When it comes to thinking about refinancing, you likely think about your mortgage. What may not typically spring to mind for many people is refinancing their car loan, but it may be an idea worth exploring.
Here’s how to refinance an auto loan: You pay off your old car loan with a new loan, often from a new lender. There may be good reasons to do so. The new loan may have better interest rates or a loan term that lets you lower your monthly payments. But as with all things financial, it’s a good idea to weigh the advantages and disadvantages of any car refinance you’re thinking about making.
Related: Can personal loans hurt your credit?
The Pros of Refinancing a Car Loan
The positive possibilities can make refinancing tempting. Here are some of the potential benefits:
- Lower Interest Rate and/or Monthly Payments: Refinancing to a loan with more favorable terms can be a great way to lower your interest rate and/or monthly payment amount. You don’t want to make any assumptions about savings, so use an auto refi calculator to see if you’ll save money overall.
- Different Loan Terms: Another major plus is the opportunity to change your loan term (the time period over which you’ll be paying back the loan). Ideally, you should try to keep the term as short as you can so that you will be paying the least interest over the life of the loan. However, you’ll also want to consider your monthly budget. If extending your loan term and reducing your monthly payment helps you stay on top of your bills, adding more time may be worth it.
- Frees Up Money to Pay Down Debt: The age of your debt has an impact on your credit score. And refinancing can temporarily lower it a little, since it’s considered new credit. However, if you use the savings to pay off higher-interest debt, reduce your utilization on your credit cards or pay off old collections accounts that may be dragging down your score, that might potentially help your score.
- A Source of Extra Cash: In some cases, you could borrow extra money. If your car is worth more than you owe on your current loan you might be eligible for a cash-out refinance loan. This helps you refinance your car loan and borrow extra money based on your equity in the car. That’s cash you can use to pay down higher-interest debt or stash in your emergency fund.
The Cons of Refinancing a Car Loan
For all the pluses of refinancing, it’s got downsides, too.
1. Finding a Lender Can Be Tough
Will you be attractive to a lender? You may not be if one or more of the following apply:
- Your vehicle is more than 10 years old
- You owe less than $7,500 on your current loan
- You owe or more than $100,000 on your current loan
- Your car has more than 100,00 miles on it
- You drive for Lyft or Uber as your primary source of income or otherwise use your car for commercial purposes
2. Prepayment Penalties and Fees
Read the fine print of your existing loan contract. Does your current loan charge penalties for paying off your loan early? Many lenders don’t, but if yours does, you’ll likely want to calculate whether those fees will cost you more than you’d save with a new loan. Plus, there could be fees charged by your new loan company, too. If it costs too much to switch your car loan to a new lender, those costs to refinancing your auto loan may cancel out the benefits, and you might be better off staying with your original loan.
3. Temporary Credit Score Dip
Refinancing an auto loan typically has the potential to lower your credit score temporarily. This is in part due to the fact that it usually requires a hard pull credit check and also to the fact that you are replacing an older loan with a newer one.
4 Tips When You’re Refinancing an Auto Loan
- Don’t be in a hurry as you shop around for a loan: Dig deep when looking for lenders and include online auto loan lenders in your search. Avoid any lender or company that charges a fee to refinance your loan; that cost could erase any savings from the new loan. And as you assess lenders, remember it’s not only fees that are worth looking at, but also what kind of interest rates they offer and customer service.
- Consider applying for prequalification: This will give you a sense of what type of offers you might be able to snag. What’s involved? For starters, the lender will look at your credit and the type of vehicle you own. Typically, prequalification is a soft credit inquiry, so it won’t hurt your credit score. And while prequalification is not a guarantee, it’s a good indicator of what you can expect in terms of loan approval.
- Remember the loan-related details: If you purchased a GAP waiver policy (which pays the difference between what you owe on your car and what it’s worth at the time of an accident) with your original loan, it will not automatically carry over into a new loan. If you still want GAP coverage, explore your options for a new policy with your new loan.
- Plan your timing: Be mindful too, if in the not-too-distant future you will begin shopping for a mortgage. You might want to delay going for a car refinance so that your credit scores are as high as they can be, upping your chances of approval, to say nothing of getting the best rates and terms.
Will Refinancing Impact My Credit Score?
Any new commitment may change your financial picture. For one thing, refinancing requires a hard credit inquiry. This means your credit score may for a time drop by as much as five points when you apply with your lender. That’s generally nothing to panic about, but it’s a good idea to be mindful of this. While you want to shop around for your loan, actually submitting multiple applications can ding your credit score down. However, timing is everything. If you submit all your applications within a 14- to 45-day window, the impact on your credit score should be the same as if you’d only submitted one application. That’s because credit score compilers understand that you may be “rate shopping.”
When to Refinance
When or whether to refinance is not always black and white. Much depends on your circumstances and your goals:
- A refi could make sense if you lost your job, or a spouse is working less and you need to cut your monthly budget.
- A refi might be a good idea if you can qualify for a better interest rate or better terms than you got on your old loan. It could be that when you got your car loan your credit score was pretty shabby, so you didn’t get a great rate. However now that your score has improved, you’re likely eligible for a much better rate. Lowering your payment by a percentage point or two can make a difference and save you money.
- Refinancing might also align with your goals. For example, if you’re on a mission to pay down debt, applying the monthly savings from refinancing can help you get there.
When might refinance be ill-advised?
- If you’re close to paying off your original car loan, getting a new loan may not make sense. If your credit stinks, you may be turned down. If you are offered a loan, you may not qualify for the best rates, making the deal decidedly less sweet and perhaps not worth pursuing.
- If the balance on your existing loan is higher than the value of the car, you’re upside down on your auto loan, and getting the green light from a new lender might prove to be difficult, so you might want to stay where you are.
The Takeaway
Refinancing a car can be a smart strategy — in some cases. Do the research to see if the numbers work out in your favor or whether you’re better off with your existing loan.
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This article
originally appeared on LanternCredit.com and was
syndicated by MediaFeed.org.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website on credit (https://www.consumer.ftc.gov/topics/credit-and-loans)
The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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How to shop for a car loan
Auto loan financing can make purchasing a new or used vehicle affordable. But to find the best financing options, it’s important to know how to shop for a car loan. Car loan shopping requires some preparation and an investment of time. But fortunately, it’s relatively easy to shop for car loans and even apply for auto loan financing online.
Here are some tips that can make finding a loan to buy your car easier.
Related: Smarter ways to get a car loan
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Before you get started shopping for auto loans, it’s important to know how much you can afford to pay for a vehicle. There are several things to factor into the equation, including:
- Your target purchase price
- How much you plan to offer as a down payment
- Additional costs that may be due at signing, such as taxes, title fees, and dealer fees
- Ongoing car insurance costs
- Annual vehicle registration fees
- Ongoing maintenance and repairs
If you have a vehicle you plan to trade in, you’ll also want to consider how that might affect the amount you’ll finance. The more trade-in value you can get for your current vehicle and the larger your down payment, the less you may have to finance.
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If you apply for vehicle financing, potential lenders will check your credit report and scores as part of the approval process. Your credit scores can also influence the interest rate and annual percentage rate (APR) you’ll pay on an auto loan. That’s why that before you start shopping for a car loan, it’s important to understand how you might look to a potential lender based on your credit history.
Reviewing your credit reports and credit scores can provide you with some perspective on what kind of loan terms you’re likely to qualify for. You can get a free copy of your credit reports from each of the three credit bureaus (Equifax, Experian and TransUnion) through AnnualCreditReport.com. As you review your credit reports, look for the following:
- Positive items, such as a solid payment history, that are helping your score
- Negative items, such as payment delinquencies or maxed-out credit cards, that might be hurting your score
- Errors or inaccuracies
If you spot any error or inaccuracy on your credit reports, you can dispute that information with the credit bureau that’s providing it. All three major credit bureaus allow you to file disputes online. Federal law requires them to investigate disputes and correct errors if they exist.
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If your credit history is insufficient or you have a poor credit score because of past financial mistakes, getting a car loan could prove more difficult. In those scenarios, you might consider asking a cosigner to help you get approved for a loan. A cosigner can be a parent, a sibling, a friend or another creditworthy person who agrees to apply for auto financing with you. If you’re approved, you and your cosigner are treated equally in terms of responsibility for repaying the loan.
Asking someone to cosign has both pros and cons. On the pro side, a cosigner with an excellent credit score could help you get approved for vehicle financing at the best interest rates. The con, however, is that if you fail to repay the loan, you could ruin your credit and your cosigner’s, as well as your relationship. So it’s important to discuss the benefits and potential downsides with your prospective cosigner before asking for a commitment.
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Once you’ve checked your credit and have an idea of what loan terms you’re likely to qualify for, the next step is to compare loans from different lenders.
You have several options for where to shop for auto loan financing:
- Brick-and-mortar banks or credit unions
- Online banks and credit unions
- Online lenders that provide auto financing
- Dealership financing
Your current bank may be the first place you shop for car loans. If you’ve been a good customer for years or you have multiple accounts, your bank might be willing to offer an interest rate discount or other special incentives for getting a car loan. But don’t limit your search for a car loan to just your bank.
Take some time to compare interest rates and loan terms from online banks and credit unions, as well as online lenders that offer vehicle loans. If you’re buying a vehicle from a dealer, you can also ask about the dealer’s in-house financing terms.
As you shop for a car loan, take note of the differences in what’s offered by different financing options. Specifically, pay attention to:
- Interest rates
- Annual percentage rates (APRs)
- Loan repayment terms
- Loan fees, including origination fees and/or prepayment penalties
- Costs due at closing
Doing the math with an auto loan calculator can give you an idea of how much individual loans might cost you. It’s also helpful to check the reputation of any lender you’re considering as you shop for car loans.
Reading online reviews, checking the Consumer Financial Protection Bureau’s Complaint Database and looking at Better Business Bureau ratings can give you an idea of how trustworthy and consumer-friendly an auto lender may be.
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Getting prequalified or preapproved for a car loan could be helpful when you’re narrowing down your financing options. Loan prequalification means that a potential lender has taken a look at your finances and is willing to lend you up to a certain amount of money.
Loan preapproval usually involves the added step of a hard credit check. If you’re interested in prequalification or preapproval, be prepared to share some basic information with your potential lender, including:
- Your income
- Your Social Security number (if a credit check is required)
- Details about the vehicle you want to buy, including purchase price, age, make and model
- Proof of auto insurance or the ability to be insured
You may also be asked about what kind of loan terms you prefer and how much money you plan to put down. Having a prequalification or preapproval in hand when you’re car loan shopping can give you a better idea of how much you can afford to spend and how much financing you’re likely eligible for.
Bringing a prequalification or preapproval letter to a dealer can also show that you’re serious about buying, which may make the dealer more willing to negotiate the purchase terms.
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As you shop for a car loan and choose your financing option, don’t neglect reading the fine print. It’s important to know exactly what your obligations are as a borrower and what your total borrowing costs add up to. When reviewing your auto loan documentation, be on the lookout for things like hidden fees or add-ons that you didn’t request.
If you spot anything in the loan contract that you don’t understand, don’t hesitate to ask the lender or financing company to explain it.
Also make sure you review the loan amortization schedule so you understand how much your loan will cost and how your payments will be applied over time. Your lender should provide this amortization schedule, which shows you how long it will take to pay off the loan and how much of each payment will be applied to interest, fees and the principal balance.
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Shopping around for the right car loan can take time. But it’s worth it to find the best option for your needs and budget. It’s also important if you want to get the best interest rates and loan terms available, based on your credit history.
When shopping for a car loan, you may want to consider whether a personal loan could be an appropriate choice for financing your vehicle. If you have a good credit score, it’s possible that you could qualify for an unsecured personal loan with a low fixed or variable APR. Whatever you choose, be sure to make your payments promptly in order to boost your credit rating and improve your chances of getting good loan rates on your next car.
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This article originally appeared on LanternCredit.comand was syndicated by MediaFeed.org.
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All rates, fees, and terms are presented without guarantee and are subject to change pursuant to each provider’s discretion. There is no guarantee you will be approved or qualify for the advertised rates, fees, or terms presented. The actual terms you may receive depends on the things like benefits requested, your credit score, usage, history and other factors.
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Personal Loan:
SoFi Lending Corp. (“SoFi”) operates this Personal Loan product in cooperation with Even Financial Corp. (“Even”). If you submit a loan inquiry, SoFi will deliver your information to Even, and Even will deliver to its network of lenders/partners to review to determine if you are eligible for pre-qualified or pre-approved offers.
The lenders/partners receiving your information will also obtain your credit information from a credit reporting agency. If you meet one or more lender’s and/or partner’s conditions for eligibility, pre-qualified and pre-approved offers from one or more lenders/partners will be presented to you here on the Lantern website.
More information about Even, the process, and its lenders/partners is described on the loan inquiry form you will reach by visiting our Personal Loans page as well as our Student Loan Refinance page. Click to learn more about Even’s Licenses and Disclosures, Terms of Service, and Privacy Policy.
Student Loan Refinance:
SoFi Lending Corp. (“SoFi”) operates this Student Loan Refinance product in cooperation with Even Financial Corp. (“Even”). If you submit a loan inquiry, SoFi will deliver your information to Even, and Even will deliver to its network of lenders/partners to review to determine if you are eligible for pre-qualified or pre-approved offers. The lender’s receiving your information will also obtain your credit information from a credit reporting agency. If you meet one or more lender’s and/or partner’s conditions for eligibility, pre-qualified and pre-approved offers from one or more lenders/partners will be presented to you here on the Lantern website.
More information about Even, the process, and its lenders/partners is described on the loan inquiry form you will reach by visiting our Personal Loans page as well as our Student Loan Refinance page. Click to learn more about Even’s Licenses and Disclosures, Terms of Service, and Privacy Policy.
Student loan refinance loans offered through Lantern are private loans and do not have the debt forgiveness or repayment options that the federal loan program offers, or that may become available, including Income Based Repayment or Income Contingent
Repayment or Pay as you Earn (PAYE).
Notice: Recent legislative changes have suspended all federal student loan payments and waived interest charges on federally held loans until 09/30/21. Please carefully consider these changes before refinancing federally held loans, as in doing so you will no longer qualify for these changes or other future benefits applicable to federally held loans.
Auto Loan Refinance:
Automobile refinancing loan information presented on this Lantern website is from MotoRefi. Auto loan refinance information presented on this Lantern site is indicative and subject to you fulfilling the lender’s requirements, including: you must meet the lender’s credit standards, the loan amount must be at least $10,000, and the vehicle is no more than 10 years old with odometer reading of no more than 125,000 miles. Loan rates and terms as presented on this Lantern site are subject to change when you reach the lender and may depend on your creditworthiness. Additional terms and conditions may apply and all terms may vary by your state of residence.
Secured Lending Disclosure:
Terms, conditions, state restrictions, and minimum loan amounts apply. Before you apply for a secured loan, we encourage you to carefully consider whether this loan type is the right choice for you. If you can’t make your payments on a secured personal loan, you could end up losing the assets you provided for collateral. Not all applicants will qualify for larger loan amounts or most favorable loan terms. Loan approval and actual loan terms depend on the ability to meet underwriting requirements (including, but not limited to, a responsible credit history, sufficient income after monthly expenses, and availability of collateral) that will vary by lender.
Life Insurance:
Information about insurance is provided on Lantern by SoFi Life Insurance Agency, LLC.
Lantern by SoFi September $10 Check Your Rate Promotion (“Promotion”):
The Promotion is offered by Lantern by SoFi Lending Corp. (“SoFi”). SoFi reserves the right to change or terminate this Promotion at any time with or without notice to you. No purchase necessary to participate. Additional terms and conditions may apply.
Promotion is void where prohibited by state law. Auto loan refinance not available in some states, including ME, MD, NE, ND, NV, NY, PA, VT, and WI.
Eligible Participants: The Promotion is open to anyone who resides within the United States** and is of the age of majority in the state in which they reside. To receive a $10 bonus in the form of a gift card through the Promotion you must agree to a soft credit pull on lanterncredit.com to check your rate for the following Lantern by SoFi Lending Corp. (“Lantern” or “Lantern Marketplace”) product: Auto Loan Refinance. Checking your rate will not affect your credit score. If you later decide to submit an application and agree to a hard credit pull your credit score may be impacted.
Participants will receive the $10 bonus gift card regardless of whether or not they are pre-qualified for a product through the Lantern Marketplace. Those who have already received a bonus for checking their rate on lanterncredit.com for a personal loan or auto loan refinance in the 2021 calendar year are not eligible for this promotion. SoFi employees are not eligible to participate in this Promotion. Notwithstanding the above, SoFi reserves the right to exclude any consumer from participating in the Promotion for any reason, including suspected fraud, misuse, or if suspicious activities are observed.
Promotion Period: The Promotion is available beginning on 12:00 AM Eastern Time on September 1st, 2021 and ending 11:59 PM Eastern Time on September 14, 2021. Participants are limited to one (1) bonus between the Personal Loan or the Auto Loan Refinance product per calendar year and two (2) per household.
Payout: All payouts are fulfilled by SoFi’s vendor Customer Motivators. Eligible participants will receive an email from Customer Motivators with a unique code and a link to a web page to redeem for a $10 bonus gift card.
Tax Consequences: Bonus amounts of $600 or greater in a single calendar year may be reported to the Internal Revenue Service (IRS) as miscellaneous income to the recipient on Form 1099-MISC in the year received as required by applicable law. Recipient is responsible for any applicable federal, state or local taxes associated with receiving the bonus offer; consult your tax advisor to determine applicable tax consequences.
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