Car loan refinancing is an option if you are upside down as people sometimes refer to, or in other words, owing more than the vehicle is currently worth. This happens from time to time when used vehicles lose significant value due to age and use. If you are upside down by a significant amount, the lender will want some collateral for this deficiency. In some cases, though not with all lenders, this can be requested in the form of a lien on the car. If this is unacceptable or not permitted with your vehicle, which some banks may not permit, you have the option to pay off the loan in full and work out a new car loan at a lower price with another bank. This is what car loan refinancing entails.
The most common repackaging of a loan is a fixed interest rate and fixed payment plan for the loan’s life. You then pay the total amount monthly for the life of the loan. The other type is an adjustable interest rate with a set term and number of payments you make in that time frame. Other types are more tailored to specific situations. However, most people will not come across them and wouldn’t even be knowledgeable about their existence. Auto loan experts want to discuss the history of car loans and how the account has evolved in the years since they started. The history of auto loan accounts stretches way back before when Refinancing Car Loan was introduced.
When Should you Refinance your Car Loan?
Refinancing is a good option if you’re upside down by some significant amount, such as more than 20%, and would like to continue driving the vehicle you already own. It’s also a good option if you’re within the loan’s time frame and have a high-interest rate (10% and up), and want to secure lower payments for the loan’s life. One last reason it’s worth considering is if you believe your vehicle’s value will decrease due to age or increased mileage.
Does Refinancing a Car Loan Hurt Credit?
Refinancing can hurt your credit most of the time because it knocks off perfect payment history, depending on your situation and lender. This would be considered negative information by credit agencies who then ding your credit score. They may even ding you to take out additional debt, which is the case in most cases. The effects differ from person to person because of other factors, but refinancing will hurt your credit in general. We advise against it if you’ve been paying on time with no late for a long period of time or have tried to lengthen them beyond the norm. You should also check your credit before you refinance since lenders offer help factoring fees into your payments or refinancing your car loan.
Is it Worth Refinancing a Car Loan?
It depends on your situation and what you’re planning to do with your money after your refinance. If you plan to use it to pay your loans down faster than you normally, then the answer is yes. It can be a huge help to improving your credit score if there are no other delinquencies on your report (just positive information), and you can still pay down the loan in a reasonable amount of time. If not, and if it is an option available at the end of your loan term, then maybe. It all comes down to how much value you place on maintaining perfect credit or have cash available now for things like principal reduction that is potentially better than having interest-only payments. It would help if you also questioned your motives for refinancing.
When Does Refinancing a Car Loan Make Sense?
Refinancing can be a wise decision if you are experiencing any of the following: You are pushing the end of the loan term and have been making interest-only payments for some time. If you extend your loan term, it could lower your monthly payment by hundreds or even thousands of dollars, depending on how much longer it takes you to pay off the loan as well as the size of your original loan. While in this case, you may end up paying more interest over time. You will effectively reduce the principal on your loan by repaying it faster than you would have without extending the term, which will boost your overall credit score. You need a longer-term loan. The fixed-rate terms of most auto loans are usually short (3 to 6 years), which means that your interest rates may go up at the end of that fixed-rate period, or they might move to a variable rate. Your best bet is to extend your loan term and make interest-only payments for as long as possible until you begin servicing the principal payments at a lower rate (all else being equal). There are other ways to extend payment periods without refinancing, such as accessing low- or no-cost GAP insurance protection to pay off your car loan in part. This can help drastically reduce the cost of refinancing by shifting more responsibility for repayment onto GAP coverage. It covers virtually every aspect for anyone who has ever had an accident that resulted in sudden and unexpected expenses associated with repairing their vehicle.
What are the Pros and Cons of Refinancing an Auto Loan?
The pros of refinancing a car loan show improvement in your credit score if there are no other delinquencies on your report. You will also have the extra cash to pay down that we mentioned earlier. The cons of refinancing a car loan include paying more for the loan because you borrow a longer period of time than you originally had and other fees that come with the refinancing, such as getting appraised for the loan again.
Requirements Refinancing Car Loan
- Recent pay-stubs or lien statements for the last three months
- Last six months bank statements or copies
- Moving, or employment advance
- Mortgage payment history check for file processing
- Tax returns, W2 forms, bank statements, home mortgage statements, expenses, and a good credit report