If you have a car loan and are wondering how to go about lowering the payment, you may want to explore renegotiating your loan. If you’ve built your credit score since you’ve signed your car loan, there’s a possibility that you can renegotiate a car loan successfully.
However, renegotiating a car loan interest rate is not a guaranteed thing. Not all lenders will allow you to do so, even if your credit score has been positively impacted.
Keep reading to learn more on renegotiating car loans, car loan interest rates, and options for lowering your auto loan interest rate.
Key Points
• Renegotiating a car loan can lead to better terms, like lower interest, if a credit score has changed.
• Negotiation skills and lender’s willingness are key factors for a successful renegotiation.
• Refinancing with a new loan can be more effective than renegotiation for lower rates.
• Precomputed interest loans are harder to renegotiate compared to simple interest loans.
• Check for prepayment penalties before renegotiating or refinancing to avoid extra fees.
What Is a Car Loan?
A car loan is money borrowed from a lender to help cover the cost of buying a car. Car loans are typically secured loans, with the collateral being the auto itself. This means that if the borrower can’t repay the loan, the lender can take possession of the car to recoup that money.
You can get a car loan from a bank, directly from the dealership, or from a third-party auto lender. When you take out a car loan, you agree to repay the amount you borrowed, which is the loan principal, as well as interest and any fees that apply.
Can You Renegotiate a Car Loan?
Although it’s not usually advertised, it is possible to renegotiate a car loan. Your ability to successfully renegotiate your car loan can depend on your credit score, your negotiation skills, your situational advantages, and your lender’s disadvantages.
That being said, a lender does not have to renegotiate a car loan. This can happen even if you have good credit, strong negotiation skills, and situational advantages.
Types of Car Loan Interest Rates
There are two ways that car loan interest rates can be calculated: precomputed interest and simple interest.
Precomputed Interest
With precomputed interest auto loans, the interest on the entire loan is calculated in advance. Precomputed loans use a formula called the rule of 78 to front-load your interest. In other words, loans with this type of interest rate charge a greater percentage of interest early on. This ensures that if you pay off your loan early, the lender still receives the money they would’ve made in interest if you had paid off the loan according to the full original term.
Precomputed interest car loans are not as common as simple interest car loans. They’re also much harder to renegotiate because it’s difficult to work your way out of the interest arrangement.
Simple Interest
Simple interest loans are the most common type of car loan interest rate. A simple interest loan calculates your interest rate based on the balance you owe on the day on which you need to pay your car loan. With a simple interest loan, if you pay more than the amount due, your loan balance will decrease.
A simple interest car loan is also easier to renegotiate than a precomputed interest loan. By lowering your rate with a simple interest loan, it can become easier for you to pay off your loan faster. This is because more of your payment will go toward the loan principal instead of toward interest.
Recommended: What Credit Score Do You Need to Refinance a Car?
Options for Lowering Your Car Loan Interest Rate
If you’re interested in lowering the APR, or annual percentage rate, on a car loan, you have a few options. You can sell the car, renegotiate the car loan, or refinance the car loan. Deciding which option to take will depend on your circumstances, finances, timeline, and preferences.
Sell the Car
In many instances, selling the car or trading it in can be the easiest way to get out of a high-interest car loan. If you purchased a car that you can’t afford, selling or trading in the car could be a good idea. When you sell the car, you no longer have to make any of the monthly loan payments.
Renegotiate the Car Loan
Renegotiating a car loan is not always possible, but it sometimes may be. You won’t know if you can renegotiate a car loan interest rate until you ask. It’s unlikely that a lender will offer to lower your interest rate, but it does sometimes happen if the lender wants to retain other business you have with them, like savings accounts.
Before approaching the lender, you should shop around and find the best offer available with another lender. Then, you should bring this offer to your lender to see if they would be willing to renegotiate your current loan’s terms.
Your lender may decide that your loan is not worth the risk to renegotiate, and they’ll let you pay off the loan to move to the new lender. Or your lender may not want to lose the business and will work with you on renegotiating the loan.
Refinance the Car Loan
If you have built your credit score or if the market rates have dropped significantly, refinancing a car loan could be a good option. Refinancing involves taking out a new loan to pay down the balance of your original loan.
Ideally, this new loan will have better terms, such as a lower interest rate. Or, you might secure a longer term in order to lower the car payment you make each month (though keep in mind that a longer term typically means paying interest for longer, which can make your loan more expensive overall).
Recommended: Calculate LTV Ratio
Renegotiating a Car Loan vs. Refinancing a Car Loan
Renegotiating a car loan and refinancing a car loan both can involve securing a new interest rate or new terms for your car loan. You ideally should have built your credit score before applying to refinance a car loan or asking to renegotiate.
The key difference between renegotiating vs. refinancing a car loan comes down to whether or not you’re taking out a new loan. When you refinance, you’ll take out a new loan to pay off your existing loan, whereas when you renegotiate, you’re sticking with the same loan, just asking for better terms.
Recommended: Guide to Finance Charges on Car Loans
Understanding Prepayment Penalties
A prepayment penalty is a fee for paying off your loan early. If you’re interested in renegotiating or refinancing your car loan, it’s important to check if there is a prepayment penalty. If there is, you’ll want to factor that amount in when doing the math to determine if a renegotiation is worthwhile. It may not make financial sense to renegotiate or refinance the loan if the penalty is significant.
Recommended: Rolling Over a Car Loan
The Takeaway
Renegotiating a car loan can be possible if your credit score has been built significantly since you’ve signed your car loan or rates have dropped. However, not every lender will allow you to renegotiate. It’s also important to weigh possible downsides, like prepayment penalties, before deciding whether you should move forward with renegotiating your car loan. Another option for lowering your interest rate could be refinancing your car loan.
If you’re seeking auto loan refinancing, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your car in minutes.
FAQ
How can you renegotiate a car interest rate?
It can be possible to renegotiate a car loan interest rate in certain circumstances. Your ability to successfully renegotiate your car loan after signing can depend on your credit score, negotiation skills, and other advantages, as well as your lender’s concerns (perhaps not wanting to lose your business due to other holdings). However, a lender does not have to agree to a renegotiation.
Should you renegotiate a car loan or refinance it to lower your interest rate?
Refinancing a car loan is typically more effective than renegotiating for lowering interest rates. Refinancing replaces your current loan with a new one, often at a better rate if your credit has been built or rates have fallen. Renegotiation with the same lender is less common and may not yield significant interest rate reductions.
Do you have to create a new contract when you renegotiate a car loan?
You will likely need to create a new contract when you renegotiate a car loan. However, whether this is necessary will depend on the lender.
Photo credit: iStock/lechatnoir
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