Once you’ve obtained a car loan or leased a vehicle, you’ll often see advertisements advising you to refinance your loan or lease. So, what should drivers know about the car refinancing process?
What Is Car Loan Refinancing?
Before we take a closer look at what you should know about refinancing your car loan, what does the term mean?
Refinancing is a broad term for any time the details of an existing loan or lease are revised. This revision could include altering interest rates, payment schedules, or more, depending on the refinancing information. It’s a term most often applied to mortgage loans, but refinancing is also an option for automotive loans in some circumstances.
The primary reason for refinancing is to reduce the loan’s interest rate. If you obtained the loan at a high interest rate and the collective interest rate for your type of loan begins to drop, refinancing could save you money in the long run.
You may also use your credit rating to obtain a cash-out refinance. You end up borrowing more in the long run, but it can provide you with some cash in hand if necessary while also providing the other benefits of refinancing.
Pay Attention to Your Credit Score
Your credit score will play an enormous role in your ability to refinance a loan. The higher your score, the better rates you’ll have access to. Aim for a score higher than 660 to be eligible for refinancing, but a score above 740 – out of a possible 850 – is better. A high credit score isn’t the only criteria your lender considers when deciding if you qualify for refinancing, but it can make a massive difference.
Understand Your Car’s Loan-to-Value Ratio
Your vehicle’s loan-to-value ratio compares the total amount of your loan divided by the value of your car. This ratio can vary depending on the age of the vehicle, the number of miles you’ve driven, and the vehicle’s overall condition.
Keeping up with scheduled maintenance can also impact the value of your car. The loan-to-value ratio will affect the amount of money you can borrow during the refinancing process.
How Many Times Can You Refinance?
Refinancing might be a great way to reduce your monthly payments or secure a lower interest rate. However, trying to refinance too often can have more negative than positive effects.
There are no rules preventing you from refinancing as often as you like, but applying for more than one or two refinancing loans could leave you paying more in the long run and could impact your credit score. The last thing you want is to end up owing substantially more than the vehicle is worth, which can happen if you refinance too many times.
Be Wary of Prepayment Fees
It might be tempting to make higher-than-minimum payments, but if you don’t pay close attention to your refinancing terms, you might be paying extra prepayment fees. Some lenders implement prepayment penalties if you repay your loan sooner than you agreed to.
Check with your lender to ensure you don’t need to contend with these fees if you plan to repay your loan faster.
Shop Around for the Best Deal
If you’ve been banking with the same institution for a long time, they might be your first stop when looking for a lender – but they shouldn’t be your last.
An established relationship with a bank or credit union isn’t necessarily enough to get you the best interest rate or payment schedule. Take the time to shop around for the best deal. Compare all the options available and pick the one that works best for you and your situation.
Looking Forward
Refinancing your auto loan is one option if you’re trying to secure some extra cash for unexpected expenses, lower your interest rate, or reduce your monthly payments.
Make sure you’re doing your research before you start signing on any dotted lines and remember the golden rule of finance: if it sounds too good to be true, it probably is. A good refinancing plan should make your life easier, not harder.
Martin Banks is the Founder and Editor-in-Chief of Modded. He covers the world of cars, driving, tech, and more.
Editor’s Note: The opinions expressed in this article are those of the author.
