A lot of people are talking about refinancing right now. Even this morning on the radio, an ad for American Financing’s home mortgage refinance solutions was talking about the benefits of finding a home loan which matched your financial situation. Refinancing does have many benefits if you need to change your mortgage payments on your house, but did you know you can do the same with your car payment as well? Auto refinancing is becoming more and more of a trend. Learn how you can take advantage of it.
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About Auto Refinancing
Yes, refinancing for vehicles does exist. The idea of refinancing the debt associated with your car revolves around taking your current loan, transferring it into a new loan with its own interest rate and term. Depending on how you plan to structure your new loan, you will often find the refinanced car loan will have a lower interest rate than your previous loan along with a lower monthly car payment.
The auto refinancing process is very similar to refinancing your home and is pretty straightforward. To get started, you just need a few pieces of information, see if you meet the lender-established criteria, and check for qualifying offers. We provide a specific refinance step-by-step list below.
Refinancing for Cars? Yep, That's a Thing.
Auto Refinance Step-by-Step Guide
The following steps give you an idea of what it will take to refinance your car. These steps are meant to provide general information most lenders use during the refinance process. The actual steps you encounter may be different or slightly vary.
Have a Financed Car
You must first have a car financed in your name to be able to refinance it.
Have a Car Loan with Positive LTV
You must have an auto loan on your vehicle with a positive loan-to-value, or LTV, ratio which means you do not owe more than the vehicle is worth.
Meet Vehicle Qualifications
Your car must meet vehicle qualifications like be a recent model year within 10 years of manufacture, have lower mileage, and hold a non-salvage title with good vehicle value.
Meet Personal Qualifications
You must meet personal qualifications related to your credit score, debts, and income.
Submit the Refinance Application
You need to apply for auto refinancing with a new lender.
Wait for Approval
Once you are approved for refinancing, the lender can help you find a new loan structure which includes a new interest rate and payment term. If you are not approved, you can try again with a different lender.
Complete the Process
Complete the auto refinance process with your new lender.
Transfer the Car's Title
Your refinancing lender will hold the car title when the refinanced loan is processed. Lenders will usually have a title specialist who will help you with the transfer.
Make New Payments
Your new car loan payments are made to the auto loan lender.
Personal & Vehicle Qualifications
Qualifying Vehicles for Refinancing
One of the most challenging parts of refinancing your car loan is meeting lender qualifications around vehicle qualifications. This part of the process can be challenging because you often meet the requirements or not. If your car does qualify, great – getting started is easy. If not, you will have to keep looking for a lender who will accept your vehicle.
Vehicle requirements vary by lender. Some universally applied conditions normally include newer model passenger vehicles which were manufactured within the last ten years. The vehicle’s title must be clean meaning the car was never written off as an insurance loss. The vehicle’s mileage also needs to have lower mileage on the odometer. Under 100,000 miles is best but under 120,000 or 140,000 miles may also be acceptable depending on the lender.
The loan-to-value (LTV) ratio of the current loan on the car must also be positive. This means the car’s equity can help cover the loan to decrease risk. These are just a few examples of refinancing vehicle qualifications. When you start the refinance process, enter your vehicle information to see the requirements from specific lenders.
Personal Refinance Qualifications
When submitting your refinance application, you also need to meet personal qualifying guidelines. Your personal information is used for this step, and the info is stored securely on the refinance platform. You will need to provide things like your address, employer details, and income amount.
Lenders use this information to run a credit check which will not impact your credit score but will provide additional information around your credit score, debt, payment history on past loans (if any), and other financial checks. This initial check is called a soft credit pull and should not impact your credit score. This step helps complete a lending risk assessment to see what level of risk is posed by you borrowing money and if you can pay back the refinanced car loan.
Your Car Requirements
Qualifying with Your Info
Qualifying Credit Score Numbers
Running the soft credit check also checks your credit score with the major credit bureaus like Exterian. This is because your credit score number is a key measurement which allows you to refinance your car. This score is pretty much a measurement of how much debt you have and how likely you are to pay back that debt along with any other financial obligations.
The score is a number which can range as low as 300 to as high as 850. A good score is usually considered around 650 or higher. As a side note, you can also have sub credit scores which are related to specific industries. These other scores are different from your general credit score which we are talking about here.
The specific credit score a lender will require you to have varies per their requirements. They can take many things into account to determine your loan suitability. They include your score, assets, liabilities, income, payment history, and other factors. You want to keep your credit score as high as possible before refinancing.
If you just bought a house, opened a bank account, took out a personal loan, or engaged in other credit score impacting behavior, your credit score may temporarily drop a little bit. You will want to avoid applying for auto refinancing right after any of these negatively impacting events to qualify for the best interest rates you possibly can get. It is best to wait six months or more after a negative event before refinancing your car.
Here are some credit score examples for a general baseline. If you are looking for a loan on a new car, lenders may require a credit score of 700 or higher. If you are financing or refinancing a pre-owned or used car, a credit score of around 600 may be required. Applying for pre-qualification is usually the easiest way to see if your credit score will be accepted.
About Credit History
Your credit score is an indication of your credit history. This is a very large topic with many facets, and there is way too much information to cover here. However, we can touch base on the refinancing basics. Your credit history is a standing record of your liabilities and debts. These areas are recorded along with your ability to repay them.
Lenders access your history by checking your information against the record maintained by credit bureaus. This helps them measure the risk of lending you money. The key takeaway here for refinancing is the lower your credit score, the higher the lending risk to creditors. For this reason, the lenders will set a minimum acceptable credit score allowable for refinancing a car.
Your credit records are securely maintained by credit bureaus. The three major credit reporting bureaus in the United States are Experian, TransUnion, and Equifax. These bureaus separately record and track your credit information. While each of their credit-related databases are relatively the same, your credit score may slightly vary by individual bureau.
Credit Pulls and Checks
When refinancing, lenders run checks called “pulls” against your credit history as the borrower. This includes when you apply for auto financing when you buy a car or refinancing when you want to adjust your current financing.
The two types of pulls are called soft pulls and hard pulls. Soft pulls determine your initial suitability. This report pulls your credit information to see your history. Soft pulls do not normally impact your credit score. Typical use cases for these pulls are during refinance applications, pre-qualifications, and pre-approval processes.
Hard pulls are completed in the finalization stages of the refinance process. This means you are actively looking for a new line of credit, and hard pulls will impact your credit score. Typical use cases for these pulls are when you already have seen and accepted your new car loan and are waiting to wrap up the process with the lender.
Auto refinancing pre-approval means lenders know who you are and have checked your basic information. They can gauge if you qualify for a target rate ahead of applying. Being pre-approved, or pre-qualified, helps you find and see potential refinance rates faster. The pre-approval process means lenders may have completed steps like reviewing your credit score and determining lending suitability This step typically involves a soft credit pull using your basic information. These pulls do not impact your credit score versus the hard pulls which do when they are completed during the final steps in the refinancing process.
Car Financing Versus Refinancing
Car financing differs from refinancing. Financing occurs during the purchase when the car loan is taken out, and refinancing can be done later in the life of the loan. You may have financed your car through the dealership, financial services division, bank, or local credit union. Be sure you are making the most of any finance offerings at the time of purchase. These vary by the car dealer and can include 0% APR, 0% down, cashback opportunities, employee pricing, and more.
Later on once you have owned the car for a while, you may be able to save money by refinancing your vehicle and save money or pay your auto loan off sooner by adjusting the payment term and interest rate. This depends on your financial goals and refinance options presented by lenders. If your goal is to save money each month, lowering the interest rate can potentially save you money on your monthly payments. On the other hand if your goal is to work towards being debt free, shortening your loan repayment term can increase your payments but allow you to pay off the loan faster.
Lending Rates & Trends
If you are interested in the best times to refinance based on market trends, you can check out Experian’s state of the automotive finance market quarterly briefings. Their insights into loan trends, interest rates, and vehicle prices can prove invaluable when looking for Refinancing insights. For example, historical price increases in vehicles can allow you to take advantage of heightened equity in your vehicle. This may lead to better car loan terms and interest rates.
Loan Repayment Assistance
If you are having trouble paying off your auto loan or making payments, there are not many programs available for auto loan repayment assistance. However, there are still ways you can change your car payment to be more manageable or potentially sell your vehicle entirely. The the following options may help you decide what to do in this case.
Refinance The Car Loan
Refinancing the loan on your car can help lower your car payments if the loan is restructured towards the objective of saving money. This will help you save in the lower to mid term but may cost more over the life of the loan.
Sell The Car
Selling the car and looking for another car with a lower payment or other more affordable means of transportation is an option to consider. This option allows you to get out of your current car payment and still get around town.
Financial Refinancing Goals
If you are thinking of refinancing your car, it is good to have a specific financial goal as an objective. These goals may be aligned with your savings, family, life, or other plans. They can include saving for retirement, qualifying to buy a house, and getting out of debt. Ask yourself the following questions to help set your goals.
Is your monthly car payment or interest rate too high?
You can have the goal to lower your interest rate if you feel like the rate is too high on your car loan. To assess your current rate level, you can use the Experian's State of the Automotive Finance Market report for comparison. For the fourth quarter of 2021, a new car's average auto loan interest rate was 3.86% with a used car loan's average rate coming in at 8.21%. Remember your rates will vary depending on your credit score.
Does it feel like you have high-interest debt holding you back?
Reallocating resources toward high-interest debt like outstanding credit card balances may be a factor in your refinancing goals. Refinancing your car by adding a cash-out option can help provide additional resources toward paying off your debt.
Do you want to be debt free and pay off your car sooner?
Becoming debt free is an admirable goal. Refinancing can help lower your term so you can pay your car off sooner. The downside of the shortened term is that your car payments will likely increase since there are fewer payments being made.
Would saving more money help you pay the bills?
Saving money to put towards other bills is a common goal when it comes to refinancing vehicles. Since the refinancing process allows you to select your new loan's interest rate and term, you have the ability to look for a set interest rate which will empower your savings. To find the appropriate rate, use a tool like our auto loan refinance calculator to see your estimated savings ahead of applying.
Are vehicle prices rising leading to more vehicle equity?
Increases in vehicle prices make cars worth more. This can affect your decision to refinance if you can identify this trend happening. While values are up, your car is worth more in relation to the value of your loan. This situation favors your loan-to-value, or LTV, ratio since the value is increasing while the loan stays the same. Refinancing your car during this period can lead to increasingly favorable increase rates.
If you answered yes to any of the above questions or feel like you need to better align your financial goals, consider learning more about refinancing your car. Our lending marketplace reviews can help you start if you need to find a lender. You may be able to save money on your car payment or reach your goal. Use resources like our auto refinance calculator and learn about the benefits of auto refinancing. Some people save $100s in savings on monthly payments.
Car Refinance FAQs
Have questions about how to refinance your car or the process? Find the information you need to know.
The idea of refinancing your car takes the debt associated with your current car loan and transfers it into a new loan with its own interest rate and term. The refinanced rate and term is different from your original loan.
Yes, you can normally refinance your car if you meet the requirements and work with a lender who services your area.
The amount you may save while refinancing your car is dependent on many factors including being able to qualify for interest rates and terms, your credit score, outstanding debts, vehicle details, where you live, and other factors.
No, pre-approval is guaranteed when refinancing even if you have good credit. You need to submit your personal information for refinancing pre-qualification and check loan options with specific lenders.
Your auto refinancing goals mostly depend on your situation. They can be financially related like saving money on payments or getting out of debt. Your goals can also be personally specific like wanting to do what is best based on family car needs. Refinancing can be situationally motivated and include wanting to adjust your auto loan details.
You usually need to start the auto refinancing process to see related refinancing rates available near you. Until you can use tools like our auto refinance calculator to estimate savings or adjusted auto loan payment rates.
Auto loan lenders and financial institutions calculate car payments based on a number of factors including your credit score, available assets, outstanding liabilities, vehicle location, and estimated lending risk. Your physical location or address can also be a consideration.
To apply for an auto loan, you don’t need to be a member of any specific bank, credit union, or other lending institution. You can easily start the application from where you are. Keep in mind you will need to qualify to complete the auto loan application process.
You can refinance your car loan by owning a car or other qualifying vehicle, having a loan on that vehicle, meeting lender requirements, and providing your loan and personal information. Refinancing your car, truck, or SUV can be a great way to lower your car loan interest rate and the amount you pay towards monthly payments.
To complete the refinance process, you will need state issued documents like your valid driver’s license, an income verification document, car documents and pictures showing mileage and VIN number, and your current car loan information. You’ll need to provide these things to the financial institution during the loan application process.
The bank or credit union you choose will review your personal and vehicle information, check your credit history, and let you know about the available new loan offers. You may qualify for a lower interest rate. If you have any questions, you can usually speak to your loan officer or business representative to see if you can lower your monthly car payment.
The loan-to-value ratio is the ratio of the car loaned amount over the value of the car. LTV is used to calculate lending risk.
The car loan term is the amount of time in months the borrower has to pay back the loaned amount. It is usually a time frame like 36, 48, or 72 months.
The car loan interest rate is the percent the lender charges to borrow the funds. It is usually a percent like 8.55%