When you refinance a car loan, you can save a lot of money on your car payments. But how exactly does it work, and what happens to your old car loan when you refinance?
When you refinance a car loan you are replacing your existing loan with a new loan, a loan that ideally has better terms and a better car loan APR. The new loan that you take out will directly pay off your old loan. Your old loan is replaced by your new loan so you only have one loan to pay off.
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:
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.
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.
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 APR. The car loan APR you are offered will depend on:
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:
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.
If car loan refinancing seems like a good idea, then don’t wait any longer! Our experts are ready to help you start saving money. And with a 96% would-recommend rating on TrustPilot, you know you are in good hands! So get your free quote today!