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What does it mean to refinance a car?

Refinancing a car –or auto refinancing– means replacing the current auto loan with a new one. The new loan pays off the old loan, so you still have only one auto loan on the car. People refinance in order to lower their interest rate, lower their payment, payoff their debt faster, or to borrow additional money. Refinancing an auto loan can be a great way to build financial flexibility. It can help improve your financial situation and pay off your debt faster. 

Why do people refinance an auto loan? Why do people refinance a car?

There are three primary reasons people refinance their auto loans:

  1. Take advantage of a better interest rate. The most popular reason people refinance their auto loan is to get a better interest rate. When interest rates drop or people’s financial situation improved enough for them to qualify for a better interest rate, people may choose to refinance their auto loan. By paying less in interest, they can either pay off the loan more quickly or have a lower monthly payment.
  2. Drop their monthly payment. People may choose to refinance their auto loan in order to drop their monthly payment. Refinancing an auto loan can help decrease how much they pay each month on their car note.
  3. Get cash back for an emergency. When people run into financial difficulty, people may cash-back auto refinance. This allows them to draw on some of the equity they have in their automobile. This can be a cheaper way to borrow money for emergencies compared to personal loan. 

How to refinance a car

The process to refinance your auto loan can be broken down into three easy steps:

Do your research

The first thing you need to do is determine whether it makes sense for you to refinance in your circumstance. Some of the questions you should ask yourself before you decide to refinance your auto loan include:

  • Why do I want to refinance? Are you looking to lower your monthly payment? Are you hoping to accelerate getting out of debt? Do you need cash back? Do you need more flexibility in your current monthly budget? If you can answer those questions, you will know what kind of refinance terms you need in order to make it worthwhile. 
  • Can I get a better interest rate? If you aren’t getting a better interest rate, you are likely to just spend money on refinancing without getting any of the benefit. You could get a better interest rate because your credit score has improved, lenders have improved their offers, or your current loan is not competitive.

Gather the relevant documents

Refinancing an auto loan can be one of the easier kinds of credit to obtain. It can be made even easier if you make sure you have everything you need before you apply. 

  • Drivers license
  • Proof of insurance
  • Statement from your current auto loan (you specifically need to loan payoff amount)
  • Vehicle registration
  • Social security number
  • Vehicle identification number (of VIN)
  • Pay stub or proof of employment

Find the right lender

You can shop around for a refinance loan without it hurting your credit score. Most lenders will do a soft pull of your credit report which will allow them to pre- qualify you for a loan. If you take their offer, a hard inquiry will be added to your credit report. For that reason, it makes a lot of sense to shop around for the lender that will give you the best terms. 

Once you select the lender and take the loan, the lender will pay off the other loan and do the necessary paperwork. You won’t have the worry about the hassle of getting a check, having two car notes, and making sure the other loan is closed out. They will cut a payoff check to the existing lien holder and file the necessary DMV paperwork. The lender will take care of all of that for you. 

One of the easiest ways to shop around is to check marketplace websites that will expose you to several lenders at the same time. This simplifies your life and allows the lenders to compete for your business. You can check our marketplace and see what you can qualify for by clicking here.

What is a cash-back refinance? Can I refinance my car and get money back?

Cash back refinancing of an auto loan is the process of receiving a loan amount that is in excess of the loan you are refinancing. The extra money borrowed is returned to you as cash that you can use towards other emergencies. To get a cash back refinance your car must be worth more than is currently owed. 

Borrowers should be cautious about undergoing cash back refinancing for their auto loans. It can increase both the loan amount and the length of time they will be in debt. However, it can be a very cost-effective way to borrow money in case of a financial emergency.

Is it easy to refinance an auto loan?

Refinancing an auto loan is pretty easy. Applying with a lender requires only a handful of documents and the lender themselves will take care of most of the paperwork required to pay off your old loan, establish the new lien holder, and file with the DMV. 

How soon can you refinance a car? How long does it take to refinance your car?

Refinancing an auto loan can be one of the easiest types of credit to qualify for. It can still take up to two weeks. You can make the process go more quickly by ensuring that you have the necessary paperwork and information as you begin the process. How long the process takes will depend on the lender you choose. 

Does refinancing a car mean starting over?

Refinancing an auto loan does not necessarily mean starting over on the loan. In fact, in many cases a refinance can accelerate your ability to get out of debt. This is particularly true if you can get a better interest rate and borrow no additional money. Avoiding added additional time to the loan is also important. 

If you elect to take a cash back refinancing option, you are likely to be moving backwards in terms of debt payoff. You will increase the amount of money you owe and may even lengthen the term over which you owe it.

Why can’t I refinance my car loan?

Refinancing a car loan tends to be a fairly easy process. Here are a handful of things that could come up that would mean that you wouldn’t be approved:

  • Currently owe more than the car is worth. If your car is worth less than you currently owe, a lender may not approve you for an auto loan refinancing. This could happen because the car has depreciated faster than you have paid off the loan.
  • You are behind on the payments on your current loan. It may be that you are seeking a refinance because your current financial situation is strained. If you are currently behind on the payments on your loan then you may not to be approved for a refinance. 
  • Your credit score is too low to qualify. It is possible you won’t qualify for an auto refinance because your credit score is too low. For refinancing, lenders often set higher standards for their loans. A credit score of 640 or higher may be required.
  • The amount you want to refinance is too low. Processing and servicing a loan costs money. An auto lender may not approve you because you are asking to refinance a very small amount. 
  • Your vehicle no longer meets minimum standards. It could be that your vehicle has been in an accident. It is just as likely that your automobile no longer meets the lender’s internal standards on things like age and mileage. 

When should I refinance a car loan?

The best time to refinance a car loan is when you are reasonably confident that you can decrease your interest rate that you pay for the loan. This can reduce your interest cost greatly. That means you can payoff your loan sooner or lower the monthly payment without extending the term.

If you suspect you can get a significantly better interest rate and you still have at least 18 months left on your car note, you should seriously consider refinancing. 

You can apply for auto refinancing loans to see what kind of offers are available without an obligation to take the loan. Many lenders will do a pre-approval on your account which only requires a soft credit pull. That means checking what rate you can qualify for will not negatively affect your credit score. For that reason, it makes a lot of sense to check whether refinancing your auto loan makes financial sense. 

You can check our marketplace page to get pre-approved by more than one lender to shop around for the best deal.

Is it better to refinance a car with a bank or a credit union?

There’s no rule as to whether it’s better to refinance a car with a bank or with a credit union. The best thing to do is should shop around! Look for the best terms available and company you feel comfortable working with. Because of the nature of credit unions, they often offer the best deals to their members. However, that is not always the case. Also, some small credit unions may struggle to offer the features or customer service that some borrowers expect today. 

The most important things you can do when refinancing your auto loan is to shop around and read reviews. Make sure you see the experience other people have had with the lender, what challenges they faced, and the quality of the customer service. 

Is it worth it to refinance your auto loan?

Refinancing your auto loan can be a smart move and definitely worth the trouble. But how can you determine if it’s a good idea for your circumstances? Here are some basic principles to consider when you are thinking about refinancing your auto loan: 

Time: The more time you have left on your existing loan, the more likely you will be able to save money with a reduced interest rate. 

Interest rate: The bigger the change in your interest rate, the less time you need to make refinancing worthwhile. 

Payment: Refinancing your auto loan in order to decrease your monthly payment is a good idea. As long as you don’t extend your term to do it.

Interest expense: If refinancing your loan extends your term and lowers your interest rate, consider paying extra each month. At least as much as is required to pay off the loan by the end of the original loan. 

Flexibility tradeoff: A lower monthly payment can often give your budget the flexibility to avoid regular financial emergencies. It is better to use that flexibility to make your financial life less stressful than to allow yourself to increase your spending.

Cost of borrowing tradeoff: A cash-back auto refinance can be a great solution to overcoming a financial emergency. Especially if the alternative would be to borrow using a more expensive form of credit. Carrying a balance on a credit card or an expensive personal loan would likely be more expensive.

Is it bad to refinance your auto loan?

Refinancing your auto loan can be a bad idea in some cases. Unnecessarily adding to your debt levels or delaying your loan pay off your debt without gaining benefits are both possibilities. Consider the following circumstances to help you determine if the loan will help you improve your financial situation.

Auto refinance example 1:

Frank has 38 months left of his five year car loan with a principal balance of $10,000. His are considering refinancing to lower his payment so that he will have more flexibility in his current monthly budget. The original loan had an interest rate of 8% and now he believes that he can now qualify for a 6% loan. 

Current loanRefinanced loan
Principal remaining$10,000$10,000
Interest rate8%6%
Months until payoff3860
Monthly payment$304$193
Interest to be paid$1,378$1,600

In this circumstance, refinancing and continuing to pay the minimum would save over a hundred dollars a month on the payment. But by resetting the life of the loan to 5 years, he will pay more total interest even though their interest rate is significantly lower than it was before. 

If Frank choose the refinance and instead of paying the minimum he stayed disciplined enough to continue paying $304 per month against the new loan, he would pay off the loan in 35 months. That’s three months earlier than the original loan term! He would only spend a total of $922 in interest expense, saving him over $400! 

Auto refinance example 2:

Annie has 19 months left on her five year car loan with a principal balance of $5,000. She is considering refinancing because she heard that it would be a good idea. Her original loan had an interest rate of 7% and now she believes that she can now qualify for a 5.5% loan. 

Current loanRefinanced loan
Principal remaining$5,000$5,000
Interest rate7%5.5%
Months until payoff1919
Monthly payment$297$277
Interest to be paid$316$254

Annie decided that she would only seek a loan for the same term. That way she could be out of debt in 19 months. As you can see, she would save only $20 per month on their payment and only $62 dollars in total interest expense. That savings is likely to be consumed by an origination fee for a new loans. It’s likely that she would be better off just sticking to their current loan and paying it off. 

When is it a bad idea to refinance an auto loan?

It may be a bad idea to refinance your auto loan if one or more of the following situations apply:

  • You would not receive a better interest rate
  • You lengthen out the time you will be in debt
  • The loan will outlast the useful life of your car
  • Your current loan is very close to being paid off
  • Fees (like loan origination fees and prepayment penalties) eliminate the savings you might get from a lower interest rate

Does refinancing a car hurt your credit?

Refinancing your car may hurt your credit score a little. There are a couple of factors to consider.  First, refinancing adds a new hard inquiry to your credit. The impact tends to be small, usually 10 points or less. You will usually see those points return within a few of months.

Secondly, by closing your existing auto loan and creating a new one you are lowering your average age of credit and creating new credit on your credit report, both of these can lower your score even though your total debt is the same.  The impact of this change can vary greatly. It could be only a few points or as much as 50 points, depending on your current credit situation.  But just like with inquiries, the negative impact will be reduced quickly with on-time payments.  Your credit score will likely return to its previous level, if not higher, within 6 months if you maintain good credit habits. 

If refinancing your auto loan makes good financial sense, then it’s likely a good idea. That’s true regardless of the short-term credit score impact.  Your credit score will recover quickly and improving your financial situation can help you build credit in other ways.  

What are the pros and advantages to refinancing your car

Refinancing your car can make a lot of sense as long as you are improving your interest rate, reducing the length of your loan, and accelerating your ability to get out of debt. Some of the advantages you could see when you refinance your auto loan include the following: 

Paying less interest

If you can qualify for a significantly lower interest rate early enough in your loan, refinancing your auto loan could save you a lot of money over the life of your loan. 

Paying off your car loan sooner

Refinancing can be a fast way to pay off your auto loan. If you refinance your auto loan for a lower interest rate, your monthly payment will go down. It will be significantly lower if you reset the length of your loan. If you continue to make the payment you were making before the refinance, you could pay off your loan much quicker! That will save a lot of money on interest over time! 

Making your monthly payment more manageable

Some people choose to refinance their auto loan because they struggle to make the monthly payment. Refinancing can help lower the monthly payment in two ways. One, a lower interest rate will mean you are paying less in interest in each payment. And two, extending the length of you loan could drop your monthly payment.

Give yourself more flexibility

People who have a very tight monthly budget have very little room to absorb even a small financial setback. Refinancing your auto loan has the potential to lower the minimum monthly payment. For months without an unexpected expense, paying the original payment will help accelerate the debt payoff. But, in months with unexpected expenses, only pay the minimum payment to the auto loan. 

Tackling a financial emergency with cash-back auto refinancing

Sometimes things come up and people can’t help but need money to get past an unexpected expense. Borrowing money can be expensive and inconvenient. A cash-back auto refinance can be one of the most cost-effective ways of borrowing additional money to get over the most recent financial emergency. 

Rolling up other debts

Another way to make use of a cash-back auto refinance is to use the opportunity to use the proceeds to pay off credit card debt. You could potentially pay less and have a lower monthly payment.

What are the cons or disadvantages to refinancing my auto loan?

It’s always a smart idea to be cautious when applying for a new loan. The last thing you want to do is to make your financial situation worse. When it comes to deciding whether to refinance your auto loan, knowing what the possible disadvantages are can help you avoid them. Some of the cons for refinancing your auto loan include the following:

Hit to your credit score

While shopping around for a new loan might only include a soft credit pull (which won’t affect your credit score), once you decide to take the loan, the lender will do a hard credit pull. A hard credit pull will show up on your credit report and will often cause a minimal, short-term impact on your credit score. Usually, the impact of a hard credit pull is less than 15 points on your credit score and the effect fades away after a couple of months. 

Paying additional fees

When you are shopping around for an auto refinance loan, you need to be aware of any additional fees that the company might charge above and beyond the interest rate. If they charge an origination fee, a processing fee, payment processing fees, or a prepayment penalty, it might be that you won’t be saving any money in the long run. 

Extending the length of your loan

When you refinance an auto loan, the default is usually to reset the length of the loan to a standard number of months, 36, 48, or 60. By signing up for a refinance, you might be lowering your monthly payment but committing to paying a year or more longer than you would have if you had just stuck with your original loan. Even if you have every intention of paying the loan off early, life can get in the way. It is possible refinancing your auto loan will just mean being in debt longer than you otherwise would have. 

Increase your debts

A cash-back auto refinance would increase your debts even if getting a little extra cash would be nice. Cars wear out, like everything else. What you want to avoid is still paying a car note on a car that also needs significant repairs. Lengthening the time it takes to pay off your auto loan can risk having the car take up a lot more of your financial resources. 

You could owe more than the car is worth 

Getting underwater on a loan means that you owe more money than the asset you financed is worth. When you refinance your auto loan, it is possible that your car will depreciate faster than you can pay off the loan. When that happens, you could be putting more money into the car than it is worth. This is an especially easy trap to fall into if you opt for a cash-back auto refinance, where you borrow more money than needed to pay off your existing car loan. You receive the difference. 

Is it best to refinance your auto loan with the current lender?

Unless you really like your current lender or they are willing to give you the best interest rate on your loan, there are no advantages to refinancing your auto loan with your current lender. Shop around and find the best deal.

What credit score do you need to refinance a car?

There is no standard credit score minimum required to apply for an auto refinancing loan. Like most lending, the better your credit score the more lenders will be willing to offer you alone and the lower rates they will offer you. So the answer to the question of what credit score do you need to refinance a car ends up being a credit score that will allow you to get a lower rate than you currently have. Fortunately, you can apply for auto refinancing to see if it is worthwhile.

What should your credit score be before refinancing a car?

If your credit score has not meaningfully improved since you got your car loan, or lenders have not dropped their rates since you last applied, it is unlikely that you will get a much better rate than you did when you applied for your auto loan. As your credit score improves you will be eligible for lower rates and better terms. If your credit score has increased by 40 points or more, you may be able to get a better interest rate. 

Can you refinance an auto loan with a 600 credit score?

There are lenders who will refinance an auto loan with a credit score of 600, but you will not get the best rates available. The basic principle of whether or not to refinance your auto loan is whether you can get a better rate than you currently have. If you can, it doesn’t matter what your credit score is or where it ought to be.

Can I refinance my car with a 550 credit score?

With a credit score of 550 or below, it will be challenging to get a good refinancing offer from a lender. But, that doesn’t mean it is impossible. If your current auto loan has a very high interest rate, it might make a lot of sense to see if a lender will give you better terms. Applying for auto refinancing takes a minimal amount of time and shouldn’t affect your credit score if you work with a lender who will do a pre-approval process which requires only a soft pull of your credit report.

Should I refinance my car with bad credit?

If your current auto loan has a very high interest rate, it is always worthwhile to see if you can find a lender willing to refinance with better terms even if you have bad credit.

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Jonathan Walker