There are several reasons why you might want to refinance your auto loan. Perhaps you want to reduce your monthly payment, extend or shorten your loan term or reduce your interest rate. No matter the reason, the new rate you are given will depend on your credit score, loan amount, car value and length of term. In this blog, we’ll discuss ways to determine auto loan refinance rates and other potential costs, so you’ll know what’s needed upfront and if refinancing is worth it.
What Are Auto Loan Refinance Rates?
Auto loan refinance rates are offered by lenders to enable those who are seeking a new loan for an existing vehicle that already has a loan on it. When you refinance, your new loan pays off the old one, allowing you to start fresh with a new loan, new rate and term, but with your same car. When shopping for auto loan refinance rates, focus on the Annual Percentage Rate (APR). The APR will vary by financial institution, along with lender requirements and fees. Research loan rates offered by credit unions and banks to gain a better understanding of the market and what you may receive when you apply. Keep in mind that lenders often advertise their lowest rate available, which is usually reserved for those with excellent credit and with the shortest loan term.
What Factors Affect Auto Refinance Rates?
To qualify for the lowest refinance rate available to you, ensure your finances are in order. First, obtain your credit report to review your credit history and credit score. This lets you identify and correct any discrepancies in the report before you apply for the auto loan. Next, compare your debt-to-income ratio (DTI) to see how much of your money each month goes to paying off debt. The lower the ratio, the better your chances of being approved for a lower-rate loan. To calculate your debt-to-income ratio, add your monthly debt payments and determine your gross monthly income. Then divide your debt by your income to get your DTI, converting it into a percentage. Generally, anything below 36% is considered healthy and manageable. Another factor to consider is the vehicle itself. What is the remaining loan balance on the vehicle, what is the car’s age and condition and its current value? This data helps you determine if refinancing makes sense to you. Also, study the current interest rate market to see if refinancing right now is worthwhile. If rates are higher than your current interest rate, it’s better to wait until they drop below your current rate. Finally, know that refinancing your auto loan may increase your monthly payment, which could affect how much money you can save. Do your research and understand all your options before you apply.
How Can Your Credit Profile Affect a Car Refinance Rate?
When you apply for an auto loan refinance, the lender will review your credit profile, among other things, to determine if you qualify for a loan and at what interest rate. Ideally, you’d want your credit score to be at least 670 to increase your chances of approval at a good rate. If it falls below that, you may receive a higher rate or be denied the loan. To increase your credit score, pay down your debt to reduce your debt-to-income ratio. Review your credit history and check for discrepancies. You can get a free credit report each year at annualcreditreport.com. Each lender has its own requirements for refinancing. Some may even require a co-signer on the loan when evaluating risk for the borrower.
Does the Vehicle Affect the Refinance Rate You Receive?
Yes, auto loans are considered secured loans because the lender uses the value of the vehicle as collateral. Should the loan be forfeited by the borrower, the lender will sell the vehicle to recover its losses. When you refinance a vehicle, its value, age and mileage are taken into consideration. Additionally, the vehicle’s loan-to-value (LTV) ratio is considered. The LTV helps the lender calculate how much is owed compared to the vehicle’s current value. All these factors come into play when your loan is under review.
How Does the New Loan Term Affect Your Refinance Rate and Total Cost?
Refinancing your vehicle means redoing your loan term, interest rate and monthly payment. If you select a shorter term than your original loan, you’ll pay off your loan faster. But that generally means your monthly payments will be higher than your old loan. Alternatively, choosing a longer term can help offset a higher interest rate by giving you lower monthly payments. The tradeoff is you’ll pay more interest over the life of the loan, but your payments will be more affordable to your budget.
How Do Current Market Conditions Affect Auto Refinance Rates?
The interest rate market fluctuates based on the Federal Reserve’s decisions on federal funds rates. If the Fed decides to increase this rate, this will cause interest rates in general to increase. If they decide to decrease rates, this action will reduce interest rates. Auto rates are affected directly by market conditions. It’s a good idea to stay up to date with the market, so you’ll know when it’s time to act. Since an auto loan is a fixed-rate loan, refinancing is the only option if you want to change your rate.
How Should You Compare Car Refinance Rates?
When shopping for auto loan rates, compare them against your current interest rate and loan term. Determine if this is the right time to refinance based on the market. Using an auto loan calculator can help you see if refinancing makes financial sense. Also, be on the lookout for offers from your current lender to refinance your existing auto loan or ask your lender if that’s an option.
Could a Lower Refinance Rate Save You Money?
Yes, refinancing to a lower interest rate can save money. When you refinance, the new loan pays off the old loan and the new term, and the lower rate and monthly payment take over. For example, your old loan had a balance of $30,000 at a 5.99% APR with 64 months remaining on its term. When refinanced, that $30,000 balance is paid off by the new loan and your new monthly payment is calculated based on a lower interest rate than 5.99% APR.
What Should You Check Before Applying to Refinance a Car Loan?
Before you apply, be sure you know your latest auto loan balance, the interest rate you’re paying and how many months are left on the loan. Also, have your vehicle’s data at hand, including it vehicle identification number, mileage and list of maintenance work/upgrades done. These will help determine your vehicle’s worth. Typically, lenders will not approve an auto loan refinance if your vehicle’s value is less than what you owe. In these cases, they may require you to pay down the loan balance enough so it does not go over the car’s value. Additionally, you should have reviewed your credit history and credit score to be sure you’re in the right position to refinance.
How TCU Can Help
Travis Credit Union is here to help you with your auto loan buying and refinancing needs. With competitive interest rates and quick loan processing, we can help you save on your refinance and get your new loan started quickly. The knowledgeable representatives at our 24 local branches will guide you through the entire refinance process, including tips on ways to increase your chances of getting approved for your loan. You can also apply easily online to get started. Apply today at TCU!
Frequently Asked Questions
When is a good time to refinance an auto loan?
A good time to refinance is when interest rates have dropped or your credit profile has improved since you took out your original loan. Lower rates may help reduce your monthly payment or total interest costs.
What credit score do I need to refinance my car loan?
Requirements vary by lender, but a higher credit score generally helps you qualify for better rates. Many borrowers see their best opportunities once their score reaches a good-to-excellent range.
How do lenders determine my auto refinance rate?
Lenders typically consider your credit score, debt-to-income ratio, loan amount, vehicle value and loan term. Current market interest rates can also affect the rate you receive.
Can I refinance my car if I owe more than it is worth?
Some lenders may not approve a refinance if your loan balance exceeds your vehicle's value. You may need to pay down part of the loan first.
Will refinancing lower my monthly payment?
It can, especially if you qualify for a lower interest rate or choose a longer loan term. However, a longer term may increase the total interest paid over time.
Can refinancing help me pay off my car faster?
Yes. Choosing a shorter loan term can help you pay off your vehicle sooner, though your monthly payment may increase.
Are there fees associated with auto loan refinancing?
Some lenders may charge fees related to refinancing. Be sure to compare the loan's APR and any applicable costs when evaluating offers.
How much can I save by refinancing my auto loan?
Your savings depend on your new interest rate, remaining balance and loan term. An auto loan calculator can help estimate potential savings.
Does refinancing affect my credit score?
Refinancing may result in a hard credit inquiry, which can temporarily lower your score by a small amount. Making consistent payments on the new loan can help support your credit over time.
What information do I need before applying for a refinance?
You should know your current loan balance, interest rate, remaining term, vehicle mileage and vehicle identification number (VIN). Having this information ready can help streamline the application process.
Can I refinance with a different lender than my current one?
Yes. You can refinance with your current lender or shop around with other lenders to compare rates, terms and fees.
How long do I need to wait before refinancing my car loan?
Many borrowers refinance after establishing a positive payment history and improving their credit profile. Eligibility requirements vary by lender.
How do I know if refinancing is worth it?
Compare the total cost of your current loan to the total cost of a new loan, including any fees. Refinancing may be worthwhile if it helps you achieve meaningful savings or better loan terms.
Can I refinance an older vehicle?
Possibly, but lenders often have vehicle age and mileage limits. Check lender requirements before applying.
What is loan-to-value (LTV) and why does it matter?
LTV compares your loan balance to your vehicle's value. A lower LTV generally reduces lender risk and may improve your refinancing options.
Should I compare APR or interest rate when shopping for refinance offers?
APR is typically the better comparison tool because it reflects both the interest rate and certain loan costs. Comparing APRs can provide a more complete picture of loan costs.