Refinancing can be a good option for your auto loan when you want to keep your car and need to reduce your monthly payment. A lower monthly payment is typically the only reason you should consider refinancing.
How Does Car Refinancing Work?
To refinance your auto loan, you replace your existing loan with a new one, often with a different lender. There are two options for lowering your monthly payment when you refinance a car loan: a lower interest rate and/or a longer loan term.
When you refinance with a lower interest rate, it can reduce your monthly payment and the overall cost of your loan. This is typically the best-case scenario when you refinance.
Refinancing for a longer loan term lowers your monthly payment, however, it doesn't save you money the same way as a lower interest rate. A longer loan term actually means paying more in interest charges over the course of your loan. This is because interest is charged daily and you're paying on the same loan for a longer period of time.
Qualifying to Refinance Your Auto Loan
Once you consider refinancing, you need to make sure you qualify. All lenders have their own refinancing qualifications, so you may need to check with several of them to find a deal that works for you. Even though it's common to refinance through a new lender, you may want to check with your current lender first.
Here are some of the requirements you typically need to meet in order to refinance your vehicle:
- There must be equity in your car – If you have negative equity, or owe more on your loan than the vehicle is worth, you won't be able to refinance. Negative equity is quite common, especially at the beginning of an auto loan, so you likely won't be able to refinance your loan within the first couple of years when you have a higher chance of having negative equity.
- Your credit score must have improved – Typically, you have to have a good credit score in order to refinance your car loan. However, if you took out an auto loan with poor credit, you may be able to refinance if your credit score has improved.
- You must be current on your loan – Refinancing is often a go-to when you're having trouble keeping up with your loan payment. While refinancing can help with this, it must be done before you fall behind. Lenders don't accept past-due loans for refinancing.
- Your vehicle must meet lender requirements – All lenders have their own age and mileage restrictions when it comes to refinancing. If your vehicle doesn't meet the qualifications, you can't refinance.
- Your loan amount must qualify – Loan amounts must fall within a lender's acceptable range in order to qualify for refinancing.
The Pros and Cons of Refinancing Your Car Loan
No one wants to be stuck in a car loan that's not working for them, so it's important that you know the advantages and disadvantages of refinancing your auto loan. There's really only one advantage to refinancing, and that's a lower monthly payment.
When you attempt to refinance, you may end up costing yourself more money if you're not careful. As we mentioned, there are two ways to lower your monthly payment, and one of them is with a longer loan term. If you refinance with a longer loan term and keep a very high interest rate, you usually end up paying even more than your original loan.
Is Refinancing a Good Choice?
Now that you know what it takes to refinance a car loan, you have to weigh the pros and cons to see if it's really the way to go. If you're driving your dream car, and it's holding on to its value, refinancing can be a great option to lower your monthly payment.
However, if you're only refinancing to get through the loan affordably, and don't plan on keeping the vehicle for long, you might want to consider trading it in for a more affordable car. If you feel like this is the way to go, let us help.
At Auto Credit Express, we can match you with a local dealership that works with borrowers in unique credit situations. These special finance dealers work with subprime lenders that are willing to help when other lenders can't. To get the process started, simply fill out our quick, no-obligation auto loan request form today.