The choice to refinance your current vehicle loan often comes down to saving money — either month to month or overall. But before signing off on a new loan you must confirm that you and your vehicle fit the necessary requirements. While there is some variation in the specifics of each between lenders, in general, you will face several limitations.
Requirements for taking out a loan to refinance your car
Be aware of these factors when you are considering whether to refinance your auto loan.
Time left on loan
The amount of time left on your loan is a common eligibility requirement. Typically, lenders will want you to have paid at least six months into the loan and have at least six months left on it. This allows the lender to see that you have an established history of payments — or still have enough to profit off interest when you finish repaying.
This means if you took out a 60-month auto loan and are only three months into paying it off, you likely won’t be able to refinance it for a few more months. Similarly, if you’ve made 54 payments already, you will likely have to finish paying it off rather than refinance it.
Amount left
Minimum loan amounts vary by lender, but you can expect to need at least $3,000 to $5,000 left on your loan. Since refinancing is essentially taking out a new auto loan, lenders don’t want to offer small amounts because they won’t be able to make as much money from them.
And if you bought a particularly expensive car, you also may not be able to refinance until it is paid down. Finding auto refinance loans for over $50,000 can be a challenge.
Mileage and model year
If you bought a heavily used car and want to refinance the loan — or you’ve just racked up a lot of miles — you may not be able to. Lenders tend to have a cap of 100,000 to 150,000 miles.
While lenders don’t set a minimum age, you may not qualify if you have an older car. Typically, lenders set a hard limit at 10 years old. But some may require a car to be under eight years old to refinance the loan.
Credit score
As with any loan, your credit score will be a major factor. Refinancing is usually a good idea if you have a poor interest rate on your auto loan and have since raised your credit score.
Anything under 600 likely won’t net you a better rate and could end up costing you more overall, especially if you increase your loan term to reduce monthly payments.
Debt-to-income ratio requirements
Your debt-to-income ratio (DTI) is a measure of your monthly debt and income. DTI is often expressed as a percentage. The acceptable range varies from lender to lender, but it is typically less than 50 percent.
Paying down your current debts is the simplest method to lower your DTI if a lender deems it too high. Lowering other installment loans or credit card bills may help you prove you are financially responsible to a new lender.
How to refinance your car loan
Refinancing a car loan is relatively simple. It involves the same basic steps that you would take to get a new car loan.
Shop around for a loan. Apply for prequalification with at least three lenders, just as you would for taking out a new auto loan.
Apply for the loan. Carefully fill out all the information requested — about your identity, employment, current loan and car — and provide documentation.
Receive your loan funds. The lender will either directly deposit the funds in your account or pay your current lender directly. This can take a few days to a few weeks, so continue making payments in the meantime.
Start paying off your new loan. Once your loan is funded, it is time to start paying it off. Make all of your payments on time and send them to the correct lender. Learn how to best use your savings. Once you have repaid your new loan, you can use the savings to improve your finances. Consider putting that money toward a retirement account, debt repayment or even your emergency fund.
Pros and cons of refinancing your auto loan Before you refinance, weigh the benefits and drawbacks. Pros You may secure a lower interest rate. The lender that is refinancing your loan may offer you a lower interest rate, which would save you over the life of your loan. This is especially true if your credit score has improved, or you financed through a dealership. Your monthly payment can be reduced. Extending your term or lowering your interest rate can reduce your monthly payments. Be careful, though. Extending your auto loan term will also cost more interest. Cons Your interest rate could increase. If you don’t qualify for as much of a reduction in interest rate as you’d like, consider improving your credit score before applying. You may extend the life of your loan — and the interest you pay. Even if your rate is lower, you may still increase the amount of interest you pay if you opt to extend your loan term. The longer it takes you to pay off your car, the more interest you’ll accumulate. What to consider before refinancing your auto loan There are a few important questions to consider before you decide to refinance your auto loan. Are your current interest rates competitive? If you’re already paying a competitive interest rate, you will want to compare current rates to make sure a new loan is worth it. The Federal Reserve increased the federal interest rate by 0.75 points two meetings in a row, which may mean auto loan rates increase over the next year. Bankrate tip: You should compare rates from several lenders to see which will offer you the best deal. Use a refinance calculator to see what your monthly payments and total interest will be compared to your current loan. What is your current vehicle worth? Before refinancing your car loan, you will need to know the loan-to-value ratio of your auto loan. This refers to how much your vehicle is worth compared to how much you owe. If you are close to owing more on your vehicle than it’s worth, you may want to refinance to a shorter term. What are the terms of the loan? You should know some of the basic details of your current loan when looking into refinancing. This includes the APR, the length of loan, the time left on the loan and the monthly payment. You can also look at your loan documents to find details about late fees, prepayment penalties and how long you have left to pay off the loan. Next steps Refinancing your car loan can be a wise financial move, but you must take a few steps to prepare for the process. Consider your current credit score, your car’s age and mileage, the amount you owe on your car and your ability to pay for the new loan.
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