A lower monthly payment is the main goal when refinancing an auto loan. When you refinance a car loan, there are two main ways to achieve this lower monthly payment: getting a lower interest rate, or extending your loan term. But in order to do either of these, you must first be eligible to refinance your vehicle.
Refinancing your auto loan means replacing your existing loan with a new one, typically with a new lender. In some cases, you may be able to refinance with your current lender, but this isn't always an option.
Though there's no set time you must wait to refinance, there's generally some change that sparks a borrower's need to refinance – a rise in credit score or a change in income, for instance. Regardless of your reason, all lenders have their own refinancing requirements that you have to meet.
In order to refinance your car loan...:
- Your payments must be current – Being behind on your payments may lead you to look for refinancing, but it isn't going to help you get approved. Lenders don't refinance people who are behind on payments.
- There has to be equity in your vehicle – If you're upside down (owe more on your current loan than your car is worth), refinancing isn't possible. Your vehicle's value has to be at least equal to what you owe.
- Your car must meet age and mileage requirements – All lenders have certain vehicle guidelines for refinancing, and your car has to fall within their acceptable age limit and mileage range in order to be eligible.
- Your vehicle must be for personal use only – Typically, lenders don't refinance commercial or delivery vehicles, including registered commercial Uber or Lyft cars. Vehicles eligible for refinancing must also have a clean title. Rebuilt or salvage titles typically don't qualify.
- Your credit score matters – If your credit is suffering, it's more difficult to get approved for refinancing. Generally, your credit score has to be good or have improved since you took out your current loan in order to be approved.
With these points in mind, let's look at how lower payments can be achieved through refinancing to save you money.
Lowering Your Monthly Payment through Refinancing
A lower monthly payment can be achieved in two ways through refinancing: by extending the loan term, or by lowering your interest rate.
With an extended loan term, the current amount of your loan remains the same, but the time you have to pay it increases. For example, let's say you currently have a $15,000 loan for 48 months with a 16 percent interest rate, which gives you a $425 monthly payment. If you were to extend the loan term 12 more months, your monthly payment would drop to $365. However, you need to keep in mind that this method increases the overall cost of your loan in the long run because it leads to increased interest charges.
The alternative to extending your loan term to lower your monthly payment is to get a lower interest rate. This typically only happens when your credit has improved since you took out your original loan. Using the example above, if you had the same $15,000 loan for 48 months but a nine percent interest rate, your payment drops to $373 a month as opposed to the $425 monthly payment with the 16 percent rate.
The Bottom Line
Refinancing can be a good way to get a lower monthly payment. Make sure you have equity in your car before you start the process, and, if you plan on extending the term, make sure refinancing isn't leaving you upside down in the loan longer than necessary.
If you need to lower your payment and refinancing isn't in the cards, you may be able to trade in your vehicle for something more affordable. If you need help getting started, Auto Credit Express wants to help.
We work with a nationwide network of special finance dealerships that specialize in helping people who struggle with credit issues get financing. If you've gone from dealer to dealer looking for a helping hand and can't find one, it's time to turn to us. Our hassle-free auto loan request form is simple and secure, and it only takes a few moments to complete. Get started today and we'll get to work matching you with a local dealership!