Is Refinancing Your Car Right For You
Before filling out a refinance application, youll want to consider whether you can score a lower interest rate. If national interest rates have decreased since you took out your original financing, it could be a good time to shop around.
Youll also want to think about your own credit. Financial institutions examine your credit score to determine how much of a credit risk you are. The higher your score, the less of a risk you are. Thus, if youve boosted your credit score since you took out your initial financing, you may qualify for a lower rate.
Finally, youll also need to consider what type of financial institution you are working with and determine if switching to another institution would yield you a better interest rate.
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Time Remaining On Your Loan
Refinancing and extending your loan term can lower your payments and keep more money in your pocket each month but you may pay more in interest in the long run. On the other hand, refinancing to a lower interest rate at the same or shorter term as you have now will help you pay less overall.
If your answer to When should I refinance my car loan? is Soon, review our current refinance rates and take a look at our auto loan refinance calculator to get a better understanding of whether refinancing makes sense for you.
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Disadvantages Of Refinancing A Car
You might pay refinancing feesAuto refinancing can include a variety of costs, including application, origination and title transfer fees. However, not all lenders charge the same fees and some may not charge any at all. When comparing refinancing options, read the fine print and factor in all associated fees. Paying too much to refinance your car loan could cost more in the end than staying put in your current loan.
You could pay more overall interest over the life of the loanIts true that getting a lower interest rate can save you money. But if you extend the term of the loan, you might pay more interest over the life of the loan. For example: If you currently have a $10,000 loan with a 20% interest rate over a 36-month term, youll pay $3,378.89 in total interest. If you refinance that same $10,000 at a 15% interest rate for 60 months, youll pay $4,273.96. Thats almost $900 more.
However, paying extra interest over time may be worth the convenience of lower monthly payments. It all depends on what makes sense for your financial situation.
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Super: TD presents Asking for a FriendWhy Would You Refinance?
Welcome to Asking for a Friend. Lets see who could use some financial advice today.
Dear Asking for a Friend,My neighbour was talking about refinancing her home so she can borrow more money to build an extension, and it got me wondering…what exactly IS refinancing and why do people refinance?Sincerely,Next Door Nancy
I hear you, Nancy. First, what is refinancing?
Refinancing means renegotiating your existing mortgage loan agreement, usually to use any available equity in your home.
So what does that mean in real terms? Let’s say the value of your home is $500,000.
80% of home value 0.8 x $500,000 $400,000Outstanding balance of your mortgage $300,000How much you can borrow $100,000
Subject to the bank’s approval, you could borrow up to 80% of the value of your home less the outstanding balance of your mortgage.
That means if your home is worth $500,000 and you have an outstanding balance of $300,000 on your mortgage, you may be able to borrow an additional $100,000 .
So WHY do people refinance?
Super: To consolidate debts.
Super: Provide flexibility to pay for big ticket items.
Book an appointment and get financial advice for what you feel is most essential, through TD Ready Advice
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When Does It Make Sense To Refinance
- You Now Qualify for a Lower Interest Rate: If interest rates go down or your credit has improved, you could save money with a lower rate. If your credit score isnt very high, refinancing with a co-signer could also help you pay less in interest.
- You Want to Lower Your Monthly Payment: You might be able to get a longer loan term by refinancing. This means youll be making payments longer but also lowers your monthly bill. You may end up paying more in interest over the extended loan term.
- Your Car Is Aging and/or Has High Mileage: Many lenders restrict your ability to refinance a vehicle once it reaches a certain age or mileage mark. If your car is close to 10 years old or is approaching 100,000 miles, then it might be time to crunch the numbers to see if one last refinance makes sense.
Other Auto Refinance Companies We Considered
- Vehicles must be less than ten years old
- Not available in Nevada, Vermont, or Washington D.C.
- Minimum monthly income of $2,000
- Must fill out an online application to get info on terms
We didn’t include Ally Clearlane in our top list due to its lack of transparency, which requires potential borrowers to go through a pre-qualification to get any information.
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Can You Refinance A Car Loan With Bad Credit
Yes, several lenders offer auto loan refinance options for borrowers with bad credit. Some lenders don’t even have a credit requirement to get a loan.
When applying for these loans, watch out for high interest rates. Many loans for borrowers with poor credit come with high annual percentage rates that can add significantly to the cost of the loan.
What Happens To Gap Insurance If You Refinance
Gap insurance coverage is associated with a specific auto loan and is designed to cover a newly purchased vehicle in the event of an accident where the car is determined to be a total loss. It can’t be transferred or reassigned to another loan, even one that covers the same vehicle. When you refinance, your loan is paid off, and your gap coverage ends. If you want to maintain gap insurance on your car, you’ll need to purchase a new policy.
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Does Applying For An Auto Loan Affect My Credit Scores
If the lender pulls your credit, your loan application will show up on your credit reports as a hard inquiry. While hard inquiries can affect your credit, each one may only knock a few points off your scores. And shopping around may not hurt depending on the credit-scoring model, any auto loan inquiries that take place within a given time span ranging from 14 to 45 days will count as a single inquiry.
Gather The Necessary Documents For A Loan Application
After you submit your application, you’ll typically be required to provide some documents to your new lender. Having this information before you even start the loan process will help it go more smoothly.
Documents that you may be required to share include:
- Copy of your driver’s license
- Vehicle registration
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When Youre Not Underwater On Your Current Loan
Generally speaking, its easier to find a lender wholl work with you when your car is worth more than your remaining loan balance.
New cars can lose about 20% of their original value within the first year, and an average of 15% to 25% each of the next four years, according to Carfax. So time is of the essence.
Some lenders wont even consider refinancing an older car. Capital One, for example, only refinances loans for vehicles that are seven years old or newer.
If your car is relatively new and still has equity, now could be a good time to refinance.
Ready To Make A Decision
Remember that you have options. While the prospect of saving money can be exciting, a refinance is nothing to rush into. Taking time to do research and considering both sides of the coin is the best way to make a confident decision.
The information in this article is provided for general education and informational purposes only, without any express or implied warranty of any kind, including warranties of accuracy, completeness or fitness for any particular purpose. It is not intended to be and does not constitute financial, legal, tax or any other advice specific to you the user or anyone else. The companies and individuals referred to in this message are not sponsors of, do not endorse, and are not otherwise affiliated with OneMain Financial.
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How To Prepare For Refinancing
Unlike a mortgage, auto refinancing should only require a few documents. Gather the following information before you begin so you have all the facts when asked about them:
- A copy of your current loan papers
- Information about your vehicle, like the VIN and current mileage
Next, before you start shopping for a new loan, you need to know where you stand with your current loan. Consider the following questions:
- What are you paying in interest?
- How many months do you have left on the loan?
- What is your current payoff amount? This is the amount you would pay the lender if you paid the entire bill today.
- Is there a pre-payment penalty in place? Some lenders only allow borrowers to pay off a certain amount of their loan each year without a penalty. It is more common with a home mortgage, though may apply to some car loans.
How Can Refinancing Save Money
Does saving hundreds of dollars pique your interest? Refinancing to a lower interest rate can save you cash over time however, thats only if you dont extend the term of your loan. If you receive a better interest rate but you decide to go with a longer term, it may reduce the amount of your monthly payment but it can end up costing you more in total.
Heres an example. Lets say you have a five-year, $20,000 auto financing package that charges an 8% interest rate. Each month, your car payment is around $406. Refinance to a 4% interest rate and your monthly payment will drop to $368 saving you almost $2,300 over the course of the term.
You might also be able to reduce your monthly bill by refinancing to extend the length of your term . If cash flow is running a little tight and your current car payment has become a stressor on your budget, this could be a good option to explore.
Take that same $20,000 financing with an 8% interest rate above. If your term is 36 months, you owe about $627 each month. Refinance and increase your term to 48 months and your monthly payment will drop by more than $100, to around $488.
Just keep in mind: a longer term may end up costing you more in total. So, if you take this route, you might want to increase your monthly payments later on if youre financially able, to pay off your principle balance sooner and reduce the amount of interest youll have to pay over the life of your loan.
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Protect Your New Car After You Buy It Out
Lease contracts can be expensive, which is why it makes sense to explore refinancing a lease to lower your monthly payment. You can also look at dealer programs if you are at the end of your lease.
If you end up deciding to buy out the car, you want to make sure youre covered as a new car owner.
Car repairs can be more expensive than your monthly lease payments, and unlike a predictable lease payment, theyre always a surprise. The last thing youd want to do is get out of your lease, only to be hit with a costly repair like a transmission replacement, which could set you and the new car you own back several thousands of dollars.
With a policy from Protect My Car, instead of paying around $2,000, youll just pay the $100-dollar deductible, and well cover the rest.
Plus, having an extended warranty from Protect My Car can be a great selling point, especially for a private party sale. These contracts are fully transferable to the new owner and pay the cost of your repairs. Thats a great gift for any new owner, and will give them peace of mind.
Better year, our vehicle service contracts come with 24/7 roadside assistance, and free oil changes and tire rotations.
So, if youre thinking about buying your way out of a lease, consider protecting your new asset with one of our great plans.
Get a free, no obligation quote from Protect My Car, and stop stressing about repair costs.
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How Do I Find The Best Interest Rate
If jumping at the first interest rate was your primary pitfall on your current auto loan, dont do it again. Take the time to browse credit and lending websites, and research other banks and credit unions in your area to see what kinds of auto APRs they offer if they specialize in auto refinancing, all the better. Dont forget to check with your existing lender, since a refinance with them could make the transition from one loan to another financially easier.
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Is There A Right Time To Refinance
You can refinance an auto loan whenever you want as long as you qualify. In order to get approved to refinance a car loan, your credit score needs to have improved from when you took out the original loan. This means that you usually have to give yourself some time to accomplish this.
If your credit score is up, the next step is to check to see if you have equity in your vehicle. Equity is when your car is worth more than what you owe on the loan, and negative equity is when the vehicle is worth less. You typically can’t qualify if you are upside down, but you can always pay off any negative equity out of pocket in order to move forward.
Another requirement that has to be met are the lender’s age and mileage restrictions. Generally, lenders don’t refinance vehicles that are older than seven to 10 years old with more than 100,000 miles on them, but the specifics vary from lender to lender.
Additionally, in order to qualify, the loan amount you’re refinancing has to fall within the new lender’s acceptable limit, and you have to be current on your loan payments.
You Can Negotiate The Payoff Amount
Some companies have a no negotiations rule when it comes to buying out your auto lease. However, it cant hurt to try. If you were to return the vehicle, the leasing company would have to sell the car to a dealer or an auction. To avoid this, your leasing company may be willing to negotiate the payoff amount with you.
To have the best possible leverage, you need to know what your car is worth.
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You May Already Have The Best Rate
If you purchased your car new, you likely got an attractive new car rate, especially if you took advantage of a special interest offer that can feature rates as low as 0% APR. The refinancing rates for some lenders, among them Bank of America, are higher than even their used-car rates. Also, interest rates have been at record lows due to COVID-19 experts predict rates will begin to rise in late 2022 to 2023.
Does My Car Loan Qualify For A Refinance
Auto lenders have rules on which cars are eligible for an auto loan refinance. Most lenders wont refinance a loan for a car with more than 100,000 miles or with a salvage title.
The lender will also assess the cars value before approving a refinance request. If the value is too low, you wont qualify. The lender will calculate the cars loan-to-value ratio, which generally needs to be below 125% to qualify.
Before you apply to refinance your car loan, determine the LTV ratio. To find the cars current value, use sites like Kelley Blue Book, Edmunds and NADAguides. Take the average from all three sites to find a general estimate.
Calculating the LTV is simple. Divide the current loan balance by the cars value: the resulting percentage is the LTV. For example, lets say you have a $9,000 balance on a car worth $11,000. In this case, your LTV ratio would be 82%.
But if the current balance is $15,000 and the car is only worth $10,000, your LTV would be 150%. This is much higher than what most lenders allow, so refinancing is likely impossible.
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