Auto Refinancing 101: How to Refinance Your Auto Loan
How does the auto refinancing process work? When does it make sense to refinance an auto loan? How do you get the lowest rate on the new loan? You'll find answers to these questions and more in the FAQ list below.
How to Refinance Your Auto Loan - FAQs
Let's start with the good news. Refinancing a car is generally much easier than refinance a home. There's less paperwork and fewer steps involved when you refinance your auto loan. But despite this simplicity, it can still save you plenty of money! As we progress through the frequently asked questions below, you'll learn everything you need to know about auto refinancing. You'll learn how, when and why to refinance your car loan.
1. How does auto refinancing work?
The process itself is fairly straightforward. When you refinance your auto loan, you are basically replacing the current loan with a new loan. You can even submit an application online, to see if you qualify. The new lender will pay off your old loan. Then the vehicle's title will transfer to the new lender. Aside from the application and a couple of other steps, that's really all there is to it.
2. When should I refinance my auto loan?
You should refinance your auto loan if it helps you accomplish your financial goals. Period. Most people refinance for one of two reasons: They want to lower their monthly payments by spreading out the loan, or they want to secure a lower interest rate to save money. You can even accomplish both of these things by refinancing -- you can reduce your monthly payments and total interest costs at the same time. So if you can refinance your auto loan to accomplish these goals, then it makes sense to do it.
3. How do I get a better interest rate on the new loan?
Many people refinance their car loans in order to secure a lower interest rate. This can save you thousands of dollars over the life of the new loan. You can get a lower rate in several ways. If your credit score has improved a lot since you took out the first loan, you'll probably qualify for a better rate on the new one.
Likewise, if the interest rates have dropped significantly since you first applied for the auto loan, you could secure a lower rate. Since the interest is part of your monthly payment, this would serve to lower your monthly payments as well. This is why many people refinance in the first place, to reduce their payments and the total amount of interest they pay on the loan.
4. How much can I save by refinance my car loan?
This depends on several factors. The interest rate differential plays a big role here, obviously. If you lower the rate by a little, then you'll save a little. But if you can refinance into a much lower rate, then your total savings will be greater.
It also depends on how far into the loan you are, and how long you'll be keeping the new loan. If you refinance the auto loan to lower your payments, then you'll save a little bit of money each time you make a payment. The longer you keep the loan, the more money you would save -- all other things being equal.
Let's look at some real-world examples:
John purchased his car six months ago. His FICO credit score was in the upper 500s at the time, so the dealer told him he would have to pay 11% interest on the loan. It was a five-year auto loan for a car worth $23,000. This equaled a monthly payment of $500.
Now let's assume that John improved his credit score over the next few months. He does some research online, and he finds a company that offers auto refinance loans. He applies for the loan and gets a better rate this time around. His new payment is $400 a month. So John would be saving around $6,000 over the remaining term of the new loan.
In some cases, it's possible to save even more than this. The greater the interest rate reduction, the bigger the savings. If I had a 17-percent interest rate, but was able to refinance my auto loan to a much lower rate, I could save even more than John did. A lot more, in fact.
5. What credit score do I need to refinance auto loan?
This is a question many consumers ask. But it's not the right question. The question you want to ask is: What credit score I need to refinance into a lower interest rate. Remember, auto refinancing is only worthwhile if it helps you achieve your financial goals -- a lower rate, a smaller monthly payment, etc.
Every lender will interpret your score differently. And they all have their own lending standards and criteria. So there is no magic number that applies to all refinancing scenarios. With that being said, having a credit score above 620 is a good starting point. This number is widely used by lenders to distinguish between "good" credit and "subprime" credit. Subprime means you have a lower score than most people, so you won't be offered the best rates. In some cases, a bad credit score can prevent you from getting an auto refinance loan altogether. So you might want to check your credit to find out where you stand.
Here's the bottom line. Different lenders have different cutoff points for approval. They also assign interest rates differently. So your credit score might get you a better rate from refinance company 'A' than what you get from company 'B.' You'll just have to apply to find out what they are willing to offer you.
Also keep in mind that auto refinance loans are easier to get than mortgage refis. So as you continue your research into this subject, you want to make sure you're reading articles about auto refinancing in particular.
6. Can I apply for an auto refinance loan online, and if so where?
Yes, and we recommend that you do. It's an easy way to get the ball rolling. It's also a good way to compare offers from several different refinance companies. These days, there are companies that specialize in auto refinance loans online. Here's a good example:
This article explains how to refinance your auto loan, and when it makes sense to do so. We highly encourage you to continue your research beyond this website. There's a lot of good refinancing advice online, and it's only a Google search away. Good luck.
