The market values are still low and you know that now is the time to refinance your car loan. But how do you know if you qualify? Is there a minimum credit score that you need to refinance your car?
Today we are talking about what credit score you need to refinance a car and how you can get the best auto refinance rates.
What factors will impact my auto refinance rate?
The car rate APR that you are offered by lenders depends on a few different factors, mainly your credit score, your income, and your vehicle.
Your Credit Score
Your credit score is a large factor in the car loan APR that you will be offered. Your credit score tells lenders how creditworthy you are, and how likely you are to pay back your loan.
If you are wondering “what credit score do I need to refinance my car”, there is no magic number. But the higher your score is, the better the rate you are offered will be.
Your Income
Your income is also taken into consideration for your car loan APR. Lenders want to know that you have a steady source of income to meet your payments. They will need to see proof of income, such as pay stubs, to validate your income.
In addition, lenders consider what’s called your debt to income ratio (DTI). This is a simple ratio of your monthly debt payments compared to your monthly income. For example if your monthly income is $5,000 and your monthly debts are $2,000, your DTI is 40%. This takes into consideration all of your debts (including rent/mortgage, child support, student loans, credit cards, etc.) and all of your sources of income (including salary, tips, rental income, investment dividends, etc.).
Just like with your credit score, there is no magic DTI that you need to refinance your car loan. But a RateGenius study between 2015-2019 found that 90% of approved customers had a DTI below 50%.
Your Vehicle
Your car is another consideration when calculating your car loan APR. It does not matter what type of car you are driving, whether it is a Honda or a BMW, but rather how much your car is worth compared to how much money you are borrowing.
Lenders use a loan-to-value ratio (LTV) calculation to determine if your vehicle qualifies for refinancing. Auto loans are called secured loans, which means that if you should default on payments, your car is the collateral and will be repossessed. The LTV will help lenders decide if they can recoup their losses should you default and they need to resell your car.
You can calculate your vehicle’s LTV with the following information: your current loan balance and your car’s estimated value (you can use Kelley Blue Book or Edmunds to get a sense of this number). Then use the following equation:
Total Loan Balance/ Vehicle’s Current Value = Loan to Value Ratio
So if your current loan balance is $15,000 and your car’s currently valued at $16,000, your loan to value ratio is 93.75%.
Once again, there is no magic number you need to qualify for auto loan refinancing, but the lower the LTV, the better. Another RateGenius study between 2015-2019 found that 90% of approved applicants had an LTV below 123%. Generally having an LTV below 100% is considered good.
What is the minimum credit score I need to refinance?
While your income and vehicle matter somewhat, no factor is more important to your auto refinance rate than your credit score. Credit scores are broken down in five categories: Super Prime, Prime, Near Prime, Subprime, and Deep Subprime. Your ability to refinance and the rate at which you can refinance your car loan will depend on what category you fall into.
Exceptional (Super Prime): 800-850
Very good (Prime): 740-799
Good (Near Prime): 670-739
Fair (Subprime): 580-669
Very poor (Deep Subprime): 300-579
Your credit score is dependent on five separate considerations: payment history (35%), accounts owed (30%), length of credit history (15%), credit mix (10$), and new credit (10%). All of these factors affect your overall credit score, but some categories carry more weight than others. Payment history and accounts owed make up for the heftiest part of your credit score.
Your credit score will drastically impact the car loan APR that you are offered when you refinance. If your credit score is deep subprime (with a credit score below 579), you may have trouble refinance your car loan at all, and if you are able to refinance, you will most likely get a very high rate. If your credit score is super prime, you will get the best car loan APRs available.
Let’s look at the latest market trends available to look at some average car loan APRs. According to Experian’s State of Auto Finance 2021 Q4, we can see the following averages.
Credit Score
Average Loan Rate Offered 2021 Q4 (New Car)
Exceptional (Super Prime): 800-850
2.47%
Very good (Prime): 740-799
3.51%
Good (Near Prime): 670-739
6.07%
Fair (Subprime): 580-669
9.41%
Very poor (Deep Subprime): 300-579
12.53%
The rate increased rather drastically between credit score tiers. So while you still may qualify for financing or refinancing with a subprime or deep subprime credit score, you will be spending a lot more on interest.
Focus on increasing your credit score to secure a good car loan APR.
How can I increase my odds of getting approved for vehicle refinancing?
To increase your odds of getting approved for car loan refinancing (and increase your odds of getting a good car loan APR), focus on improving each of the areas from above: your credit score, your income, and your vehicle. But how?
Improve your Credit Score
Improving your credit score can help your odds of getting a good car loan APR. Consider the following measures to improve your score.
- Check your credit report. Dispute any errors or mistakes that you notice, as these can impact your credit score negatively.
- Make on time payments. Your payment history makes up 35% of your credit score, so prioritizing this can help your score a great deal. Sign up for autopay if you can to ensure you are not missing any payments.
- Pay down your debts. Reducing your credit utilization ratio by paying down debts can have a positive effect on your credit score. This ratio is part of your accounts owed category, which makes up 30% of your credit score.
- Request higher limits. Requesting higher limits from your credit accounts can also help improve your credit utilization ratio and boost your credit score.
- Hold off on opening other new accounts. When you open a new account, it triggers a hard inquiry on your credit report, which can cause your score to dip slightly. It will also affect your length of credit history. While these will not drastically change your score, they can be the difference between a good credit score and an excellent credit score.
Improve your Debt to Income Ratio
It’s also worthwhile to try to improve your debt to income ratio. While you may not be able to change your salary, you can prioritize paying down the principals on your existing accounts so that your ratio lowers.
Improve your Loan to Value Ratio
Your loan to value ratio depends heavily on the car you are driving. While you may not be able to change your car, there are steps you can take to slow down the depreciation on your car.
One of the biggest causes of depreciation is mileage. Try to cut down on your mileage if possible to stay ahead of depreciation. Routine maintenance and care of your car can also help curb depreciation.
Some cars simply hold their value more than others do. You should keep that in mind when you are initially car shopping. But taking care of your car and cutting down on mileage may help improve your loan-to-value ratio.
While there is no magic credit score that you need to refinance your car, the lower your credit score is the better your chances are for approval (and the better the rates you are offered will be).
And that’s what you need to know about credit scores that qualify for refinancing!
Focusing on increasing your credit score, decreasing your debt to income ratio, and decreasing your loan to value ratios will help you secure financing approval.
If you are still unsure of how much you could be saving with an auto loan refinance, contact the experts at Auto Approve today! The car loan APRs are low, so now is the perfect time to refinance your car loan. We make refinancing simple: just fill out your information and you will have car loan refinance offers in minutes. We handle all of the pesky paperwork so you don’t have to (yes, even the DMV)!
So what are you waiting for, get started with Auto Approve today!
