan has been completely paid.
Refinancing Auto Loan Rates
As with standard auto loans, the interest rate on a refinance loan can change depending on a number of factors. Your credit rating is among the most crucial factors. There are five different credit bands, each of which might have a significant impact on the interest rates you’re offered.
Factors That Affect Refinancing Auto Loan Rates
When you refinance your car loan, the interest rate you receive depends on a variety of criteria. The interest rate and repayment conditions offered by a lender are based on the following factors:
- FICO Rating: Reduced interest rates are one of the benefits of having a high credit score. Loans may be difficult to come by and interest rates for borrowers with bad credit will be significantly higher.
- Loan Duration: A higher interest rate is typically associated with a longer loan period.
- Age of the Vehicle: Some banks refuse to finance older automobiles. If you need to finance a vehicle that is several model years older than the one you now own, you should expect to pay a higher interest rate.
- Loan-to-value (LTV) ratio: Lenders often base their interest rates on the difference between what you owe and what your car is currently worth. The term “LTV ratio” refers to this figure.
Best Refinancing Auto Loan Companies
The following are the best refinancing auto loan companies:
#1 Auto Approve
Unlike the other companies, Auto Approve does not provide financing for brand-new vehicles. Instead, they focus on vehicle loan refinancing. However, Auto Approve provides far more options when it comes to refinancing vehicles. In addition to car, truck, and SUV refinancing, the organization also works with a network of lenders to provide finance for motorcycles, ATVs, boats, and RVs. However, only the most creditworthy borrowers are likely to be offered the lowest rates offered by Auto Approve, which start at 2.94% APR for auto loan refinancing. There is no application cost and no penalty for paying off your loan early.
Due to its low entry credit requirement of 580, Auto Approve is available to those with less-than-perfect credit histories as well.
#2. PenFed Credit Union
Pentagon Federal Credit Union, also known as PenFed, is a military credit union that frequently provides auto loan and auto refinance rates that are competitive. It was first conceived as a benefit for military personnel and their families, but membership is now extended to include civilian employees of participating government and nonprofit agencies, as well as donors to eligible charities.
However, the lender has a higher minimum credit score requirement than some of its rivals despite offering generally competitive rates. PenFed may not refinance your auto loan balance if your credit score is too low.
#3. myAutoloan
MyAutoloan isn’t a lender itself, but rather a marketplace where you can shop around for the best auto loan rates from multiple providers. Your options for a loan will be presented by lenders when you submit your information.
If you’re contemplating refinancing an auto loan, the myAutoloan marketplace can help you locate low-interest rates. The service allows those with less-than-perfect credit to refinance their auto loans by giving them access to a variety of options for doing so. However, the best interest rates are only available to those with the best credit.
#4. Bank of America
Bank of America is among the most prominent American banks. It provides a number of banking and lending options, including refinancing an auto loan, at competitive rates. Our investigation also revealed that the company extends credit to those with less-than-perfect credit (a score of 580 or more is required). With 18.25% of individuals polled owning loans from the company, Bank of America was also the most popular lender in our survey on 2023 auto loans.
Bank of America’s auto refinancing rates start a little higher than those of some other lenders, but they are still among the lowest in the business. A decent credit score is required to qualify for the bank’s top rates, but the organization is still a good option for individuals with poor credit.
Refinancing an Auto Loan with Bad Credit
If your credit hasn’t improved since you obtained your initial vehicle loan, refinancing an auto loan with bad credit may be an option even if you have poor credit, but it may be challenging to achieve a cheaper rate. Interest rates are often higher for those with poorer credit scores. Your current auto loan interest rate may be lower than the rates now available. One approach to see if rates have improved overall is to look at historical statistics on average interest rates for new auto loans. If the interest rate you locked in when you took out your loan was greater than the rate you could get today, refinancing could save you money.
Keep in mind that rates for new cars and rates for refinancing are different; using past data is just one approach to getting a feel for the market. Refinancing with the intention of obtaining a lower monthly payment (rather than a lower rate) may necessitate a longer loan term. Keep in mind that the interest you pay on a loan could significantly increase if the term is made to last for a longer period of time.
Here is how refinancing an auto loan with bad credit works:
#1. Check Your Credit Score
When refinancing an auto loan with bad credit, you must first determine whether you genuinely have a negative credit score. It might have changed in either direction if you haven’t checked yours in a while. If you know your credit score, you’ll have a better understanding of what interest rates and terms you might be offered.
One of the three major credit reporting agencies, Equifax, TransUnion, or Experian, is required by law to provide you with a free credit report once every year. However, many financial institutions (such as banks and credit unions) and credit card issuers now provide customers with regular, free updates to their credit scores.
Credit reporting services can be subscribed to in order to gain regular access to a more comprehensive credit history. If there are problems on your credit report, you may see them here and go to work fixing them.
#2. Find a Refinance Lender That Works With Bad Credit Borrowers
Finding companies that deal in refinancing an auto loan with bad credit is the next step after getting a good picture of your credit position. You can start looking in a few different places.
- Traditional banks
- Credit unions
- Online lenders
- Auto loan brokers
- Lending marketplaces
#3. Shop Around for Your Best Options
We advise that customers solicit competing loan proposals and carefully evaluate each one. Finding the finest firms to refinance a car loan for customers with negative credit can be a challenge.
People with low credit scores may feel hopeless when trying to secure financing. For that reason, certain lenders would charge extremely high-interest rates to their customers. However, not all lenders are like this. Some lenders do provide affordable options, albeit at slightly higher interest rates than those available to borrowers with excellent credit. You can obtain the best rate for your specific needs and credit score by comparing many quotations.
Best Lenders to Refinance Your Auto Loan When You Have Bad Credit
The following are the best lenders to refinance your auto loan when you have bad credit:
#1. Auto Credit Express
If you need auto finance but have bad credit, Auto Credit Express can put you in touch with a group of lenders who specialize in helping people in your situation. There are specific criteria that must be met before applying for a refinance loan through its network of lenders. To qualify, your credit must be good or showing signs of improvement, you must be current on your vehicle loan payments, and you must not be underwater on your car loan.
#2. New Roads
A bankruptcy, charge-off, or repossession on a person’s credit history has been taken into consideration by New Roads. You must have made at least 12 payments on your existing auto loan before you may refinance with New Roads, and your loan balance cannot be more than 120% of the wholesale value of your vehicle.
#3. Tresl
Even though they are not a direct lender, Tresl (formerly Innovative Funding Services) gives you the opportunity to quickly check your eligibility for an auto loan from any of the lenders in their network.
When Should You Refinance Your Auto Loan?
Although refinancing an auto loan isn’t always the best financial move, there are times when doing so makes sense. We’ll get into the specifics of when it’s a good idea to refinance your automobile and when it’s not, so keep reading!
Consider refinancing an auto loan if and when the following situations arise:
#1. Your Credit Score Improved
You may have been stuck with a high-interest rate on your initial loan because of your low credit score. You might save hundreds or even thousands of dollars over the life of a new auto loan if your credit score has increased.
#2. Reduced Interest Rates
Interest rates fluctuate over time. Refinancing an auto loan could be a good idea if interest rates are significantly lower now than when you first received your loan.
#3. Your Car Is Worth More than You Owe
A lower interest rate may be available if your car loan is for a smaller amount than the value of your vehicle.
What To Look For When Refinancing an Auto Loan
Consider more factors than just APR when considering possibilities for refinancing your auto loan. A loan’s total cost is heavily influenced by several other critical factors. Here are things to check out when refinancing an auto loan:
#1. Interest Rate
Your interest rate is the percentage by which your lender increases the cost of borrowing money. Your interest rate is one of several factors that go into determining the total cost of your auto loan. The change from interest rate to APR. Interest accrues during the life of a loan, thus even a seemingly insignificant difference in interest rates can have a huge effect on total repayment amounts.
#2. Loan Term
Loan terms from the majority of lenders are quite adaptable, typically falling between 12 and 84 months. Although you will pay less each month if you spread out your loan payments over a longer period of time, you will end up paying more in interest overall. Furthermore, interest rates are typically higher for longer terms.
#3. Discounts
To assist borrowers save a lot of money, several lenders provide discounts on their auto loans. Signing up for automatic payments often results in a 0.5% reduction in the annual percentage rate (APR). If you have multiple accounts with a large bank, like checking and a savings account, you may be eligible for a discount.
#4. Fees and Penalties
Some lenders charge fees and penalties that make it more expensive to refinance a car loan, even if they offer competitive interest rates. Some lenders charge loan origination fees to cover the expense of originating the loan. However, some lenders will charge a one-time fee if you miss a payment, while others will increase your interest rate. Always make sure you read the fine print before applying for a loan.
Benefits of Refinancing an Auto Loan
Refinancing an auto loan has a lot of benefits. The following are some of the benefits of refinancing an auto loan:
#1. Getting a Better Interest Rate
A lower interest rate is a popular motivation for people to consider refinancing an auto loan. The ups and downs of interest rates in the market provide possibilities to save money on financing over time. You should expect an increase in your credit score if you have a history of paying your bills on time each month. Lenders may offer more favorable terms if they see a lower risk associated with lending to you.
#2. Making Car Payments More Manageable
One potential benefit of refinancing an auto loan is lowering monthly car payments. Refinancing when interest rates are low can help you save money on your monthly payments if money is tight right now. Refinancing to a longer loan term is also an option, however, it isn’t one that should be taken lightly. If you do this, you may be able to significantly reduce your monthly expenses.
#3. Paying Off Your Car Loan Sooner
However, if you’re in a better financial position now than when you bought the car, you may be able to refinance into a shorter loan term and pay off the vehicle sooner. One benefit is that interest on the loan won’t have as much time to accumulate, reducing the overall amount of interest you have to pay back.
Paying off your loan early also helps you avoid being upside down (or underwater) in the loan, which is a very undesirable financial situation to be in. What it means to be “upside down” on a car loan is to owe more on the loan than the car is worth. Given that cars lose value over time, this can be a huge boon if you ever plan to sell the car or if an accident renders it a total loss.
Will Multiple Bad Credit Refinance Auto Loan Applications Affect My Credit Score?
Refinancing an auto loan, like applying for any other loan, will result in a hard inquiry being made on your credit report. Your credit score will most certainly decrease as a result of this. That’s just something that has to happen.
However, credit reporting agencies now treat identical loan hard inquiries made within a short time frame as though they were made simultaneously. This means that having many loan offers from different lenders has the same effect on your credit score as having just one.
Is Refinancing an Auto Loan a Good Idea?
You can save money each month by refinancing and stretching out the life of your loan, but you may wind up paying more in interest overall. On the other hand, if you refinance to a loan with a shorter term and a cheaper interest rate, you will save money in the long run.
Does Refinancing an Auto Loan Hurt Your Credit?
Refinancing an auto loan might have a negative impact on your credit score, to put it briefly. A rigorous credit check is performed whenever a new loan application is submitted, including when refinancing an auto loan. However, the good news is that credit inquiries tend to disappear quickly after being made.
What Is the Purpose of Refinancing an Auto Loan?
refinancing an auto loan is taking out a new loan to pay off an old one. Depending on the terms, it can help you lower interest rates, decrease monthly payments, and speed up the debt repayment process.
Final Thoughts
If you are paying a rate higher than the market or if your credit has improved, refinancing your auto loan can save you money. Don’t refinance until you’re sure you’ll save money. You may wish to consider other choices if reducing your monthly payments by refinancing will necessitate increasing your loan term.
Related Articles
- WHAT IS REFINANCING: Meaning, How It Works & Purpose
- WHEN SHOULD YOU REFINANCE YOUR CAR? Is It Ever a Good Idea to Refinance Your Car?
- Important Things to Know before Refinancing Credit Card Debts (Refinansiering Av Kredittkort)
- HOW MANY TIMES CAN YOU REFINANCE YOUR HOME: Updated
References
