This calculator will help you to figure if you should refinance your current auto loan at a lower interest rate. It calculates monthly payments and net interest savings on your automobile loan.
Your Guide to Auto Loan Refinancing
No doubt you've heard about the benefits of refinancing a home loan. Frankly, it's pretty hard to avoid those mid-afternoon and late night television ads championing the benefits of home equity loans, and promoting the financial advantages of refinancing an existing mortgage. But did you know that you can also refinance an existing auto loan?
Auto loan refinancing offers many of the same benefits as home loan refinancing (albeit on a somewhat smaller scale), and under the right circumstances can be a real boon to anyone diligently working away at a high interest car loan. Refinancing allows you to secure a lower interest rate on your loan, reduce your monthly payments, and even free up some much needed ready cash. However, refinancing a car loan does have a downside, and it is important to understand both the advantages and disadvantages before you put pen to paper.
Car Loan Refinancing in a Nutshell
Refinancing an existing car loan is a relatively simple process. Essentially, you are using a new, and more favorable, loan to pay off the loan you have now. Of course, nothing is ever that simple. You first have to find a lender who is willing to underwrite a new car loan that gives you a lower interest rate, as well as offering more manageable repayment terms. Still, if you can secure a new loan that is even a single percentage point cheaper than your current loan you can save a significant amount of money, especially if the remaining balance on your existing loan is fairly substantial.
The Pros and Cons of Refinancing Your Auto Loan
There are some definite advantages to refinancing your current car loan, and they all have to do with managing your money more effectively. Some people refinance their auto loans to save on the total cost of their purchase, while others choose to refinance as a way of lessening their monthly financial burdens. In some cases, when there is sufficient equity in the vehicle itself, people choose to refinance in order to free up some ready cash. Let's take a closer look at some of the benefits of refinancing your existing auto loan.
- Lower Interest Rates – This is the most common reason people choose to refinance their car loans. If your credit was less than stellar when you applied for your original loan, or if you opted for dealer financing on your purchase, you may have been forced to accept a higher interest rate than you would have liked. More to the point, interest rates are always in flux and what was a good deal two years ago may not be so attractive now. Refinancing your existing auto loan at a lower interest rate can save you a considerable amount of money over the life of your loan. Even shaving a point or two off of your current interest rate can save you hundreds, if not thousands, of dollars on the total cost of your loan.
- Smaller Monthly Payments – The second most popular reason for refinancing an existing auto loan is to lower your monthly payments in order to make the repayment plan a little more manageable. This can be a definite advantage if your financial status has changed since you took out the original loan, and you are finding that the size of your monthly payments is becoming something of a burden. Again, this ties in directly to securing a lower interest rate on your new loan.
- Reduce the Term of Your Loan – If you refinance your car loan at a significantly lower interest rate, it is possible to shorten the term of the loan with little or no impact on your monthly payments. This makes it possible to pay off the debt quicker, ultimately saving you money on the total cost of the loan.
- Cash Out for Emergencies – If you've built up some equity while paying on your current loan, you may be able to take advantage of a cash-out option when you refinance your vehicle. The new lender will base your new loan on your vehicle's current value, using guidelines set down by the National Automobile Dealers Association. If your vehicle is judged to be worth more than you owe, a lender may agree to pay off your current loan and pay you the difference in cash. It's worth noting, however, that while a cash-out option can be beneficial in an emergency, it typically results in the extension of the life of your loan and an increase in its total cost.
- Changing Lenders – This is more of a personal consideration, but it does come into play when deciding to refinance an auto loan. If you are unhappy with your current lender, and you find their services lacking in any area, you may choose to refinance your vehicle simply as a way to partner with a lender that is more supportive or responsive to your needs as a borrower.
While there are some distinct advantages to refinancing an existing car loan, there are also some disadvantages that you need to be aware of, and they can negate any possible savings that you may have anticipated.
- Longer Repayment Periods – It's important to understand that refinancing isn't always a guarantee of savings. Sometimes, even though you've refinanced at a lower interest rate, you can still end up increasing the total cost of your loan. If your new lender offers you a better rate, but extends the life of your loan at the same time, you may not see any real savings. In fact, you may actually end up paying more in the long run. If you are trying to lower your monthly payments, or you need to take advantage of a cash-out option, refinancing may still be the smart move. But you should consider it carefully before entering into an agreement that may end up costing you more than you may have anticipated.
- Negative Equity – Negative equity means that you owe more on your vehicle than it is actually worth, and this can happen all too easily if you refinance a car loan on extended terms. If you are already upside down on your existing loan, you may find it extremely difficult to find a lender willing to refinance your vehicle, and if you do you are likely to be faced with much higher interest rates to offset the reduced collateral value of your automobile.
When to Consider Refinancing
Refinancing a vehicle is not for everybody, and there are times when it can work against you. That being said, if one or more of the following conditions apply, you may find that refinancing makes good financial sense.
- Interest Rates Have Dropped – If interest rates have dropped significantly since you first purchased the vehicle, refinancing may be a good option. It's worth pointing out, however, that when you refinance a vehicle it will be treated as a used car loan, and as such will be subject to a higher interest rate than if you were borrowing towards the purchase of a new automobile. This is because the collateral value of the vehicle will have depreciated since the original purchase. Still, if you can shave even a couple of points off of your current loan you can save a fair amount of money.
- You Failed to Get the best Rates on Your Original Loan – This happens all too often when dealer financing is involved, or when buyers fail to fully research their loan options before finalizing a purchase. If your current loan is saddled with unusually high interest rates, refinancing is a wise decision.
- Your Credit Score Has Improved – If your credit score was compromised in any way when you applied for your original loan, you may have been forced to accept a relatively high interest rate. A credit history that is even slightly marred can easily result in interest rates of 18% or more. After a period of making regular on-time payments on your original loan, you may find that your credit score has improved, in which case you might be eligible to refinance at a lower interest rate.
- Your Financial Situation Has Changed – It doesn't take much of a financial setback to turn a simple car loan into a monthly burden. If your financial circumstances have take a turn for the worse, it may be wise to refinance your vehicle, if only to make your monthly payments more manageable.
Where to Apply for Refinancing
Banks and credit unions are usually the best options when it comes to refinancing your vehicle. Online lending companies are also a viable alternative, and some even specialize in auto refinancing. However, online lenders rarely offer the competitive interest rates that are available from traditional banking institutions. Moreover, dealing one on one with a bank or credit union in your community typically makes the entire loan process easier. You can speak with a loan officer directly, and go over all aspects of your refi agreement before you sign the contract. You will also have direct access to customer support throughout the life of your loan.
As with any car loan, you will want to investigate a few different lenders in order to find the best deal that is available. Compare and contrast three to four different refinancing offers, and pick the one the best suits your financial needs at the time. Remember, refinancing a vehicle is simply paying off one loan with another, and you do not want to rush into any agreement that you don't fully understand, or that you are not completely comfortable signing.
Applying to Refinance Your Vehicle Loan
When it comes to refinancing an auto loan, the application process is relatively quick and painless. In fact, you'll likely find it much easier than when you applied for your original loan. Many lenders, banks and credit unions among them, allow customers to apply for refinancing online, often with same day approval. You may even be able to finalize the loan online with an e-signature, or by printing out the loan documents and returning them by mail. Having said all that, it is always helpful to speak with a loan officer in person to ensure that you fully understand the terms of the agreement, and in order to negotiate the best deal possible.
Whether you decide to apply online or in person, you will need to have some specific information at your fingertips in order to complete your application. The following checklist should help ensure that you have all of the necessary documents at hand when it comes time to contact a lender.
- Valid Drivers License – Standard when applying for any auto loan.
- Social Security Card – Again, standard when applying for any loan. Your lender will use your social security number to verify your identity.
- Title and Registration – Your lender will need to see the title to the vehicle to confirm that it is registered in your name. You will also be expected to provide proof of insurance.
- Pay Stubs – Your new lender will want to verify your income to ensure that you have the financial means to pay off your new loan. Most creditors require 2 to 3 months worth of valid pay stubs as proof of employment and income.
- Tax Forms – If you are self employed, some lenders may require you to submit copies of your 1040 SE forms as further proof of income. You may also be asked to provide copies of your most recent tax returns (typically going back 2 to 3 years). Lenders use this information not only to verify employment and income, but also to track trends in your earnings.
- Credit Report – As with any loan application, your new lender will run a credit check to determine if you are eligible for refinancing. Your credit report will also have a significant impact on the terms and conditions of your refi loan. It is always advisable to check your credit report before you apply for refinancing, as this will give you a better idea of your eligibility, and will put you in a better position to negotiate more favorable interest rates.
Keep in mind that while you are researching lenders, and applying for a refinance loan, you must maintain your current repayment schedule. Should you miss any payments, you will not qualify for refinancing. Your responsibilities to your original lender will remain in force until the refinance agreement is finalized and your new lender has resolved the original debt.
Under the right circumstances, refinancing an auto loan can be a smart financial decision. It can help you reduce the total cost of your loan, or can provide some much needed financial relief if you are finding it increasingly difficult to keep up with the payments on your existing loan. Still, as advantageous as refinancing may be it is still a debt, and as such should be approached with all of the care and attention to detail that you would bring to any other loan important financial decision. Take your time, research a variety of different lenders, and only sign a contract when you have a refinancing agreement that you are comfortable with, and that you are sure will serve your current financial needs.