In simplest terms, refinancing is the process of using a new loan to replace one that already exists. The new loan pays for the same item (this is known as the collateral). There are many reasons for refinancing (which we’ll cover below), but ideally, you’d end up with a better interest rate and a lower monthly payment.
With an auto refinance loan, a new lender pays off the debt of your current car loan with your current lender. In exchange, the new lender holds the collateral (your car) on paper (your car’s title) while you pay back the new loan, plus interest and any fees. When the refinance loan is paid off, the title is transferred to you, and you officially own your car free and clear.
Auto refinance loans are secured loans. This means if you can’t make the payments on your refinance loan, the lender can repossess the vehicle and sell it to make up for the financial loss.
Given that loan terms and rates are determined by several factors, you could save a lot of money by refinancing at a time when the factors are more favorable.
Why Should I Refinance My Car Loan?
They’re based on the borrower’s financial history, credit, and current lifestyle, but also other external factors, like the economy. This means that at the moment when the loan is generated, it is a reflection of both you and the globe at the time when you chose to purchase your car. Though that seems a bit complex now, it is helpful to understand the reasons why people consider refinancing.
1. Save money
You shop around when you are buying a new pair of shoes, so why not shop for the best auto loan too? Comparing all of your options versus taking whatever offer the dealership or your bank throws at you will probably save you money and free up extra cash for your monthly budget or savings account.
We all want to save some money and put it towards other priorities. Though a desire for “saving money” isn’t necessarily a qualification that would determine whether you’re approved for a refinance, it’s certainly one of the major motivators for doing so, as it can save you a lot of dough.
2. Lower interest rates
The Federal Reserve controls the baseline interest rates for lending institutions nationwide. They change regularly in an effort to regulate the economy. It’s likely that rates are lower than when you originally took out the loan, meaning that you could be eligible for a loan with a better rate.
Update: In 2020, interest rates are the lowest they have been in years due to rate cuts by the Federal Reserve.
3. Subprime auto loan
We’ve all been there. Maybe you were in a pinch, and a subprime auto loan was your only option. Maybe you didn’t have the best credit when you bought your car and were stuck with a really high rate. Maybe you just didn’t know better, and you agreed to a loan without shopping around
It’s important to act quickly here, though, as car loans with high interest rates are more likely to be upside down more quickly, meaning you owe more on the loan than the vehicle is worth.
It’s also more difficult to qualify for refinancing with a heavily upside down loan. However, If you’ve done work to improve your credit, increased your income, or reduced your overall debt or cost of living, it’s very possible that you could qualify for a much more desirable auto loan.
4. Loan term too long
Sign up for an 80-month term to get a lower rate? You’re not alone. While that option might have been preferable for you at the outset, longer term loans are also more likely to be upside down, and tend to cost more in interest in the long term. Refinancing can get you into a loan with fewer installments.
5. Dissatisfied with your lender
Maybe you took out an auto loan with the dealership where you purchased the car or with your primary bank. Some of the time that leads to unforeseen issues, like agreements signed without reading the fine print, and ultimately, frustration.
Or, maybe you simply moved and want a lender who is more local to your new location, or one that offers online payment options. Or, perhaps you’ve heard the benefits of financing through a credit union, and thought you’d give it a try.
Whatever your motivation for switching lenders, refinancing is the way to go.
6. You’d like to buy the car you’re leasing
Also known as a “lease buyout“, the process of buying a car that you have on lease is a little different than just re-buying the car. Refinancing allows you to secure a loan in order to purchase the car at its post-lease estimated value.
7. Need to add or remove someone from your loan
Whether you took out a joint loan or one with a cosigner and would like to remove them, or whether you’re seeking to either get a better rate by adding a cosigner or add your new significant other, refinancing can help you with that.
People working at busy modern office in front of computers
When is Refinancing My Car Loan Not the Best Option?
While we’d love to think that refinancing is a great fit for everyone, the truth is, there are certain situations where it either doesn’t make sense or it’s just not possible.
1. You have bad credit
Bad credit may be one of the reasons drivers find themselves in undesirable loans to begin with. If your credit score and history hasn’t shown much improvement since the loan was originated, then refinancing likely won’t be beneficial, as the offers presented could still come with high rates, fees, or tough terms.
In the same vein, if your credit score is lower than it was when you first bought the car, you’re likely to get offers that are worse than the loan you started with. If you’ve had issues with your credit recently, it might be best to take steps to improve your score before making other financial decisions, as credit history is an important factor for lenders and creditors of all types.
2. You’re very upside down
Cars depreciate quickly. Because auto loans are secured by the car itself, the car’s worth is important because it helps understand how much of the loan could be paid back simply with the value of the car.
Loans that are upside down have a high loan-to-value ratio, or LTV. This means that the amount of the loan is more than the value of the car.
Loans are more likely to become upside down if it has a high interest rate, or if the car itself is older, higher mileage, or if the model tends to have a lower resale value. Given that cars do depreciate more quickly than other assets, being a little bit upside down is normal. Most lenders accept upside down refinance loans up to a certain point, typically around 125%.
However, if your LTV is risky, you may encounter loan offers that come with high rates or large down payments, ultimately costing you more. If you are quite upside down in your current loan, over 125% LTV, it might be difficult to find a lender willing to refinance altogether.
Vehicle Titling Tips
Ensure that your registration is in good standing before applying for auto loan refinancing.
In order to complete any title process, registration must be in good standing. The most common reasons why a registration would not be in good standing are:
- Toll violations
- Parking tickets
- Unpaid taxes
Having registration issues can severely delay the title process, thus delaying the final completion of your refinance loan. In the event that your registration is not in good standing, your state’s DMV collects the amount due on behalf of the municipality where the fines are owed.
Understand that most government agencies have strict rules and processes.
As do most large organizations, your state’s government agencies (e.g. tax office, DMV) tend to follow policies and procedures exactly, with few exceptions. Therefore, just like everyone else, RateGenius has to play by their rules.
Although typically straightforward and simple, sometimes there are special circumstances which make the process a bit more complex.
We handle all of the leg work with your state on your behalf, ensuring that the process is as easy as possible for you. But, we still have to do things their way — often relaying information or requesting items per the state’s requirements.
