As prices for used and new cars skyrocket, you may be wondering how to get the most value from your current vehicle. One option you might consider is refinancing. Refinancing can lower your monthly payment, which can give you more flexibility in your overall budget. Refinancing is dependent on multiple factors, which can include features relating to your vehicle. One of these can be the car’s mileage. So, if your car has high mileage, you may wonder if your loan application will be successful. Here’s what to know about refinancing a car with high mileage.
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Difficulty of refinancing a car with high mileage
A potential lender typically analyzes several factors in your refinance application, one of which is your loan-to-value ratio (LTV). This number analyzes how much you owe versus how much the car is worth. The lower your LTV is, the better. A car with high mileage may have a low value, which can push the LTV ratio up to a percentage that the lender may not be comfortable with. That’s because a car with high mileage can become a liability to lenders, especially if they’re concerned that the car won’t outlast the life of the loan.
A lender may also be worried about car value. If the loan is worth more than the value of the car, then the loan is considered “upside down” or “underwater.” In that case, it may be hard to find a lender to refinance your car. Your interest rate on the loan may also be higher. But high mileage doesn’t necessarily mean that your car has little life left. Overall, vehicle condition plays a role in your application profile, too, as does your own creditworthiness.
What’s considered high mileage on a vehicle?
In the past, the rule of thumb was that high mileage was anything above 100,000 miles. But that isn’t necessarily the case any longer, thanks to new technology. Now, cars can be driven well beyond the 200,000-mile mark, especially if they’re in good condition. But while 200,000 miles may be a benchmark for the “average” car life expectancy now, high mileage is typically measured in how many miles you drive per year.
The average driver puts 12,000 to 15,000 miles on their car a year. If you put more mileage on your car each year, then your car may be considered a high mileage vehicle. High mileage is an issue for lenders because it may signify more wear and tear on the vehicle. Your lender may also have specific guardrails when it comes to how much mileage it will consider for refinancing applications, while others may have general questions about the condition of your vehicle.
What to know when considering a high-mileage refinance loan
Refinancing your auto loan can make sense in some cases.
- If your credit has improved to the point at which you’ll have a lower interest rate on your loan
- If it will lower your monthly payments.
- To shorten the life of your loan, which may lower the amount of interest you pay over the life of the loan
Things to consider when you’re thinking of refinancing
Knowing why you want to refinance can help you assess whether refinancing is the best idea for you. Keep in mind that refinancing a high-mileage car may mean that the new interest rates you’re offered will actually be higher than your current interest rate, which may not make refinancing worth it. Weighing the pros and cons of refinancing is also important. Refinancing can be beneficial if it lets you pay less over the life of the loan or reduces monthly payments you can’t afford by extending your loan term. But if it threatens to make you go upside down on your loan, it’s likely not a good idea.
Going upside down on your loan, as it’s called in auto loan terminology, means that you owe more than your car is worth, and it’s one of the dangers of refinancing a high-mileage car. It can put you in a financially vulnerable position, especially if your car does become unusable at any point through your loan. If this were to happen, you would still be responsible for paying down your loan—and you would also need to somehow budget for a new mode of transportation. Finally, it can also be a good idea to think of next steps: How long do you plan to have your current car, and how will you finance a new one, when and if, you need one?
Improving your credit may make refinancing a high mileage car worth it
In addition to checking out the condition of your vehicle, a lender will also assess you as a potential borrower, using your credit score as one way to evaluate your creditworthiness. If your credit score has improved since your initial car loan, you may find a lower interest rate on a refinance. But if your credit score is similar or went down, you may find that refinancing doesn’t necessarily make financial sense, and it may make more sense to find wiggle room elsewhere in your budget.
Avoid going upside down on a car loan
Refinancing a car can be risky if you’re not careful. Here, ways to avoid going upside down on a car loan.
- Minimize your loan length. This may mean you’re paying more money each month, but if a refinance gives you a lower interest rate, then you’ll save money in the long term.
- Keep your car in good condition. Follow your manufacturer’s recommendations for servicing, including replacing the battery, to avoid letting a minor issue become a major issue.
- Pay off your loan early. If you have the means to do so, prepay your loan before its ultimate due date. Make sure your lender doesn’t have any prepayment penalties.
Some car dealers may offer you incentives to trade in your old car for a new car—even if you still owe money on your current car. This can be financially risky. While your loan gets paid off on the old car, your loan on the new car will include what was still owed on the old car loan, raising the overall loan amount and setting up the potential for you to get even deeper in debt.
You may also want to assess whether you really need a car at all. In some cases, car owners realize that they can sell their current car for more than what they owe on the car. Of course, this depends on whether you can live without a car or if you’ll still have access to transportation if you need it. In short, consider all options and assess how the financial moves you make today may impact your finances tomorrow. In all scenarios, crunch the numbers, consider what-ifs and assess next steps.
The takeaway
A car refinance can be beneficial. It can lower your current interest rate and can free up money in your budget. But because refinancing a car with high mileage can be tricky, it may lead to you spending more money and more time paying down the loan. It can be a good idea to look at your overall financial picture: How will the refinance serve you? If you’re in a better financial spot than you were when you started the loan, then it may mean you can save money. But if you’re thinking of a refinance to try to free up money in your budget, you may need to crunch your numbers to see if refinancing your car loan makes sense for you.
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This article originally appeared on lanterncredit.com and was syndicated by MediaFeed.org
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Auto Loan Refinance:
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How to save up for a car
Does anything feel quite as good as hitting the open road in a shiny new car? Alright, a hot stone massage might feel better, but it’s still pretty hard to resist that new car smell. Buying a car should be a celebration, but often it can bring financial stress into your life. That’s why it’s important you take your time saving up for a car.
Learning how to save for a car may not be as fun as the road trip you’ve been fantasizing about, but it’s a necessary step if you want to buy your car in a stress-free way. We’ll break down the ways to save for a car so you can spend more time checking out roadside attractions and less time worrying about your bank account.
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If buying a new car is your plan, start your research by comparing a variety of makes and models. Figure out what’s right for your needs and budget. You can visit dealerships in person or review manufacturers’ websites to research car models that catch your fancy. Don’t be afraid to ask questions! Ask car sellers to clarify any fine print in their advertisements and try your hand at haggling for a better deal.
When shopping for a car, you should take advantage of any deals you can find such as rebates and special dealership offers. You can receive quotes from multiple dealerships—make sure you ask them if the price quoted includes deducted rebates. This process may feel tedious, but it will help you learn which make and model you can afford.
Purchasing a used car can potentially save a lot of money. If you find your dream car for sale as a used vehicle, you may need to be prepared to make the purchase quickly before someone else purchases the car.
That’s why it’s important to determine how much you can spend on a used car before you begin your search. The last thing you want is to feel pressured into spending more than you can really afford because you think a good deal is slipping away.
Purchasing a used car can potentially save a lot of money.
Before you begin shopping, review the used car market for the makes and models you are considering, to get an idea of what it may cost for you to buy the used car you want.
Before you purchase a used car, it’s good practice to follow the steps recommended by USA.gov for your financial and physical protection.
Steps like finding out if the car has any recalls, researching if the warranty is still in effect, and having a mechanic inspect the vehicle before making a purchase will hopefully keep both you and your wallet from being injured.
Ridofranz / istockphoto
Parting with a solid chunk of cash is never fun, but an appropriate down payment can help to make your car repayment process more manageable. There are two ways you can go about calculating your down payment:
Option 1: You can choose a make and model based on how much you’ve already saved for a down payment.
Option 2: Pick out which make and model you’d like to buy, get a price estimate, and then determine how large you’d like your down payment to be.
A 20% down payment is often recommended when purchasing a car, but this is not a set rule. Generally, the higher the down payment is, the lower the interest rate on your loan may be. Your down payment amount should ideally help bring your monthly loan payments to a cost you can afford.
If you have the cash flow to be able to purchase your car outright, then you can skip step three. Also, congrats, that’s a huge accomplishment! But if you can’t, there is no need to feel alone. 44% of American adults have auto loan debt.
DepositPhotos.com
Buying a car can cost a pretty penny. According to a report from Experian, the average monthly car payment was $554 for a new car and $391 for a used car.
If you want to determine how much your monthly car payment will be, you can sit down and crunch the numbers, or you can let the Cars.com car loan calculator do the work. This calculator is designed to help you estimate what your monthly car loan payments will be throughout the life of your auto loan.
The process is fairly simple. To use the calculator, enter the vehicle price, down payment amount, trade-in value (if you are trading in a vehicle), sales tax rate, interest rate, and the rate of your loan.
The calculator will take care of the math and present you with your estimated monthly payment. Next, it’s time to figure out how to save up for a car.
DepositPhotos.com
Unfortunately, the need to buy a car doesn’t always happen according to schedule. An unexpected breakdown, pricey repairs, or a change in your commute can all speed up your car-buying timeline.
An unplanned car purchase can lead to copious amounts of stress and unnecessary costs.
If you are able to, one good idea is to create a savings plan in advance of buying a car so you can take your time making such a big financial decision—and it could help you find more affordable options.
An unplanned car purchase can lead to copious amounts of stress and unnecessary costs.
Steps one through three should have given you a decent idea of how much money you’ll need to save for a down payment, and how much money you’ll need to budget each month after you purchase your vehicle.
One approach to saving is to take the amount you’ve determined you’ll need for a car upfront (don’t forget to subtract any money that may come from selling or trading in your current car) and divide it by however many months you have left until your ideal purchase date.
The number you get after doing this equation is how much money you should be saving each month to meet your goal. You might also think about saving more than that per month so you can prepare for your monthly payments.
And if you’re currently driving an older vehicle that is prone to issues, you may want to save a little extra as a cushion for any necessary maintenance or repair costs. Remember, saving for a car can take longer than you’d planned and that’s okay.
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Learning how to save money for a car can take a little trial and error. If you need to boost your saving efforts, consider a cash management account that allows you to spend, save, and earn all in one place.
That means the money you put aside for your new car could help you earn even more money. Happy driving!
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SoFi Money is a cash management account, which is a brokerage product, offered by SoFi Securities LLC, member FINRA / SIPC . Neither SoFi nor its affiliates is a bank.
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Featured Image Credit: DepositPhotos.com.
