Refinancing a car loan can help you secure better terms and save money on your car payments. But how exactly does it work, and what happens to your old car loan when you refinance?
The new loan you take out will directly pay off your old loan.
When you refinance a car loan, you replace your existing loan with a new loan. Your old loan is replaced by your new loan so you still only have one loan to pay off.
In this article, we’ll go over refinancing FAQs, including more detail on what happens to your old car loan when you refinance.
Read on to get the answers to these common questions about refinancing:
What is car loan refinancing?
What happens to your old car loan when you refinance?
When should you refinance a car?
What happens to your credit score when you refinance?
Refinancing means getting a new loan. The new loan is used to pay off your old loan. That means you get new terms and pay a new lender, instead of the old one.
Refinancing is very common, as it is a simple, low-effort way to save money. If you’re not refinancing your vehicle, you’re likely leaving money on the table.
When you refinance, you take out a new loan with a new lender. That lender pays off your original loan, and you pay back the new lender instead of the old one, under the new terms set by the new lender.
Here are the key things you need to know:
Your old loan is paid back in full and the loan is closed out.
Once the old loan is paid off by your new lender, you no longer need to make payments on the loan.
The new lender handles the actual pay out on the old loan.
You should make sure to read everything and check your accounts regularly to ensure you keep making payments until the old loan is paid off and don’t accidentally send a payment on the loan once it’s closed.
Pay attention when refinancing so you know when you need to start making payments on the new loan. Depending on the terms of your loan, you may have up to 3 months between your last payment on the old loan and first payment on the new loan, so mark your calendar accordingly!
When your credit score has increased
When market rates have decreased
When you need breathing room in your budget
When you want to add or remove a co-signer
Refinancing your car loan has a lot of benefits. It can help you lower your monthly payments, lower your interest rate, and even allow you to add or remove a cosigner from your car loan. If any of the following apply to you, it’s time to consider car loan refinancing.
If your credit score has increased since you initially financed your car, there’s a good chance you will qualify for a lower car loan annual percentage rate (APR). The car loan APR you are offered will depend on:
Your credit score
Your debt-to-income ratio
The balance of your loan
The market rates
Your credit score is the most important factor in this, so if your score has increased in the months or years since you originally financed, there’s a good chance you can find a lower APR.
There are a few reasons why your credit score may have increased since original financing:
You paid down some of your debts
Your lines of credit increased
You made consistent, full, and on time payments
You had a negative event expire
You disputed errors on your credit report
We recommend consistently checking your credit report and credit score to monitor changes. And if your score has increased, you might want to think about refinancing your car loan.
If the market rates have decreased since your initial financing, there’s a good chance you can secure a lower car loan APR. The APR that you are offered is based on your finances as well as the market rates, so a decrease in market rates can mark a big decrease in your car loan APR.
When you refinance your car loan you can adjust your repayment period. You can shorten your repayment period, which will allow you to pay off your loan faster and save you money overall, although it will make your monthly payments a bit higher. You can also choose to lengthen your repayment period. By lengthening it you are spreading out your payments over a longer period of time. This means that while you will be paying interest for a longer period of time (and therefore spending more money over the course of the loan) you will significantly decrease your monthly payments.
You may want to add a cosigner onto your loan. Adding a cosigner with a good credit score can help you secure a lower car loan APR. Adding a cosigner on who doesn’t have any credit, such as your child, can help them to build credit. Either way, adding a cosigner is only possible through refinancing.
Conversely, you may wish to remove a cosigner from your loan. Again, the only way to adjust and remove a cosigner is to refinance your car loan.
Read on to learn:
How credit scores work
What happens when you apply to refinance
How refinancing affects your credit score
Your credit score is used by lenders to determine how fiscally responsible you are (and ultimately how likely you are to repay a loan).
Your credit score takes five major categories into account:
Your payment history. This is the most important category of your credit score and accounts for 35% of your score. This measures if you pay your bills in full and on time.
Your amounts owed. This accounts for 30% of your credit score. This looks at how much money you owe compared to how much credit you have available to you.
Your credit history length. This accounts for 15% of your credit score and looks at the age of your accounts. A longer credit history with longstanding accounts makes you more favorable to lenders.
Your credit mix. This accounts for 10% of your credit score and looks at how healthy your credit mix is. A diverse portfolio with a mix of loans (like mortgage, student loans, and credit cards) shows that you can balance your money over several accounts.
Your new credit. This accounts for 10% of your credit score and looks at any new accounts you may have opened and how many inquiries you have on your account. Since the accounts haven’t been around very long, your ability to manage them has not been proven.
When you are in the process of refinancing, every application you send will trigger a hard inquiry on your credit report. Having a lot of hard inquiries on your credit report may cause even more of a decrease in your credit score. That’s why it’s important to send out all of your applications in a short timeframe.
Credit bureaus will give you a fourteen day window to shop around. This means that if you send out all of your applications in that fourteen day time period it will only trigger one hard inquiry on your credit report.
When you refinance your car loan, two of your credit score categories will be affected: your credit history length and your new credit. Having a new account will shorten your credit history length and show a new account on your report, both of which will cause a dip in your score.
But this dip will not last very long–most likely it will affect your score for about a year. And this will pale in comparison to the benefits for refinancing. Refinancing your car loan to make your car loan payments more manageable will actually help your credit score in the long run.
To recap, when you refinance:
Your old loan is paid off by a lender, and you pay back that lender in a new loan with new terms
Refinancing can lower your monthly payments and/or the amount you’ll pay on the loan overall
Refinancing is a common way to change loan terms for various reasons, including to make room in your budget or to add or remove a co-signer
When you apply to refinance, your new lender will need to perform a hard inquiry on your credit, which will be temporarily reflected in your credit score
The resulting dip in your credit score should last roughly 12 months
If car loan refinancing seems like the right choice for you, don’t wait any longer! Our experts are ready to help you start saving money. With a 4.7 on TrustPilot, you can feel confident you are in good hands when you choose to refinance with Auto Approve.
