Is it better to put money down when refinancing a car?
A down payment will lower the value of the loan, which should lower the lender's risk. This will often improve the likelihood that you get approved for refinancing. This situation is much less common than having negative equity.
The application process is very similar to securing a new loan, but a down payment isn't required. If your credit score and financial situation have recently improved, it might be a great time to consider an auto loan refinance.
You don't need a down payment to refinance, but you'll likely have to come up with cash for closing costs. Some lenders let you roll closing costs into the mortgage to avoid upfront expenses. You can also try negotiating with the lender to waive them.
Refinancing and extending your loan term can lower your payments and keep more money in your pocket each month — but you may pay more in interest in the long run. On the other hand, refinancing to a lower interest rate at the same or shorter term as you have now will help you pay less overall.
Lenders often require at least six on-time payments before they consider you eligible for refinancing. This is to lower the risk of default. If you can keep up with your current payments, you prove that you can handle your debt.
- Extending the Loan Term Too Long. ...
- Not Shopping Around for the Best Offer. ...
- Not Checking Your Credit Score. ...
- Being Upside Down on Your Loan. ...
- Refinancing Too Early or Too Late in the Term of Your Existing Loan. ...
- Getting Stuck with Penalties from Your Existing Lender.
If interest rates are higher than they were when the former loan originated, it may lead to owing more than you did under the previous loan. Refinancing may involve fees such as origination or document fees and prepayment charges, which can add to the overall amount you owe on the loan.
Moving into a longer-term loan: If you're already at least halfway through the loan term, it's unlikely you'll save money refinancing. You've already reached the point where more of your payment is going to loan principal than interest; refinancing now means you'll restart the clock and pay more toward interest again.
The main benefits of refinancing your home are saving money on interest and having the opportunity to change loan terms. Drawbacks include the closing costs you'll pay and the potential for limited savings if you take out a larger loan or choose a longer term.
Historically, the rule of thumb is that refinancing is a good idea if you can reduce your interest rate by at least 2%. However, many lenders say 1% savings is enough of an incentive to refinance. Using a mortgage calculator is a good resource to budget some of the costs.
What is a good interest rate for a car?
A good interest rate for a car loan is typically below 5.18% for new cars and 6.79% for used vehicles. However, the best rate is unique to the borrower so it's best to look at the average interest rates for your credit score category to know if you're getting a good deal.
While interest rates aren't at historic lows anymore, other market factors like car values could make this a good time to refinance your car. However, whether it's a good time to refinance heavily depends on your credit situation. If you can get a lower interest rate, it's a great time to refinance.
The benefits when you refinance a car loan can include lowering your monthly car payment, reducing the interest you pay or shortening your loan term. The downsides to auto loan refinancing can include paying lender fees and additional interest if you extend the loan term or cash out auto equity.
An interest rate under 5% is a great rate for a 72-month auto loan. However, the best loan offers are only available to borrowers who have the best credit scores and payment histories.
The best time to refinance a car loan is when you can secure a lower interest rate, a lower monthly payment, or both. You likely won't be able to refinance your car loan until the loan is six months to a year old.
Although the hard credit checks associated with your auto refinance application will remain on your credit report for two years, most credit scoring models only consider inquiries made within the past 12 months. Generally, the impact of credit checks on your credit score is minimal — around 5 points.
You don't have to lose any equity when you refinance, but there's a chance that it could happen. For example, if you take cash out of your home when you refinance your mortgage or use your equity to pay closing costs, your total home equity will decline by the amount of money you borrow.
Key Takeaways
Don't refinance if you have a long break-even period—the number of months to reach the point when you start saving. Refinancing to lower your monthly payment is great unless you're spending more money in the long-run.
Refinancing a car loan with negative equity can be difficult, unless you have good credit. If you find you owe more than your car is worth, you most likely can't refinance until you get into a positive equity position.
You can reduce your monthly car payments on an existing loan by negotiating with your lender, refinancing, selling your car or trading it in for a cheaper car. You can also get lower payments on a new car if you make a larger down payment and shop for an affordable vehicle.
Am I better off refinancing vs making extra payments?
A rate-lowering refinance reduces the rate of return on future extra payments, which could induce the borrower to reduce or stop such payments. However, the principal motivation for making extra payments seems to be to get out of debt faster, and the refinance won't change that.
Refinancing your car means replacing your current auto loan with a new one. The new loan pays off your original loan, and you begin making monthly payments on the new loan. The application process for refinancing doesn't take much time, and many lenders can/may make determinations quickly.
| Product | Interest Rate | APR |
|---|---|---|
| 30-Year Fixed Rate | 7.20% | 7.24% |
| 20-Year Fixed Rate | 7.03% | 7.08% |
| 15-Year Fixed Rate | 6.70% | 6.77% |
| 10-Year Fixed Rate | 6.69% | 6.77% |
Negatively Impacting Your Long-Term Net Worth
Refinancing can lower your monthly payment, but it will often make the loan more expensive in the end if you're adding years to your mortgage. If you need to refinance to avoid losing your house, paying more, in the long run, might be worth it.
| Company | Forbes Advisor Rating | Turnaround time |
|---|---|---|
| Consumers Credit Union (CCU) | 3.8 | Same-day funding available |
| Navy Federal Credit Union (NFCU) | 3.5 | 1 to 7 days |
| U.S. Bank | 3.2 | 1 to 7 days |
| LightStream | 3.6 | Same day funding offered |
