Are you spending too much on your auto loan payments?
Chances are, you probably are. Cars are one of those tricky necessities in life – you need one to get to work so you can get paid, and you need one to get to everywhere life takes you, from shopping to school drop-off to summer beach fun. When you keep money out of the equation, cars are one of the most valuable objects we rely on.
But you can’t keep money out of the equation. And in reality, cars decrease in value faster than probably most other big-ticket items you own; it’s estimated that vehicles drop around 11% of their value just being driven off the car lot. That’s when it becomes easy to fall into the trap of a long-term auto loan, in which you are suddenly paying more than your car is actually worth.
Instead, when you refinance your auto loan, you can renegotiate your terms, including the interest rate on your loan. You’ll end up with lower monthly payments, and you’ll offset some of the depreciation of your car’s value with these new savings.
If you’re ready to reevaluate your car’s cost-to-value ratio, it’s time to consider a refinance on your auto loan.
How To Refinance An Auto Loan: Where To Start
If you think you may be spending more than you should on your auto loan payments each month, start by calculating what that cost actually is. Pull together all of the information you have on your loan, including the lender, the auto loan terms, the interest rate, and your current monthly payment amount.
You’ll also need to gather your personal financial information so you can have a general idea of what types of auto refinance loans you’ll qualify for. The first step in this process is to check your credit report and score. Lenders are going to look to this information to determine your new rate and terms, so the better shape your credit is in, the more you’ll end up saving.
Considering a refinance on your auto loan also requires looking at your car and its history. Lenders typically offer the best rates on newer cars, as they’re holding more of their original value than used or older cars. However, refinancing a new car will likely result in a much higher cost than refinancing an older one, so know what to prepare for when it comes to your new monthly payments.
Where To Find The Right Auto Refinance Loans
When you’re looking to refinance any type of loan your goal is to find a lower interest rate, better terms, and ultimately, a lower monthly payment. Therefore, you’ll need to shop around a bit before you can find the right options to refinance your auto loan.
Start with online lenders since they are the easiest to gather information from quickly. Compare advertised rates, but also go a step further and apply for the most preferential ones. If you have the right credit profile, you’ll find that you can quickly gather several quotes from different lenders for comparison.
However, be careful about who you apply with and where you apply. If you aren’t refinancing with the existing lender, your credit history will be pulled with every new application. Each time this happens from an official organization, your credit score takes a small hit. Make sure you’re only providing personal information once you’ve decided to apply for a loan.
From there, you can look at banks for their auto refinance options. Start with your current bank as they may offer loyalty programs with better rates or terms. However, banks will have the most difficult qualifying criteria when it comes to credit scores, so yours should be as high as possible to qualify.
Credit unions often offer excellent auto loan rates and are typically more open to less-than-stellar credit. However, the caveat is you may need to qualify to access a local credit union, based on your employment or other membership requirements.
How Do You Know When It’s Time To Refinance?
There are no set guidelines regarding the best time to refinance an auto loan, so it is up to you to make the decision. Of course, the most significant benefit of refinancing your loan is ending up with lower monthly payments and paying less interest, so if you feel as though you can get a better deal elsewhere, it’s time to refinance.
There are a few situations in which it’s most common for car owners to refinance their loans:
- When rates have decreased since the initial loan was taken out
- If your credit score and financial situation have improved since you took out the initial loan
- If your car’s value is less than your current loan
How To Get An Auto Loan Refinanced If Your Loan Is Upside-Down
There may be times when your car’s age or history may work against your attempts to refinance an auto loan. Because lenders tend to see older cars as less valuable and more of a liability, you can expect vehicles with high mileage to have a higher interest rate.
There can also be a situation in which your car is not worth as much as your existing loan, which means new lenders aren’t necessarily willing to offer you a refinance loan. As with other types of secured loans backed by assets, your lender will look to your car’s Loan-to-Value Ratio (LTR). They will calculate the existing loan amount compared to the current value of your car, and the closer the two are, the better.
What can you do if you find yourself in a bind where lenders don’t want to offer a refinance?
- Try negotiating: Let lenders know what is going on, and be upfront with your goals for a new refinance loan. Start with your current lender and see if they are willing to negotiate some of your existing loan’s terms into more preferential rates.
- Make bigger payments: If you can pay off more of your loan in a short period by making larger payments, you may be able to reach a ratio where a lender is comfortable offering you a refinance.
- Get an alternative loan: You could try getting a personal loan to cover your existing auto debts. However, finding a personal loan that will cut your interest rate will require excellent credit, and you could still be on the hook for more in payments than your existing loan.
How To Get An Auto Loan Refinanced The Right Way
If you’re wondering how to refinance an auto loan safely, you’ll want to avoid some common mistakes that can negate any potential savings – or worse. The most important thing to remember about the process is that you are looking for a better interest rate on your loan. Try some of these simple steps to prevent yourself from getting trapped in a loan that doesn’t meet your goals
1. Watch for longer auto loan term lengths: If your new loan kept the same interest rates but promised you lower monthly payments, that might sound appealing – until you step back and realize that those lower payments are coming from an extended loan term. That means you’re still paying interest at the same rate – and now you’ve guaranteed that you’ll pay more over the life of the loan.
2. Actively reduce your interest rate: If your credit score doesn’t get you enough of a discount on your current auto loan terms, consider finding a cosigner with a higher credit score who is willing to put their name on the loan. Keep in mind that your cosigner is responsible if you should default, so consider the impact on any of your relationships. On the other hand, you can always remove a cosigner from your loan if your credit score improves.
3. Negotiate terms: Don’t be afraid to negotiate with prospective lenders for a better interest rate on your loan or for more preferable terms.
4. Increase your down payment: The more money you can put down, the less you’ll pay in interest in the long run. Even if your interest rate will stay the same, that smaller principal will accumulate less, and your monthly payments will go down.
5. Know your rights: The Consumer Financial Protection Bureau (CFPB) clearly outlines your rights as a borrower when it comes to auto loans. Lenders must rely on your provided information to issue loan terms, and cannot discriminate based on your job, race, gender, or other factors.
Auto loan refinancing can be a great way to lower your monthly bill payments and overall debt – but only when you find a lower rate and better terms. Beware of falling into traps where you sign-up to pay more money over the long-term than you do now, and know your rights as a borrower. Never be afraid to negotiate with potential lenders, and always shop around for the best deal possible.