According to recent data, nearly 84% of new cars and over 40% of used cars purchased today are financed with the help of an auto loan. These auto loans typically come with terms as short as 12 months or as long as 108 months, depending on the lender and the type of vehicle purchased.
The average auto loan term length today is just shy of 72 months, meaning that the typical car buyer is agreeing to a loan with terms that will follow them for six whole years. But what if you decide at some point that the loan terms you agreed to when you bought your car are no longer the right ones for you? Can you refinance that loan and, if so, how soon can you do it?
Refinancing is the process of taking out a new loan to repay and replace an existing loan. In the case of auto loans, a refinance (or refi) means you’re agreeing to a new auto loan from the same lender or a new lender, which will be used to satisfy the remaining balance on your current loan. You’ll then begin making payments to your new lender as agreed.
There are many reasons why you might want to refinance an existing auto loan. Here are some of the most popular.
Arguably one of the best reasons to refinance an auto loan is because you may be able to save yourself some money.
The interest rate determines how much interest you will pay on your car loan each month, with a portion of your payment going toward interest and the rest toward paying down your principal loan amount.
The interest rate you’re offered when you buy your car depends on a number of factors, such as:
Whether the car is new or used
Where you’re located
Market rates at the time of purchase
Your credit score and credit history
How much you want to borrow
The loan term you choose
Your down payment amount
If at any point one or more of these factors changes — your credit score improves, rates go down, etc. — you may be able to refinance into a lower-rate loan and lower your overall interest, lower your monthly payment, or in some cases, both.
Your monthly payment obligation is determined by how much you borrow, the interest rate you’re offered, and how long you spread out those payments for (your loan term). A shorter loan term will result in higher payments compared to a longer loan term, and a higher interest rate will mean higher payments compared to a lower-rate loan of the same length.
Whether you opt for a longer loan term, a lower interest rate, or both, you may be able to reduce your monthly car payment with a refinance. This could help free up your budget whether you’re struggling to make your payments or just want to focus on other financial goals.LEARN MORE
Sometimes, buying a car with a co-borrower makes the most sense. Maybe you bought your vehicle with a former spouse or your parents cosigned so you could qualify even though you had a limited credit history.
If you decide over the years that it’s time to remove that cosigner from your auto loan, you may find that your only option could be refinancing. As long as you qualify to refinance on your own, your new loan can be taken out solely in your name, removing the financial obligation of that debt from your previous co-borrower.
There’s no hard and fast rule dictating how long you have to wait before refinancing an auto loan. It really is contingent on the refinance lender and depends on your own creditworthiness, the vehicle, and even your location.
Most lenders will want to see the auto loan appear on your credit report for at least a month of two prior to refinancing, which means you may need to wait two or three months before it’s actually reported to the credit bureaus. Other lenders may want to see six months or more of on-time payments before they’ll approve a refinance , especially if you don’t have excellent credit.
You may also find that your loan-to-value ratio, also known as LTV, can be an impediment. Many refinance lenders will allow for an LTV of up to 80% or 85%. This means that if your vehicle is worth $50,000, you cannot refinance an auto loan of more than $40,000.
Why is this a problem? Well, if you just bought the car six months ago and only put down $3,000 on the purchase, you may not have built up enough equity yet to qualify for a refinance . Essentially, you’ll owe too much compared to the car’s value.
In this case, your lender may require you to pay the difference in cash before they’ll approve a refinance loan.
If you don’t qualify for an auto loan refinance, or if interest rates have risen since you first bought your car, there are a few alternatives to consider:
Make additional monthly payments. If your goal is to save money in the long run and pay off your loan faster, simply making additional payments toward your principal balance each month can get you there. You’ll save on the overall interest paid while maintaining flexibility with your monthly payments: if you have extra cash one month, you can pay more. If the next month is a little thin, you don’t have to worry about contributing anything extra.
Consolidate your debt with a HELOC. If you have a home equity line of credit (HELOC), you may have access to funds with a lower interest rate than you’re paying on your auto loan. HELOC funds can be used for almost any purpose, so simply request a draw in the amount of your remaining auto loan balance, and pay it off in cash. Then, you’ll pay your HELOC back as agreed.
Utilize a balance transfer offer. Using a credit card to pay off a car is usually an expensive idea. However, if you only have a small amount left on your loan and are given a 0% interest offer on a credit card, you might be able to pay off your auto loan without any additional interest. Just be sure to have the borrowed amount repaid before your promotional period ends, or your auto loan interest rate may jump well into the double digits.
Take out a personal loan. If you purchased your vehicle at a high APR, you might find that you now qualify for a personal loan at a much lower rate. In this case, taking out a personal loan to pay off your car could help you adjust your loan term, lower your monthly payment, reduce your overall interest, or all three.
The majority of car buyers today will require an auto loan for their purchase, which will likely follow them for many years to come. If at some point you decide that you no longer like your auto loan terms, refinancing could be the answer — whether you bought your car three months ago or three years ago!
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