If you are looking to refinance your car loan, you might have a lot of questions. On the top of that list is probably “Do I meet the requirements to refinance?” Car loan refinancing does have some requirements, but if you are eligible, you can save a whole lot of money by doing so.
Here we will discuss some of the basic requirements to refinance a vehicle, help you decide when the time is right, and give you some tips on choosing the right car refinance company.
So let’s dive into the ins and outs of car loan refinancing!
The Basic Qualifications for a Car Refinance
When looking into car refinance, there are a few qualifications of which you should be aware. The specifics will vary from lender to lender, but in general these are the elements you may need to consider.
Your Car’s Age and Condition
Lenders will often have age limits and mileage limits on refinancing. Some lenders may not refinance your car if it is more than ten years old, or if it has more than 100,000 miles on it. Additionally, lenders will not refinance your loan if it is upside down, meaning that you owe more on your car than it is worth. If your car is a few years old and/or you drive a lot, you will need to keep this in mind while looking around at lenders.
Depreciation is always something that you should keep an eye on while you are financing. Checking your car’s value routinely on a site such as Kelley Blue Book will help alert you if you are in danger of becoming upside down on your loan.
The Time Left on your Current Loan
There may be requirements about how much time is remaining on your current loan. If there is less than a year left on your loan, lenders may not choose to approve you. This is because car loans are front-loaded amortized loans, meaning that the majority of the interest is paid in the beginning of the loan. As the loan nears the end of it’s time, you are paying less and less in interest and more and more in principal. At a certain point it is not worthwhile for a lender to refinance you, as they will not really be making any money off of you.
Furthermore, your current loan may have prepayment penalties that may make refinancing difficult. If the prepayment penalties outweigh any savings from refinancing, it will probably not make sense to refinance even if you do qualify.
Your credit score is a major component of your refinancing requirements. A credit score shows a lender how likely a person is to pay back the money they are borrowing. Credit scores are comprised of five major components:
- Payment History (35% of your credit score): This shows lenders if you pay your credit accounts on time or not. It will also show missed payments and bankruptcy details.
- Accounts Owed (30% of your credit score): This refers to the amount of money you owe. This number is considered in relation to how much credit you have available to you (your credit utilization ratio).
- Length of Credit History (15% of your credit score): The longer you have had credit, the higher your score will be.
- Credit Mix (10% of your credit score): You will need a good mix of retail accounts such as credit cards, loans, and mortgages for a good score.
- New Credit (10% of your credit score): If you open new accounts or have hard inquiries into your credit, your score will decrease.
If your credit score has dropped drastically since your initial financing, you may not qualify for refinancing. If your score has dropped a little since your initial financing, you may qualify, but not qualify for a good APR.
You should always ensure that your credit score is in as good of a shape as possible before refinancing your loan. To do this, commit to making on time, consistent payments to all of your accounts. Work to pay down outstanding debts if at all possible. Additionally, try to hold off on opening any new accounts or signing up for anything that might trigger a hard inquiry. While only temporary, these inquiries and new accounts will cause your score to drop.
Your Current Payments
In addition to your credit, lenders will look specifically to make sure that you are up to date on your payments with your current lender. After all, if you are not paying your current lender in full with consistency, why would they risk lending you money?
Choosing the Right Time to Refinance Car
Timing is incredibly important when it comes to refinance. Car loans will be most beneficial to refinance when the market values are low, your credit score is high, and you are towards the beginning and middle of your repayment.
You will be best served to look into refinancing when the market interest rates are low (like right now!) When interest rates are low in general, you will find much better rates available to you than when the market interest rates are high.
As we discussed before, the higher your credit score is, the better of an interest rate you will be offered. Focus on increasing your credit score before approaching lenders.
Refinancing your loan makes more sense when you are towards the beginning or middle of your loan. As we discussed before, car loans are amortized and front loaded. In the beginning of your loan, your payments go more towards the interest than towards the principal. This means that refinancing to a lower rate will be more beneficial when you are paying the most towards that interest, i.e. in the beginning of the loan.
You will need to make sure that all of the paperwork is finalized on your initial financing before you apply for refinancing, which can take anywhere from 30-90 days. After that you can then refinance your loan immediately, technically speaking.
Experts do however recommend waiting 6-12 months before refinancing. This will give your credit score a chance to recover from the hard inquiries of your initial loan. This will also give you time to make consistent, on-time payments on your initial financing, which will also help ensure you have the best credit possible (and you are therefore offered the best APR possible).
But remember, the earlier you refinance, the more money you will be able to save. It’s all about finding the sweet spot when it is most beneficial AND you will score the best rates.
Your Cash Flow
If current circumstances in your life have made your monthly budget tight, it might be a good idea to consider refinancing. Lengthening the repayment period of your loan will decrease your monthly payments by spreading them out, ultimately giving you some wiggle room in your budget. And if you can qualify for a lower APR on top of changing your repayment period, you may be able to save a good deal of money overall as well.
How To Choose Between Car Refinance Companies
If the time seems right to pursue refinancing, you will now need to choose between car refinance companies. In general, you should apply to 3-5 lenders to get some competitive quotes. This will give you a chance to look at several offers and compare not only their rates, but their other terms as well (including repayment periods, prepayment penalties, etc). You should look at traditional banks as well as credit unions and online lenders. Until you actually apply, it’s hard to get an idea of what your rate or terms will look like.
A great way to ensure you are getting competitive rates is to use a company that will do this legwork for you. Companies that specialize in auto refinance, like Auto Approve, already have relationships with lenders and can get you the best rates possible. By simply filling out an online quote form, we can get you a quote in minutes. Auto Approve will even handle the paperwork for you–DMV forms included.
Auto Approve has a sterling reputation from the industry as well as from real life customers. We have an A+ rating from the Better Business Bureau and a 96% would-recommend rating from TrustPilot. Our customers know that we work tirelessly to find the best auto refinance rates and will never markup the prices–we pass the savings on directly to you.
And that’s everything you need to know about refinancing a car loan.
There are some things that you need to consider before you refinance your car. But if your car qualifies, the market rates are low, and your finances are in order, it might be a great idea to consider refinancing your vehicle. Customers who shop with Auto Approve save hundreds–sometimes thousands!–of dollars by refinancing their car loans. So if the time is right for you, don’t wait another minute to start saving money!