You can replace your current auto loan with another one, and possibly change your interest rate in the middle of your car loan! This is called refinancing, and it can be a great way to lower your monthly car payment and save cash on interest charges during your loan.
Switching Car Loan Terms Up
Having a lower credit score can mean qualifying for a higher interest rate than you wanted on your car loan. Thankfully, this is where refinancing can come in handy. With refinancing, you replace your old loan with another one.
To do this, you can either work with the lender that originally financed your vehicle, or find another one. Most borrowers tend to go with another lender to refinance the car and attempt to qualify for more favorable terms.
Refinancing can be done in a few different ways:
- By lowering your interest rate
- By lengthening your loan term
- By both lowering your interest rate and lengthening your loan term
The ideal way to refinance is to lower your interest rate. If you only lengthen your loan term with the same interest rate, it’s actually going to cost you more cash in the long run. This is because auto loans are almost always simple interest loans, which means you’re charged interest on your balance – so the longer you owe the lender, the more you pay. Interest accrues daily, based on your principal loan balance.
However, if you lower your interest rate and lengthen your loan term, it may just lower your monthly payment. Take some time to crunch the numbers and figure out which option you would like to aim for.
Another thing to take a look at is your credit score. Typically, borrowers refinance after their credit score has improved since the start of their loan. If you took out a bad credit car loan and your credit has been polished up, you may qualify for a better rate now than when you first financed the vehicle.
Additionally, no lender is going to approve you for refinancing if your auto loan is less than a year old. There are other refinancing requirements that you’re going to need to meet besides a better credit score, too.
Typical Refinancing Requirements
Refinancing isn’t always an option for every borrower. Before you run out the door and look for a lender to refinance your auto loan, take a look at this list of common refinancing requirements:
- Your car loan is at least one year old – Lenders don’t refinance auto loans that are less than a year old.
- Good payment history – Lenders won’t refinance your loan if you’re behind on your car payments.
- Your vehicle has equity – If you owe less on your loan than what your car is worth, it means you have equity. Lenders won’t approve you for refinancing if you have negative equity, also called being underwater or upside down.
- Your vehicle meets lender’s requirements – You’re going to find that most lenders don’t want to refinance a car that’s over 10 years old, or one that has over 100,000 miles on it. This varies depending on the lender, so be sure to ask about their vehicle requirements before getting too far into the process.
- Your loan balance matters – This also varies depending on the lender, but if you owe too much or too little on the auto loan, you may not be eligible for refinancing.
Be sure to ask around and look for a lender that can work with your car and your loan balance. Not every lender can help every borrower or vehicle.
Looking for Your Next Auto Loan?
If you find that your car or loan doesn't quite meet the refinancing requirements, but you need a more affordable auto loan, your next step may be trading in for a different vehicle.
Even if you have bad credit, there are lenders that can work with all sorts of credit situations. In some dealerships, there are special finance departments that are signed up with bad credit lenders. Here at Auto Credit Express, we match bad credit borrowers with lending opportunities through a network of special finance dealers.
To start the process of getting your next car loan, fill out our free auto loan request form. After you do, we’ll start looking for a dealership near you.