Whether you bought your vehicle four months ago or four years ago, refinancing your auto loan can be a great way to save some money on interest. Here’s a look at why you might want to refinance your auto loan, when you can do it, and how a refi might be the best way to snag a competitive interest rate.
There are many reasons you may have for refinancing your auto loan, including:
Lowering your interest rate
Lowering your monthly payment
Paying off your vehicle sooner
Releasing a co-signer from the debt
Depending on certain factors, there are multiple instances where a refinance can help you lower your loan’s APR (i.e., the amount of interest you pay over the course of the repayment).
Your credit has improved: If your credit score has increased since you first took out your auto loan, refinancing can be a great way to take advantage. With a better credit score in tow, you will likely be eligible for better rates compared to the one you received when taking out your initial auto loan.
Market rates have dropped: The interest rate you’re offered on a loan is a reflection of not only your creditworthiness, but overall market rate. So if rates overall have dropped significantly since you took out your loan, it might be worth exploring rates through refinancing.
You’re adding a co-signer: One potential way to lower your interest rate is by adding a more creditworthy co-signer to the loan. This individual agrees to share responsibility for repayment, even if you’re the one making those payments. In exchange for their liability, lenders will often offer lower interest rates and better loan terms.
You’re shortening your loan term: The best loan terms are typically offered to the most creditworthy borrowers, and those who choose the shortest loan terms. If you are willing to refinance your auto loan for a shorter term, you may be able to snag a lower interest rate.
You have more equity in your vehicle: The less equity your vehicle has, the greater the risk your lender takes on. Many lenders will charge higher interest rates as a result for new or recent buyers. By the time you refinance, though, you may have enough equity to unlock better loan terms with a new lender.
Before you can refinance your auto loan, you’ll need to meet a few important requirements. The specifics of these will vary from one lender to the next, but generally include the following:
LTV ratio — Most lenders will have a certain loan-to-value ratio threshold before they’ll refinance. This ratio, also referred to as LTV, shows the difference between what you owe on your vehicle and what it’s worth. Since lenders want to take on as little risk as possible, a lower LTV will increase your chances of not only getting approved for refinancing, but at the lowest rate.
Vehicle age — The majority of auto loan lenders have vehicle age limits for refinancing, meaning that you can’t refinance an auto loan on a vehicle that’s more than 10 or 15 years old. Be sure to check with your lender to see whether your vehicle meets the requirement.
Mileage limit — Regardless of the car’s age, many lenders will also have mileage limits for refinancing. It’s common for lenders to require any refinanced vehicle to have an odometer reading of 100,000 miles or less, though this also varies by lender.
Time requirement — Though not always the case, some lenders will require you to make a certain number of payments on your vehicle before refinancing the loan. Often, the period can range from 60 to 90 days, but be sure to read the fine print before applying with a lender.
Credit check — As with any loan product, you’ll need to meet credit requirements before getting approved for an auto loan refinance. This usually involves a hard credit inquiry to check for negative reports, as well as a check on your credit score.
While there are multiple factors to consider, refinancing your auto loan can be a great way to save money both in the short- and long-term. One of the best benefits of refinancing is potentially lowering your interest rate, which is especially advantageous if your credit has improved since you took out the loan.With Fiona, you can compare refinancing offers from top online lenders fast and easy ― all in one convenient place. See what offers await you today.TRY FIONA
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