If you’re a car owner, maybe you can relate to the “mid-loan crisis:” You’re halfway through paying off your car loan, but you’ve got some regrets about your financing and wish things could have turned out differently. It could be a less-than-ideal interest rate you’ve carried around for the last 36 months, forcing you to spread your dollars a bit too thin. Or, it could just be one of those auto loans where everything is wrong on every possible level, from unnecessary fees to bad warranties.
At this point, you can either stick it out or take another turn such as refinancing your auto loan to save cash. But be careful what you wish for. Jump into a new loan too hastily, and you’ll end up repeating the same patterns from before — a surefire bad money move.
Before going in for a new car loan, check out these seven common questions on refinancing a car:
1. Does refinancing a car hurt your credit?
If your credit score was low to begin with when you took out your original auto loan, you should check to see how much it’s improved since you’ve been paying off your car.
According to FICO, a minimum 720 credit score or higher is needed to qualify for the best interest rates, reports Mint Life. And AutoTrader.com notes, “If you’ve improved your credit enough, your interest rate is likely to go down, and that means you’ll make a lower monthly payment and you’ll pay out less money in interest.”
But if your credit score is still too low to be approved for a refinance that’s worth it (600 or below), play it safe and hold off. Go in blindly, and you might end up wasting money on loan application fees or be approved for a new loan that’s only marginally better than your existing one.
2. How soon can you refinance a car loan?
According to Rebecca Lake of Can Do Finance, it’s “essentially the equivalent of starting over which can end up costing you more money in terms of the interest you’ll pay.” Pursuing a refinance a few months into your existing auto loan doesn’t give your credit score a chance to improve or to see if the loan in fact does work within your budget. Refinance too late — when the majority of your principal and interest is paid off — and there’s not enough savings worth your money or time.
3. How do I find the best interest rate?
If jumping at the first interest rate was your primary pitfall on your current auto loan, don’t do it again. Take the time to browse credit and lending websites, and research other banks and credit unions in your area to see what kinds of auto APRs they offer — if they specialize in auto refinancing, all the better. Don’t forget to check with your existing lender, since a refinance with them could make the transition from one loan to another financially easier.
4. Should I overextend the terms of my car loan?
On paper, it might sound like a good idea, since a 36-month loan refinanced to 48 or 60 months lowers your monthly payments…but it also tacks on more interest for you to pay.
“Unless you’re seriously in danger of missing payments or defaulting on your loan altogether, avoid refinancing into a loan that would extend your current one,” writes Stephanie Taylor Christensen of Mint Life. “Your monthly payment may go down, but you’ll end up forking more money to the bank or dealer’s financing arm over the life of the new loan.”
5. What is the role interest rate plays on my car payment?
Likewise, a shorter-length, refinanced loan with the same monthly payment — or even a higher APR — could actually save you money when compared to a longer loan with lower payments, since the majority of those payments are comprised mostly of interest.
“Many people only pay attention to their monthly payment when purchasing a car and have no idea how much of that payment is interest,” writes Christensen. “Refinancing into a loan with a shorter term will lower the total amount of interest you’ll pay, even if it doesn’t considerably lower your monthly payment.”
6. How do LTVs and DTIs affect my loan?
Your car is always depreciating. Edmunds.com notes that it can lose 15 to 25 percent of its total value during the first five years, and that can disappoint borrowers who realize their new loan terms reflect the current, depreciated condition of their cars instead of their original condition.
Many consumers fail to take this loan-to-value ratio (LTV) into account. “They think it’s a new car, but they don’t realize there are a lot of things that affect the value,” such as wear and tear, age and mileage, says Robert Janssen, sales manager with Innovative Funding Services.
Janssen also suggests determining your debt-to-income ratio (DTI) to compare how much you’ll likely owe on a new loan to the amount you earn, another decisive refinancing factor.
7. What should I be aware of in the fine print?
All loans come with their share of hidden costs and other factors buried deep in the fine print, but some are unique to refinances. According to Janssen, many of the extras you might have had attached to your original auto loan — like GAP or disability insurance — don’t transfer over to your refinanced loan. There are also the other requisite costs to look for, like prepayment penalties or loan processing fees.
But the real financial loss comes in neglecting to ask if refinance discounts are available. Many banks and credit unions offer loan specials such as refinance rate reductions. Missing out on those could be your biggest mistake ever, since it’s like free money in your pocket.
Preparation Is the Best Prevention
“There are a lot of things to take into consideration the average consumer may not be aware of. A lot of times someone shows up who may not be experienced in financing,” says Brian Server, assistant vice president of Consumer Lending at Evansville Federal Credit Union. “They just want to drive off with the car and take the first offer.”
Server suggests that borrowers do a bit of homework ahead of time and come prepared with questions for a potential lender. “It’s not quite the same as a mortgage, where you could lower your rate and have it be worth the closing cost,” he said. “In the case of a vehicle loan, if you can lower your rate and not be charged some fees, then there’s no downside to look at refinancing.”
To learn more about auto loan refinancing check out our latest SavvyMoney video!
Source: Paul Sisolak, GoBankingRates