Refinancing a car loan can be a smart financial move, especially if you’re looking to lower your interest rate, reduce your monthly payments, or adjust your loan term. But before signing on the dotted line, it’s important to ask the right questions to ensure you’re making the best decision for your situation.
From understanding the total cost of refinancing to evaluating potential savings, asking the right questions can help you avoid surprises and maximize your benefits. Here’s what to ask when you’re considering refinancing your auto loan.
Key Points
• Auto loan refinancing is the process of replacing your current car loan with a new one, usually to secure better terms like a lower interest rate or reduced monthly payment.
• Lenders have varying requirements for refinancing. Factors such as your credit score, vehicle mileage, and remaining loan balance can influence your eligibility.
• Refinancing can alter your monthly payments based on the new interest rate, loan term, and total loan amount.
• Cash-out refinancing allows you to borrow against your car’s equity, providing a lump sum of cash.
• Shopping around for auto loan refinancing is important because it helps you find the best interest rates, terms, and fees, which can save you money and ensure the new loan aligns with your financial goals.
1. Do I Qualify for Car Loan Refinancing?
There’s no guarantee that you’ll be approved for auto refinancing. It can be difficult to qualify for an auto refi loan if you have bad credit or a high-mileage car. Even if you have excellent credit, a lender may be unwilling to refinance your car loan if you owe less than $5,000 on your loan.
Each lender has its own eligibility requirements and underwriting standards. Prequalifying for an auto refinance loan doesn’t guarantee loan approval, but it may help you determine whether refinancing is right for you.
2. Will Refinancing Impact My Credit Score?
Yes, refinancing affects your credit score because it requires a hard credit inquiry. This means that when you apply for a refinancing loan, your credit score may for a time drop by as much as 10 points.
And while you’ll likely want to shop around for the best loan terms, submitting multiple applications over several months can ding your credit score. However, timing is everything. If you submit all of your applications within a short window, the impact on your credit score should be the same as if you’d only submitted one application.
Keep in mind that the age of the debt is a factor in your credit score. Taking on the refinancing debt increases your amount of newer debt, which may also temporarily ding your credit score.
In the aftermath of acquiring your loan, much of what happens to your credit score depends on you. For example, if you use the savings from your lower monthly payments to pay off higher interest debt, reduce your credit utilization ratio on your credit cards, or pay off old collections accounts that drag down your score, these actions may help rebuild your credit record. And of course, if you pay your loan back in a timely fashion, that can work toward building a positive credit history, too.
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3. Is Cash-Out Auto Refinancing Worth It?
Cash-out auto refinancing allows you to borrow against the available equity in your financed car. This can provide you with a lump sum of cash for covering personal expenses, but there are some potential downsides to cash-out refinancing. For one, it can increase your overall debt in terms of outstanding principal and total interest costs. Your personal preferences and circumstances may dictate whether cash-out auto refinancing is right for you.
4. What Will My New Payment Be?
There are several factors that may determine what your new monthly payment will be after refinancing your auto loan. These include your interest rate, the length of the loan term, and the total loan amount. Each potential refi lender should let you know exactly what the payment would be so that you can compare it with your current monthly obligations and other refi loan offers.
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5. What Will My New Interest Rate Be?
Ideally, your new interest rate will be lower than the one you’re paying now. If you can’t get a lower interest rate, refinancing will likely lose much of its appeal.
The odds are in your favor if you’ve built your credit score since you got your first loan. If interest rates have generally dropped, too, you may also qualify for a better deal for you.
On the flip side, if your credit score has dropped, you’re likely to face the consequences, meaning you won’t necessarily qualify for the best interest rates — or even the same ones you got before. Also, if your car’s appraisal value has declined significantly, you’re likely to receive a higher interest rate.
6. How Long Will My New Loan Term Be?
Some borrowers may qualify for auto refinance loan terms up to 84 months. Creditworthy applicants may have the option to choose either a short or long term. A longer term may provide you with a lower monthly payment, but it could also increase your total interest costs over the life of the loan.
Refinancing may not be right for you if it leads to an upside-down car loan. This describes a situation in which the outstanding balance on your auto refi loan is greater than the resale value of your refinanced car. Being underwater on a car loan is generally not an ideal situation.
However, if you’re unable to afford your monthly payments, refinancing for a longer term may provide you with a much-needed lower monthly payment.
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7. How Soon Can I Refinance a Car Loan?
You can technically refinance a car loan at any time, but most lenders prefer you to wait at least 60 to 90 days after the original loan begins. This gives the initial lender time to finalize the title transfer and for your payment history to start building. Lenders also want to see that you’ve made at least a couple of on-time payments, which shows you’re a responsible borrower. Some lenders may have their minimum time frames, so it’s worth checking their policies before applying.
That said, there are certain particular times when you might consider refinancing. These may include when interest rates are significantly lower than what you’re currently paying or when your credit score is now higher than when you got your current loan (since you will likely be offered a more favorable interest rate this time).
8. What Fees Are Associated With Auto Refinancing?
There are usually fees involved in refinancing, which may vary by lender, your state of residence, or the state where your refinancing lender is based.
Some fees are relatively standardized, including the transfer of lien holder fees and state re-registration fees (which can cost more than $200 in some cases).
However, other fees may depend on your old and new lenders. They can include the following:
• Prepayment penalties. Your existing lender might have prepayment fees. Many lenders don’t charge these, but if yours does, calculate whether those fees will cost you more than you’d save with a new loan.
• Application fees. Your new lender might charge you an application fee for filing the papers. Don’t be shy about asking the lender to waive the application fee, though.
• Transaction fees. There could also be a transaction fee, an administrative fee, or a processing fee charged when you terminate your loan.
9. What Should I Be Aware of in the Fine Print?
You have to be a bit of a sleuth when you’re thinking about signing any sort of contract. You want to be on the lookout for disclosures and details about any and all fees. Do ascertain whether there are prepayment penalties for early payoff of the loan, for example.
Also, be aware that your loan could include items you might have no interest in, like gap insurance, which could add more costs to your refinance. Take your time and review the fine print; it could save you money and costly misunderstandings.
The Takeaway
Refinancing your car loan can mean a positive difference to your finances if you get a lower interest rate and lower monthly payments. Asking questions can help you be sure you’re making your decision based on solid information.
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
Do I qualify for refinancing?
You may qualify for auto refinancing if you have a steady income, you’ve built your credit score, and your car is newer with sufficient value. Lenders also consider your current loan balance, payment history, and whether your vehicle meets mileage and age requirements. Each lender’s criteria may vary.
What will my new loan payment be after refinancing?
Your exact new loan payment depends on your individual situation. But typically, when you refinance, it’s most often so that you can get a lower monthly payment. Potential refi lenders should tell you what your monthly payment would be if you refinanced with them so that you can compare your options.
What will my new interest rate be after refinancing?
Ideally, when you refinance you’ll be getting a lower interest rate than you have on your current loan. What that rate is may depend on factors such as your credit score, the value of your car, and prevailing market rates, among other things.
How long will my new loan term be after refinancing?
How long your new loan term will be depends on what you work out with your new lender. Ideally, you’ll be aiming for the shortest term that you can afford, that way you can minimize the amount of interest you end up paying over the life of the loan.
Photo credit: iStock/Jinda Noipho
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