Did you know Americans saved an average of $989.72 a year on refinancing their car in 2020? I’m sure I can speak for most in saying having some extra cash is a pretty good feeling. I mean, who doesn’t enjoy having an additional $50 - $100 in their pockets?!?
While many have turned to us for refinancing their auto loan, there are some who still question if refinancing is truly an option for them and when they should switch out and into another auto loan with better terms. That’s why I have your ultimate guide to refinancing!
By the end of this article, you’ll have the deets of what refinancing a car loan has to offer including the best time to refinance and how to compare so you can select a refinancing offer that could potentially work for you. I’ll also throw in a checklist you can use to help determine when you should refinance your current auto loan.
But first, let's start with the basics:
Refinancing your auto loan is where you receive a new auto loan to pay off your current one. The goal of an auto refinance is to replace the loan you have with a better rate or monthly payment.
When refinancing with a new lender, they’ll send your current lender a 10-day pay-off letter (showing how much is needed to have your current car loan entirely paid off) and a check to pay off the existing auto loan. In return, the current lender will send the title paperwork to the new lender, so it’s clear who exactly is on the title for the loan.
The process is simpler because the change is done in-house, so no 10-day pay-off letter or exchange in title paperwork is needed. The current lender can make the change on the existing auto loan and confirm the title paperwork is accurate. That’s it!
Once refinanced, you can repay your auto loan under the new loan agreement until it’s completely paid and full. Next, you’ll have complete ownership of your car. Woo hoo!!
Psst… before refinancing with a new lender, consider refinancing with your current credit union or a bank. Your current lender might have a better interest rate then when you first financed. Plus, this would make it easier for you when repaying the new auto loan. You can transfer funds and make payments within one financial institution instead of dealing with a completely different lender. |
Many lenders don’t have an official prequalification or preapproval process for consumers looking to refinance their auto loan, but you can get an idea of what option works best for you (or if it’s an option at all) by asking. At Skyla, we can review your pay stubs to give an idea of how your ratios look and verify if you can repay the new auto loan. Also, we can give an idea of the interest rate you’ll receive if you refinanced with us.
When comparing refinance offers, make sure to pay attention to:
Here’s an example of some refinancing offers and how to best compare them before deciding to refinance:
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Refinance Option #1
Refinance Option #2
Here you’ll see a similar auto refinancing option with the same loan amount but the loan term is shorter. The interest rate is still lower than the original interest rate at 6.75%APR*.
Although you would be paying more in monthly payments, choosing this option means you'll save $2,334 in total costs and your auto loan will be completely paid off sooner.
Whether you already have an answer or you're still thinking - let's reach deeper and discuss when's the best time to refinance, pros and cons, and other ways you can get cashback into your pocket when refinancing your car.
The common recommendation is to wait 60-90 days from getting your original auto loan to refinance. That’s how long it may take to get the title for your vehicle to transfer correctly. Although this is true, if you’ve had your auto loan for more than 3- months, then the best time to refinance depends on your auto loan balance. If you have 6-months left, most of the payments may be going to your principal balance, so it may not be beneficial to refinance.
Here are reasons why you should and shouldn’t refinance to help determine the best time to replace your current auto loan:
Psst... Need to improve your credit score? Take advantage of our credit score tool here. |
Via GIPHY
Psst… you’ll notice a lower monthly payment if you extend your auto refinance by 1-2 years. |
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Notice when refinancing, the monthly payment is lower when you extend the loan term to 72 months. Your credit score and the interest rate are the same but the loan interest is $2,337.64 more than when you first financed.
[table3]
Here your monthly payments are lower when you refinance with an increased credit score and lower interest rate.
Psst...Before shortening your loan term, make sure you can handle a higher monthly payment and make sure to consider your other expenses. It’s a bad idea to take on a loan that you can't handle! |
[table4]
Notice the monthly payment has increased, but you’ll repay the full amount of your auto loan in four years(48 months) instead of the original financed six years (72 months).
QUICK TIP: review your loan agreement or contact your lender to ensure there are no surprises when you’re ready to refinance. |
When refinancing, you can receive cashback but, you’ll need to have equity that you’ve built into your car. So, if you refinanced and received a new auto loan that’s worth more than what you have to pay on the balance of the previous auto loan, then you can keep the difference if needed.
Say your car is worth $13,500, and you’ve paid $7,500 (with a remaining balance of $6,000). Lenders allow you to borrow different amounts, such as 90% of your car’s value. This rate would mean you’ll qualify to refinance your auto loan for as much as $12,150 ($13,500 - 90%), which leaves you with $4,650 in equity on your car that you could cash out if needed.
Psst... cashing out can be risky due to having additional debt with your lender, which you’ll have to eventually payback. |
When applying for any loan, lenders will review your credit, which knocks it down a few points when refinancing your auto loan. Like applying for an auto loan, your credit score is temporarily impacted, but your credit score should bounce back after a couple of weeks.
Psst… Don’t rush into applying for credit cards or other lines of credit immediately after refinancing. Opening up numerous loans in a short time can hurt your credit score tremendously and may take more time to increase your score back. |
There isn’t a legal limit on how many times you can refinance, but you have to make a financial decision that works best for you. As mentioned above, lenders review your credit report, and they’ll notice inquiries such as how many loans you have and the attempts you’ve refinanced if you’ve refinanced more than once.
Try to avoid refinancing more than once by doing some research first. Using the examples above, you can contact a lender and see how much a new loan would be, then you can compare offers and select one that works for you.
Of course! If you already have the perfect car and are financed with another lender, you can refinance with us where we can beat your current lender’s interest rate up to 1% APR1 reduction for loans up to $24,999 and up to 1.5% APR1 reduction for loans above $25,000!
Before you apply to refinance, make sure you:
It won't hurt to learn what offers you may be eligible for and you may save more than $300 on monthly payments with a new auto loan agreement, with a lower interest rate, or pay your auto loan off sooner than anticipated.
Although this was a boatload of information to take in, this ultimate guide was made for you. If you need help with some auto loan terms or need ideas with some auto loan questions to ask a lender or dealer you can also grab the free Auto Loan Tool Kit.
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