For many, refinancing a car loan means saving money every month by changing lenders and searching for a more competitive loan. But it’s not a guaranteed process — even if you are approved for an car refinance loan, you may not get a better deal that lowers your monthly repayments significantly.
How does the coronavirus outbreak affect car loan refinancing?
You might be able to get a better deal if you waited to refinance your car loan during the coronavirus outbreak. After the Bank of Canada lowered rates to between 2.45% in March 2020, many car loan providers also lowered their rates.
But you’ll still need to shop around to make sure you’re getting the most competitive rate. And you still need to meet the lender’s requirements — which typically include having good credit and a steady source of income.
Car loan refinancing involves taking out a new loan to pay off your old one, usually with lower rates and more favorable terms.
The new loan amount typically covers the amount remaining on your previous loan, including any prepayment fees or closing costs. When you compare your refinancing options, you’ll want to be looking for the deal that saves you the most money every month and over the life of your loan.
Should I refinance for a longer term?
Even if you can’t score a lower interest rate, you may be able to extend your loan term. But this method has its pros and cons. Your monthly payments may be lower, but you’ll often end up paying more in interest than if you’d stuck with your original lender.
Generally, auto loan refinancing isn’t the best choice unless you can be sure your new loan will really cost you less. Consider talking to your lender about your options if you’re struggling with the monthly cost.
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Pros and cons of auto loan refinancing
Auto loan refinancing can be helpful if you’re trying to save, but there are some drawbacks that might have you considering other options.
Lower your monthly cost with a lower rate or longer term
Lower your total interest cost with a lower rate or shorter term
Switching providers can get you better customer service
Get out of debt faster by shortening your term
Prepayment penalties increase your monthly and total cost
Potential fees could reduce savings
Lengthening your term for lower payments increases the total cost
When should I refinance my car loan?
You should refinance your car loan if your credit and income have improved since you first took out the loan. Even if it hasn’t changed, refinancing can also help if you think you can qualify for a lower rate with another lender.
Generally, you should avoid refinancing if your financial situation has changed for the worse. And if your lender charges a prepayment penalty, refinancing can make your car loan more expensive.
What should I look for in auto loan refinancing?
Every lender offers different terms and features, so don’t let a low potential APR dazzle you. Take your time and compare everything that goes into borrowing, including the lender’s legitimacy and the fees it charges.
Loan amount. Make sure that the lender you choose offers enough money to cover your current loan amount. Otherwise, you could end up paying more in interest on top of out-of-pocket refinancing fees.
Interest rates. Check the maximum interest rate the lender charges. This way, you’ll know the highest potential cost of the loan and can better compare it to your current loan.
Fees. Ask about the fees a potential lender will charge you — including prepayment penalties, monthly maintenance fees and origination fees — to see if refinancing is worth it.
APR. Looking at a loan’s annual percentage rate (APR) is often considered the best way to compare offers to see which will cost you less each year.
Repayment flexibility. If you’re currently struggling to meet your repayments, ask a potential lender how flexible it is with changing payment dates, automatic payments and late fees.
Legitimacy. Read reviews and give customer service a call. If it’s difficult to get a clear answer about rates and fees — or if you don’t get an answer at all — you’ll know it’s best to move on.
Although auto loan refinancing isn’t always the best idea, it can net you a little extra cash every month, especially if you know when it’s the best time to apply.
When you’ve improved your credit score. One of the best times to refinance an auto loan is after you’ve improved your score. You may be able to score a lower rate through refinancing, which means you’ll pay less every month and less over the life of your loan.
When you need to lower your monthly repayment. Life circumstances can change and make your current loan repayments unaffordable. With auto loan refinancing, you’ll likely be able to find a lender that can lower it — either by extending your loan term or offering you a more competitive interest rate.
When you financed through a dealership. Financing through a dealership isn’t always the worst way to go, but more often than not, your auto loan will be marked up. If you took out a loan through a dealership instead of an independent lender, you might want to see what kind of rates you could get by visiting a bank or online lender.
When interest rates are dropping. Interest rates are influenced by the economy. If you notice that interest rates are falling, take advantage of it by applying for auto loan refinancing. You may not get the lowest rate out there, but you could walk away paying less on interest than you did previously — definitely a big win for your budget.
When should I avoid refinancing a car loan?
Refinancing your auto loan may not always be the best financial choice. You may want to avoid refinancing if:
You’ve been late on car payments. Not only will this lower your credit score, it also makes you look like more of a risk to lenders. Many auto loan refinance lenders will want you to have multiple months of timely payments in order to qualify.
You don’t have a regular source of income. If you don’t have a regular way to make payments, lenders are unlikely to consider you. You’ll have to supply proof of income — not necessarily employment — to qualify for most refinancing.
You’ve taken on more debt. Taking on more debt increases your debt-to-income ratio (DTI), which lenders look at to make sure you can afford repayments. If you’ve recently started on a new credit card or borrowed a personal loan, you likely won’t be in the best position to borrow.
You have an older car with significant mileage. Although there are lenders that will refinance a vehicle no matter its age or mileage, most want to see vehicles under certain limits. This way, you avoid borrowing money on a car that might not retain its value.
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You can, but you’ll want to make sure it’s a smart financial move. If you borrowed your first car loan at a similar credit rating, you’re unlikely to really lower your interest rate by refinancing. But if your score has increased slightly, you might be able to qualify for a better deal with another lender that’s willing to work with bad-credit borrowers.
Can I refinance if I’m upside down on an auto loan?
It’s possible, but it might not be the best idea. If you’re already upside down on your car loan — meaning you owe more than the car’s worth — you may have to put up additional collateral to cover the remaining loan balance.
Refinancing can help you turn your car loan around and avoid defaulting. Some lenders even offer loans specifically for this situation. However, not all lenders are willing to work with upside-down car loans, so you might want to reach out to customer service first to make sure you’re eligible.
You can, but you’ll want to make sure it’s a smart financial move. If you borrowed your first car loan at a similar credit rating, you’re unlikely to really lower your interest rate by refinancing. However, if you’ve since raised your credit, you may be able to refinance your car loan and get a better deal.
On the other hand, you can lower your monthly payment by refinancing at a longer term, which could make it easier to repay your loan and start building your credit. But you should make sure you won’t owe more on your loan than what your vehicle is worth. Otherwise, you may be taking on a longer loan term and paying more in interest without really benefiting.
Once you’ve made sure refinancing is the right decision, know that there are lenders that accept borrowers with bad credit.
How do I apply for auto loan refinancing?
The refinancing process varies depending on your lender. However, you generally need to review your current loan, credit score and check the value of your car before comparing lenders. That way you can rule out providers that you can’t qualify with.
Consider applying for preapproval with your top choices after a quick comparison to see what rates and terms you might get. After you apply for your loan and sign the contract, make sure your new lender paid off your old car loan before you start to make repayments.
What information do I need to refinance my auto loan?
In order to complete the refinancing process, you’ll need to provide information about yourself and your vehicle, just like when you applied for your original loan. Your lender will typically also request information about your current loan so it can calculate a competitive offer.
Every lender has a different process, but most ask for some or all of the following information:
Information about yourself
Date of birth
Proof of income
Proof of citizenship
Information about your vehicle
VIN (vehicle identification number)
Vehicle make, model and year
Information about your loan
Your current lender
Remaining loan balance
Current loan term
Amount you want to finance
Exploring refinancing car loan options doesn’t have to be a complicated process. As long as you know how to compare new loans against your current loan, you may be able to find a better deal that lowers your interest rate or monthly repayments — or both. However, you aren’t guaranteed a better deal. Carefully consider all of your options and your current financial situation before applying.
And if you’re not sure where to start, you can always read our guide on car loans to make sure you have everything ready when you start the auto loan refinance process.
Frequently asked questions
Yes, but minimally. Whenever you apply for a loan, lenders will run a hard credit pull that can lower your score by a few points. However, once you start making regular repayments on your new auto loan, you’ll likely be able to raise it back up without too much hassle.
A lender will review your credit history, collateral, income, personal details and ability to repay the loan.
You may be able to, although it can be difficult and you might not get a better rate or lower your monthly payments significantly. A cosigner with a good credit score and high income could improve your chances of approval.
Matt Corke is Finder's head of publishing for rest of world and New Zealand. He previously worked as the publisher for credit cards, home loans, personal loans and credit scores. Matt built his first website in 1999 and has been building computers since he was in his early teens. In that time, he has survived the dot-com crash and countless Google algorithm updates.
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