If you want to reduce your monthly car payments, pay your car off more quickly, or qualify for better interest rates, you should consider refinancing your automotive loan. Here’s everything you need to know about refinancing your loan and how to get the best auto refinance rates.
What Are Auto Refinance Rates?
When you refinance your automotive loan, you pay off your current loan and replace it with a new one from a different lender. The new lender makes money on your loan by charging you a percentage of the principal amount. This percentage is the interest rate, otherwise known as the auto refinance rate. Your lender’s rate depends on your credit rating, income, and other essential information.
Should You Refinance Your Automotive Loan?
Refinancing your automotive loan makes sense in the following circumstances:
Your Credit Score Goes Up
When you first purchased your vehicle, you may not have qualified for a low-interest loan if your credit score was less than perfect. However, if you’ve made all of your car payments on time and don’t have any outstanding debts, your credit score has likely gone up since then. You should qualify for lower interest rates when your credit score goes up.
You’re Paying High Dealer Rates
Many drivers finance their vehicle through the dealership because it simplifies the car-buying process. If you financed your car through your dealer, you could be paying marked-up interest rates on your loan. Shop around with other lenders because you’re likely to find one offering lower rates. With the option of refinancing, you can still qualify.
Your Monthly Payments Are Too High
Refinancing your auto loan allows you to extend the loan and lower your monthly payments. Keep in mind that your lender will typically charge you higher interest rates in exchange for lowering your monthly payments. While higher interest rates can increase your total loan amount, they might be worth paying if the alternative is having your lender repossess your car.
Interest Rates Drop
If there’s a general drop in interest rates, that means automotive lenders will charge lower rates on loans. It makes sense to refinance your loan if you want to take advantage of lower interest rates.
Factors That Affect Auto Refinance Rates
While refinancing a vehicle typically results in lower interest rates, that isn’t always the case. The following factors can affect your refinance rates:
- Credit score: The higher your credit score, the lower the interest rates you’ll pay when refinancing your car. Lenders will offer you higher rates or even refuse to refinance your vehicle if you have a poor credit rating.
- Loan term: If you apply for refinancing and want to extend your loan, you should expect your new lender to charge higher interest rates. If you apply for a loan shorter than your current one, you’ll likely pay lower interest rates but have a higher monthly car payment. Remember that a shorter loan term can save you money and help you pay your loan off quickly.
- Vehicle age: Many lenders won’t refinance an older vehicle. If you do have an older car and qualify for refinancing, your lender is sure to charge you higher interest rates.
- Loan amount vs. value: When you apply for refinancing, potential lenders will compare how much you owe on your loan to your vehicle’s actual value. This comparison is the loan-to-value ratio, and a lower ratio typically results in lower interest rates.
How To Refinance Your Auto Loan
If you’re in a situation where it makes sense to refinance your auto loan, here’s how to complete the process:
- Review the terms of your current loan. Before you apply with a new lender, familiarize yourself with your existing loan’s interest rates and other terms. That way, you can determine how much you can afford to pay your new lender and whether your new lender is offering a better loan.
- Review your credit score. You’ll have to supply your credit score when pre-qualifying for financing. Knowing your credit score can also give you an idea of what your rates will be.
- Review your vehicle’s value. Determine your car’s actual cash value and calculate your loan-to-value ratio. If your car has a high ratio, you may end up paying higher interest rates, and you might not qualify with some lenders.
- Apply with several lenders. A loan application opens a dialogue between you and potential lenders without requiring you to make any commitments. That’s why you should apply with several lenders, compare their preliminary offers, and compare them with your current loan.
- Sign off on the best offer. Once you determine which offer you want to accept, you can complete the necessary paperwork to finalize your new loan.
- Pay off your old loan. After your new lender approves your refinancing package, they’ll send you the necessary funds to pay off your current lender or pay your lender directly. You might have to wait a few weeks to receive your funding, so continue making your payments until you do.
Which Lenders Offer the Best Auto Refinance Rates?
When refinancing your automotive loans, consider the following lenders, which have some of the lowest starting annual percentage rates (APRs):
- LendingTree: 1.99%
- RateGenius: 1.99%
- Caribou: 2.79%
- AUTOPAY: 2.99%
- myAutoloan: 1.99%
- LightStream: 3.99%
How To Select an Auto Refinance Lender
In addition to interest rates, you’ll want to consider the following when selecting a lender to refinance your auto loan:
- Approval criteria: While all lenders review your credit score, income, and debt-to-income ratio, many lenders have more specific criteria when refinancing a loan. Some lenders won’t refinance a vehicle if it is too old, if it has too much mileage on the odometer, or if the loan-to-value ratio is too high.
- Your current loan: If your goal in refinancing your automotive loan is to save money, go with the lender that offers you the best balance between monthly payments and interest rates. You don’t want to go with an offer that ends up costing more than your current loan.
- Repayment options: Whether you want to extend your loan or pay it off quickly, you should compare lender terms. You might be able to extend your loan with a lender that offers reasonable rates if you take the time to look at all the details.
Hopefully, with this information, you can find an excellent auto refinance rate and a lender that makes the process as stress-free as possible.
At FIXD, our mission is to make car ownership as simple, easy, and affordable as possible. Our research team utilizes the latest automotive data and insights to create tools and resources that help drivers get peace of mind and save money over the life of their car.