News & Tips
How to Refinance a Car (+ When to Do It)
Refinancing a car involves replacing the current loan on your vehicle with a new loan that typically has more agreeable terms. This can take place with your current lender or with a different one. To help you navigate this process, we’re sharing the pros and cons of refinancing a vehicle, the steps involved in refinancing, and when it makes sense to do so. You can learn more about the specifics of refinancing a car with Space Coast Credit Union (SCCU) here.
What Are the Benefits When You Refinance a Car Loan?
If you can refinance a car at an interest rate that’s lower than what you’re currently paying, you can typically save more money over the life of the loan. Typically buyers choose to refinance when average car interest rates drop, or if they have a signification change in their credit score that could help them negotiate for more favorable loan terms
In some cases, you may have accepted the dealer’s financing rate without shopping enough for a lower one — and since discovered that better opportunities exist. (It’s common for people to focus their research on the car they want to buy rather than how to get the best financing.)
When you get a lower interest rate, your monthly payment will likely go down. Here are current auto rates and an auto refinance calculator to help you figure what your new payment could be. Your new payment, as the calculator indicates, will also depend upon the new loan’s term (the number of months). Depending upon your financial goals and situation, you could:
- Get a lower rate and lengthen your term to lower your car payment: This can help with monthly cash flow and create a more comfortable budget.
- Get a lower rate and shorten your term: This might cause your payment to go up, even with the lower rate, but it will help you to pay less in interest over the life of the loan.
Since your car is an asset with value, you can often put it up as collateral to get funds. So, in some cases, people will refinance their car to cash out on their vehicle’s value and then make purchases or pay off debts. Let’s take a closer look at how that works:
- If your vehicle is currently paid off, you can borrow up to a lender’s maximum loan to value (LTV) amount. Let’s say the lender of choice has a 75 percent LTV on vehicle refinances and your car is worth $15,000. You may therefore be able to borrow $11,250 ($15,000 x .75). You could use those dollars to pay off credit card debt, cover college tuition, or fund a vacation, as just three examples.
- If your vehicle currently has an outstanding loan on it — say, $4,000 — then the formula would look like this: $15,000 - 4,000 = $11,000 x .75 = $8,250 available to borrow and use as desired.
Estimate Your Vehicle Payment¹
"I purchased a vehicle very recently and SCCU had the BEST interest rate of all other financial institutions."Mike V.
Here are two other common reasons why people refinance cars:
- They want to switch lenders. It may simply be more convenient to have another lender, or they aren’t happy with the level of customer service they’re currently receiving.
- Or, someone may have leased a car with an option to buy. If they decide to buy that vehicle, they would need to either pay it off in cash or take out an auto refinance loan.
You can learn more if it's a good idea to refinance your car here.
What to Consider When You Refinance Car Loans
- Interest rate: In most instances, you’ll be shopping for an interest rate that is lower than your current one. Although you may be more comfortable with the same rate if your goal is to cash out on the loan. When comparing rates among lenders, pay attention to the annual percentage rate (APR), as this is a key measure that allows you to make an apples-to-apples comparison among lender options.
- An APR represents the actual annual cost of borrowing. It’s typically higher than the interest rate because it’s a calculation that includes the interest rate being charged along with any loan fees and interest that will accumulate before you make your first car loan payment. When the APR is greater than the interest rate, look at how much higher it is — the greater the difference between the APR and the interest rate, the more fees that are being charged for the refinance.
- Fees can vary significantly by lender, and upon request, each lender should give you a breakdown of what they are. In general, the fewer the fees, the better the deal for the consumer. Note that some lending institutions, such as SCCC, don’t charge fees to refinance car loans.
- Prepayment penalty: Check if your current auto loan has a prepayment penalty that’s currently applicable. If so, the amount you’d need to pay for the penalty may make refinancing less attractive for you, which may factor into your decision. If you have a penalty, see how much longer it will affect your account. If the penalty period ends soon, it may make sense to wait until it does and then refinancing may become a financially savvy choice.
- Collateral: When refinancing a car, it’s also important to remember that you’re putting up this vehicle as collateral. If you default on payments, then the vehicle can be repossessed. This is especially important to consider if your vehicle is currently free and clear.
- Equity: Also, if your current loan amount is near, at, or above the value of the vehicle, it can be more challenging to get a lender to agree to loan against it. It can also be more difficult to refinance a car that’s more than eight years old or with 100,000+ miles already on the odometer although some lenders may agree to do so. On the other end of the spectrum, if your car loan is pretty new, you may not yet have enough equity in the vehicle to successfully refinance.
Steps to Refinance Car Loans
The process for refinancing a car loan can feel rather daunting. We’ve broken it down into five major steps with specific details to help walk you through it.
#1 Weigh the Pros and Cons of Refinancing Your Car
After reviewing the benefits of refinancing and the considerations listed above, does this type of loan make sense for you? If not, under some circumstances, a personal loan may be a better choice. If the answer is yes, you would benefit financially by refinancing, then don’t procrastinate. Here’s one reason why: although interest rates may be attractive right now, there’s never a guarantee that they won’t go up.
If you find yourself procrastinating, know that you’re not alone (20 percent of the population chronically procrastinates). It may be best to take a step back, take a breath, and look at the big picture. Here are two key strategies to help you break through:
- Consider why the task is important to you. When it comes to refinancing cars, the answer might be that it will save you money over the next few years, freeing up cash for something that matters to you. Focusing on the meaning attached to the action can make it easier to move forward.
- Take one step at a time. Sometimes, taking all of the necessary steps can feel overwhelming, but you really only need to do the next one on your list — and then the next one after that. That’s one reason why this post is laid out step by step: so you can keep moving forward.
So, weigh the pros and cons of when car refinancing is right for you. If that action makes sense, move on to step two.
#2 Check Your Credit Scores
Credit scores are three-digit numbers that provide a snapshot of your creditworthiness. They are calculated by consumer credit bureaus with the three main bureaus being Equifax, Experian, and TransUnion. Each one will likely issue you a slightly different score at any one time with the range of possibilities typically being between 300 and 850. The higher your score, the better your credit rating — and, the higher your credit rating, the easier it will likely be to get a loan and obtain the best interest rates available.
Before you apply to refinance your car, it can make sense to check your credit reports. If you see any errors that could harm your creditworthiness, address them before applying. This is also a time to ensure that no identity theft problems exist for you.
You are eligible to receive a free credit report from each main credit bureau annually. However, you’re entitled to the report rather than your scores.
Using the FICO credit score as an example, here are ranges and what they mean:
- Excellent: 800-850
- Very good: 740-799
- Good: 670-739
- Fair: 580-669
- Poor: Less than 580
If your score is satisfactory to a lender, there’s a good chance it’ll positively influence the credit offer. If it has improved since you originally took out a loan on the vehicle you want to refinance, this may mean you’ll get a better interest rate. As an SCCU member, you can check your FICO score for free!
If there are credit score challenges, you can improve your score the following ways:
- Making all of your payments on time.
- Trying to keep your credit utilization score below 30 percent. You can calculate your credit utilization score by adding up all credit card balances and also adding up your credit limits. Divide the aggregate balance by the total credit limit, and if the result is less than 30 percent, then that can also be a plus when it comes to your credit scores.
- Other factors include your credit history length with longer being better; a balanced mix of credit types (such as mortgage loans, car loans, student loans, personal loans, and credit card accounts); and fewer “hard” credit checks on you.
A hard credit check (inquiry or “pull”) typically occurs when a lender is checking your scores to determine whether to approve a loan application. This hard pull usually stays on your credit report for a couple of years and may have the potential to lower your credit scores by a few points (although that’s not always the case). When there are numerous hard pulls in a short amount of time, this can have a negative impact on credit scores.
So, if you’re in the midst of applying for a mortgage loan, you may want to wait a while before refinancing your car — or you could do both through the same lender at the same time so that the financial institution has the potential opportunity to process them with one credit pull.
Soft credit pulls don’t have an impact on credit scores. Some examples include employers doing background checks on job applicants and when consumers are getting prequalified for a loan. If getting prequalified for a loan, be sure to ask if a soft credit pull will be done.
#3 Gather Information and Documents
You’ll need to share personal information and details about the vehicle with a lender when you apply. Personal info will include your address (and previous addresses if you’ve moved within the past couple of years), phone number, Social Security number, place of employment, and so forth. You’ll also need to share specifics about your income, perhaps by providing pay stubs and/or tax returns, and debts so the lender can determine if you’ll meet the appropriate debt to income (DTI) ratio for their underwriting (approval) guidelines.
To calculate your DTI, add up all of the debt payments you must make each month for your mortgage or rent along with payment for debts like cars, student loans, personal loans, and credit cards. Divide that total by your gross monthly income (before taxes) and the result is a percentage: your DTI.
Let’s take a look at an example:
- Debts: $700 mortgage; $300 car; $200 student loans; $100 credit card payments = $1,300
- Income: $4,000 per month
- DTI: $1,300/$4,000 = 32.5 percent If a lender is willing to loan up to 36 percent, then your DTI would fit within that financial institution’s parameters.
To refinance a car, the lender will also want information about the vehicle: the make, model, year, mileage, and vehicle identification number (VIN), along with the current loan information (including the lender, payments, and balance) and proof of insurance.
#4 Research Auto Lenders and Compare Options
Just like with any other important consumer transaction, you can ask for lender recommendations from friends and family members and then see which one offers the best deal for your situation. If you have any concerns about an institution, check to see if any complaints have been filed on the Better Business Bureau (BBB).
Compare the interest rate and APR among lenders along with loan terms available, any fees or penalties charged, and what the total cost of borrowing will be for each possibility. Look into what discounts are available — for example, auto-pay. Then, make your decision!
#5 Apply for the Auto Loan
You’ll fill out a loan application form, either in person or online, using the personal and vehicle-related information you’ve gathered. The lender will review the application, check your credit scores, and decide whether to approve the loan. If yours is approved, then you’ll sign paperwork; your old auto loan will be paid off from proceeds; and you’ll begin paying on your new loan.
Note that you might be approved for multiple options from the lender — perhaps ones with shorter terms and lower interest rates along with options with longer repayment terms and higher interest rates. If presented with this type of choice, consider your goals for refinancing a car along with what you can comfortably afford.
Factor in that, if a loan doesn’t have a prepayment penalty, you can choose a longer term with a higher monthly payment and then put down extra money on the loan whenever you can to reduce the amount of interest you’ll pay over the loan’s life.
Not all lenders have the same approval guidelines. So, if you get turned down by one of them, it’s possible that another lender would approve your loan request. Or it may indicate that you need to do further repair work on your credit scores or pay off credit card debt to hit the appropriate DTI. If turned down, ask your lender what you could do to get approved in the future.
Refinance Car Loan Myths
You might hear that refinancing won’t save you much money — and in some cases, that may be true. Each situation is unique. But if you can get a significantly lower rate (perhaps because of improved credit scores), then savings can also be significant. To quote Consumer Reports, “Sometimes refinancing can save you hundreds or even thousands of dollars.”
Let’s set the record straight on some other common refinancing car loan myths:
- Comparison shopping for a lender is a waste of time. That’s not true because lenders can have different qualification requirements, interest rates, and overall loan programs.
- Refinancing a car is too expensive to be worthwhile. There are lenders, like SCCU, that don’t charge an application fee or otherwise tack on costs. Plus, in some circumstances at SCCU, you can have a period of up to 120 days with no payments.
- Car loans are a fairly new phenomenon. The reality is that car loans have been around for a while. General Motors Corporation (GM) created the first financing for vehicles in five U.S. cities in 1919 to help meet the growing demand for cars after the end of World War I. Within a year, GM opened an office in Great Britain. In 1923, Ford Motor Company followed suit by offering financing for people wanting to buy their vehicles.
- By the second half of the twentieth century, car financing became more common. The issuing of VINs made it easier to identify individual vehicles. And in 1956, the Federal Aid Highway Act propelled today’s interstate highway system into motion, which only increased the demand for vehicles — and, therefore, for car financing.
- In fact, in 1956, FICO score was created, which gives lenders a tool to measure the creditworthiness of a borrower.
Benefits of Credit Unions to Refinance Cars
Why are credit unions favorable to borrowers? Credit unions are not-for-profit financial cooperatives that benefit its members because they are the owners, not stockholders. This means that car loan interest rates and fees are usually lower than what you might find at a bank.
Plus, because credit unions are created to encourage and enhance financial wellness of its members, interest rates paid on savings accounts, certificates, and other accounts are typically higher, creating a win/win situation.
When you belong to a credit union, you are part of a geo-targeted or professionally niche financial institution, giving you an opportunity to support your community. You can receive more personalized service at a credit union, which can include financial education; and, as a member, you may have a better chance at getting your loan application approved.
Refinancing a Car at SCCU
Here at SCCU, we’d like to make the refinancing auto loan process as efficient and effortless for you as possible. It’s an easy 1-2-3 application process. We offer competitive car loan interest rates that will help you save more money in the long run with your auto loan. If you’re not already a member and would like to refinance your car with us, don’t worry, we’ll set you up with an account and walk you through the process.
Benefits of choosing SCCU to refinance cars include:
- Low rates8
- Flexible terms up to 84 months9
- No application fees
- No prepayment penalties
- Fast approval decisions
- Simple electronic closing
- Automatic online bill pay
- Excellent member service
- Free online and mobile banking
Also, ask us about the possibility of not making a payment for up to 90days.11
Whether you already have a loan with us or with another lender, you can apply with us online or over the phone to see if you can get a lower interest rate. If you have any questions, feel free to get in touch with us by phone, Chat live, or Secure Messaging in Online Banking.
APR = Annual Percentage Rate
¹CALCULATOR: The information provided by these calculators is intended for illustrative purposes only and is not intended to purport actual user-defined parameters. The default figures shown are hypothetical and may not be applicable to your individual situation. Be sure to consult a financial professional prior to relying on the results.
²TERMS: Terms available up to 84 months for auto loan purchases and auto loan refinances, up to 240 months for boat and RV loan purchases, and up to 72 months for motorcycle loan purchases and are based on your credit quality, vehicle type, model, and year. Our usual credit criteria apply. Your term may be different. Qualified borrowers only.
³RATES: Rates are subject to change. Rates shown are fixed Annual Percentage Rates and are affected by your credit quality, model year, term selected, loan-to-value (LTV), and payment method. Your rate may be different. Qualified borrowers only. Our usual credit criteria apply. You may be asked to furnish a down payment. Rates shown for auto purchases/auto refinances are fixed Annual Percentage Rates for vehicle model years 2023 and newer. Rates shown for motorcycle purchases are fixed Annual Percentage Rates for vehicle model years 2020-2024. Florida loans are subject to Documentary Stamp Tax. The tax amount is not included in the quoted APR.