Refinancing a car loan often happens when you want to lower your monthly payment, but you can't always refinance right away. In order to qualify for refinancing, two things have to happen: your credit score must improve, and enough time has to pass. Even though refinancing the auto loan on your car may sound like a good idea, there are times when it may not be wise, or possible.
Refinancing Defined
Refinancing isn't just new terms on an old auto loan. You're closing out your original loan and signing a new contract while keeping the same vehicle. Refinancing is typically done with a new lender, but even if you were to refinance with your current lender, it'd still be a whole new loan.
The most common reason to consider refinancing is to lower your monthly payment with a lower interest rate and/or a longer term loan.
Timing Is a Key Factor for Refinancing
The first key you need in order to be eligible to refinance your auto loan is having a good credit score, or at least once that has improved since you took out the original loan. If you originally took out a bad credit car loan, you may be able to refinance if your credit has gone up since signing the contract.
The second key is time, itself. Refinancing is usually only available after you’ve paid at least a year on your original loan.
These two factors go hand in hand if you had bad credit, since making all your payments on time for at least the first year of your loan is imperative if you want to refinance for a better interest rate and/or loan term.
It's important to know that you shouldn't just jump at the chance to refinance as soon as you're able if it isn't necessary – it's not something that you do just because. However, if your credit score has improved or interest rates are falling, it might be worth it to see if you can take advantage of this money saver, even if you can handle your current payment.
Refinancing for a Lower Monthly Payment
If you're having trouble keeping up with your payments, refinancing could help you out. Typically, refinancing is only helpful if you can reduce your loan payment. A lower interest rate is usually the best way to do this; it lowers your monthly payment and saves you money because you're being charged less for the amount you're borrowing.
If you don't qualify for a better interest rate, you may still be able to lower your monthly payment by extending the loan term. However, doing this without reducing the interest rate only lowers your payment. Your monthly payment is less, but you end up paying more for your car, since you're paying interest expenses for a longer period of time.
When Refinancing Isn't the Answer
Refinancing isn't always an option, even if it's been more than a year and your credit score has improved. Lenders have certain rules that have to be met in order for you to be considered to refinance.
General qualifications for refinancing include:
- Your loan amount must meet the lender's guidelines.
- Your vehicle has to be less than 10 years old.
- There can't be more than 100,000 miles on your car.
If you're already having trouble keeping up with your payments, and aren't current on your loan, refinancing isn't an option to help you catch up. Your loan must be current in order for you to refinance. Additionally, you can't have negative equity – your vehicle has to be worth at least as much as you owe on your loan, if not more.
Looking for Refinancing or Financing Options?
If you think refinancing might be the best option for you, you can start your search for a lender with our refinance partner here.
But, if your loan or car doesn't meet a lender's requirements, it might be time to look into alternative options, such as trading in your vehicle for a more affordable one. If you're still struggling with credit issues and need a more affordable car, Auto Credit Express wants to help.
We’re teamed up with a large network of special finance dealerships all across the country that have lenders that work with people in many unique credit situations including bad credit, no credit, and bankruptcy. Skip the hassle of searching for one of these dealers, and start here instead. Simply fill out our fast and free auto loan request form, and we'll get to work finding a dealership near you.
