Auto Loan Refinance Tips.

Extensive answer section about Auto Loan Refinance

We've assembled a comprehensive set of questions and answers to help you with car loan refinancing. With more knowledge, you will be informed about how to lower your auto financing rate and your monthly car payment.

Understand what is used to evaluate auto refinance loans

Every auto refinance lender will evaluate your application differently. Rather than list out the requirements for multiple different lenders, we’re going to provide you with general requirements all lenders use to evaluate the quality of an application.

Who should apply for an auto loan refinance?
There is no “perfect” customer, but anyone with a current open auto loan and a stable payment history should consider applying.  Of course, for it to be meaningful, you’ll need to see a lower interest rate from what you’re currently paying.  Thus, if your interest rate is at say 8% or lower, you probably won’t see any additional savings, regardless of your credit history.  If you are paying 10% or higher, we encourage you to see if you can receive a better rate!

In our opinion, we see little downside to apply for an auto loan refinance, and tremendous upside opportunities.  Most lenders will provide a free auto loan refinance quote and there is no obligation to take the loan if you are approved.

Who will refinance my car loan?
There are many lenders who participate in auto loan refinance activities.  Rate Genius, Capital One, Up2drive, myAutoLoan, and a few others.  Your local bank or credit union could be a good fit, but many credit unions do not offer auto loan refinance.  Many loan aggregators, such as Lending Tree, no longer offer auto refinance within their product portfolios.

Auto Refinance Lenders who we recommend:

• Delivers quotes from 4 lenders • Decision within 15 minutes • No obligation • No fees to apply

• Simple refinance process • Fast decision after applying • No obligation • No fees to apply

How does the auto loan refinance process work?
Each lender will have a slightly different process, but you can generally expect the following process:
1. Application: You complete an auto loan refinance application (either online or via telephone).
2. Decision: The lender will inform you if you have been approved. This can happen immediately, or take up to a day. Most approvals are “preliminary”, meaning that they are subject to meeting all terms and conditions of their auto loan refinance requirements.
3. Loan Selection: You will work with the lender to finalize the loan terms (interest rate, term, principal balance, etc.). The lender will likely ask for more information than you provided on the application. After receiving this information, the lender will create auto loan refinancing documents for you.
4. Sign Documents: You will receive auto loan documents (either online or hard copies through the mail); sign them, provide any required documents or notarizations, and return them.
5. Auto Loan Processing: The lender will process the car loan documents, payoff your existing auto loan to your current lender, and inform you that you have a new auto loan.
6. Car Loan Payments: Your new loan begins! You will likely receive a welcome packet and payment information from your new lender.

While we’ve listed several steps here above, note that the process does not take very long.  In some situations, customers can complete all six steps within one day!  The process is far easier than other refinance processes (like a mortgage, which can take 30 days or longer).

 

Should I expect to pay fees for an auto refinance?
Each lender will explain to you their fees (if any), but do your homework:  most auto lenders will NOT charge you any transaction or processing fees to refinance your current auto loan.  Be wary of lenders that charge substantial fees to refinance your auto loan—reputable lenders avoid this practice.

You should expect to pay fees associated with the lender registering your vehicle under a new lienholder and/or under different party names.  Fees charged by a state Department of Motor Vehicles are often added into the principal of the auto loan.  These fees can range from $5 up to $50, and will vary by state and by your situation (for example, registration fees can be higher if you are adding or deleting an individual from the title).

What amount of the car loan will be refinanced?
In general, most lenders will refinance the exact amount owed to your current lender (the “principal balance”).  For example, if you owe $10,500 on a current auto loan, your new lender will pay $10,500 to the current lender, and start your car loan for $10,500 (note that it may be a few more dollars once registration fees are added).  Check with your lender to ensure that there are no additional fees added to your principal balance.

Note that some lenders will also offer a “cash out” option, in which you can choose to refinance your auto loan for more than the principal balance.  In the example above, some lenders may allow you to select an auto loan for more than $10,500.  Let’s assume a lender allows you to take up to $2,000 “cash out”

What will the car loan documents look like?
If you have ever refinanced a home, you may remember the mountain of paperwork you signed during the loan origination process.  What a nightmare.

Auto loan refinance, however, there are usually no more than 10 pages of documents to review and sign in order to complete your refinance.  While all lenders will  have specific documents, you should expect to see the following in your loan package:

• Contract—which details the terms and conditions of your new auto loan.  The contract will contain the Truth-In-Lending (TIL) box, which contains the details on your interest rate, future monthly payment, and term of the auto loan.
• Payoff Letter—you will usually need to sign a document instructing your previous lender to send the title to the new lender.
• Registration and Title documents—you will need to sign the required DMV documents so tha the lender can register the car again.  These could include a power of attorney form, or state specific documents.
• Verification of Employment authorization—in some cases, a lender will want to verify your current employment, and will seek your written authorization in order to check your employment status.

In addition to the documents you’ll be asked to review and sign, you may be asked for furnish any or all of the following:

• Proof of Income—in most cases, a copy of your current pay stub is sufficient
• Proof of Insurance—lenders will want to know that you have current insurance on your vehicle
• Proof of Registration—a copy of your current registration statement is often required.

Despite the number of documents listed above, completing auto loan refinance paperwork is generally very easy.  Most consumers indicate that the process takes less than one hour to review, sign, and complete all paperwork!

Should I apply with more than one lender? Does it pay to shop around for an auto loan refinance?
You want to find the most competitive rate and term options available. To achieve that end, we recommend that you evaluate the auto loan refinance offers from several lenders. Don't be surprised to see that the rate and terms you are offered might be substantially different from one lender to another.  This happens because each lender appraises risk differently.  Most auto loan refinance banks use bureau scores as an indicator of your creditworthiness, but they also have their own internal risk models that compute the interest rate that they can offer to you.

Because each lender has a different opinion about the factors that determine your particular risk profile, you will likely be offered similar, but not exact, rates and terms.  Based on our experience, the variance in interest rate could be as high as 5 percentage points.  However, most customers will see rates within 1-2 percentage points.  That still is quite significant and could translate into HUGE savings.

Some people believe that applying from multiple lenders will damage your credit rating.  This is simply a myth.  While credit scoring agencies do not provide a formula for how their scores are impacted, the major credit bureaus have all indicated that multiple credit inquires from the same category (such as Auto Lending) will not have a material negative impact on a credit rating.  Contact the credit bureaus if you would like more details on their scoring methods.

What are some of the additional products offered during an auto loan refinance?
Some lenders will offer additional products beyond the opportunity to do an auto loan refinance.  Note that regardless of the additional offer, none are required in order for you to refinance your auto loan.  Some lenders will not offer any additional products or services, while others will.  Here is a list of a few “extras” that we have seen over the past few years:

• “Cash Back”—also called “cash out”, this allows a borrower to not only to do an auto loan, but also take on additional debt with a cash loan.  For example, if the principal on a car loan is $12,000, the lender may allow the borrower to take out an auto loan for as much as $15,000.  $12,000 is used to pay off the prior loan, and $3,000 is sent to the borrower.  The borrower will then make payments on a $15,000 loan.  While a cash back loan can certainly cost you less than by borrowing from higher interest rate tools such as a credit card, carefully consider whether you can afford to take on additional debt.
• GAP Insurance—GAP Insurance covers the deficiency balance, or “gap”, between the amount you owe on a vehicle, and the amount you would get paid from your insurance company, in the event of a total loss.  For example, if you owe a lender $10,000 on your loan, and the insurance company offers you $7,500 for your totaled vehicle, then you have a gap of $2,500 that the lender will expect you to pay.  This gap can often cause financial hardship for the borrower that just experienced a total loss vehicle.  GAP insurance would cover the $2,500 difference, so that the borrower did not owe the lender any additional amount.  The greater the difference between the value of your car and the size of your loan, the more you may want to consider GAP insurance; alternatively, you may want to consider contacting your current insurance company to discuss similar options.
• Vehicle Warranty programs—some auto loan refinance lenders have partnered with car manufacturers to offer vehicle warranties.  We recommend you evaluate your need for a warranty, your current manufacturer coverage, and the pricing offered. In general we don't recommend this option.
• Credit Protection, Unemployment Insurance, etc.—some lenders will offer additional programs that will provide services such as identify theft coverage, deferrals on payments if you lose your job, and numerous other options.  While we don’t have specific recommendations on these types of programs, be careful—what seems like small dollars can often add up substantially over the life of a loan.

Should I purchase extras such as Gap insurance or Warranties?
GAP insurance is bought to insure against a wreck once you leave the lot.  Your car is a depreciating asset, which means it will be worth less tomorrow than it is today.  Once you drive the car off the lot, the logic is that the car will be worth less than what you paid.  GAP insurance fills the “gap” between the purchase price of your car and what it is actually worth once you drive it.  I don’t recommend that you buy it because many insurance companies will offer to insure your car for replacement value.  They will replace your car of similar like-kind and quality.

Generally speaking I don't recommend that you buy an extended warranty. Read more about my opinion on extended warranites.

If I apply for a car loan refinance, will lenders check my credit score?
Yes.

When the lender checks my credit will my credit score increase?
The short answer is "yes. However your score will not be materially impacted.  We'd estimate that you'd receive a 3-5 point decrease in your score, which is not very high. Each bureau check over the course of 1 month is counted as one pull of your credit.  So, if you apply with 3 auto refinance companies and they all pull your credit over a 30 day period, then the bureau companies score it as only 1 credit check. 

Will my interest rate increase if I choose to extend the term of the car loan?
Probably.  Lenders will typically charge a higher interest rate as the period grows.  At the highest level, lenders do this because the auto loan becomes more risky as the time it takes to payoff the car loan increases.  More concretely, most lenders will charge a higher rate for loan term that exceeds 60 months (5 years).  For example, Capital One will add 1% to your rate if you decide to extend your term beyond 60 months.

I have "prime credit". Should I try to refinance my car loan? Generally, we recommend that those consumers who are paying more than 10% interest on their car loan ought to consider approaching another lender to see if they can secure more favorable loan terms.

However, we encourage virtually all consumers to try auto loan refinance as an option to save money. Those consumers with FICO scores 700+ likely already have a good rate, but that shouldn’t discourage you from trying to find a better one.  The Federal Reserve has cut rates to historic lows, which should translate into lower borrowing costs for consumers in the near future.  Therefore, auto loan rates will likely drop to very low levels in the foreseeable future.

Can I negotiate the quoted auto loan interest rate I’m offered?
Probably not.  While there certainly may be exceptions, the rate a lender will offer is usually not negotiable.  A lender uses a complex set of criteria and analytics to determine your auto refinance interest  rate, and that rate is a reflection of your risk, the cost the lender pays to borrow the money, and a margin for expected profit.  Additionally, most lenders try to avoid rate negotiation, as it opens them up to further regulatory analysis.  You won’t be penalized for asking about a rate discount, but don’t feel bad if you are told that the rate is not negotiable.

This does not mean, however, that “discounts” are not available.  For example, some lenders will offer you a discount if you elect to make your payments through an automated withdrawal through your checking account (lender up2drive currently charges .5% less on your interest rate if you agree to make electronic payments).  Some large lending institutions may offer you a discount for having multiple products with them, such as both a home mortgage and an auto refinance loan.  Check with each lender to see if there are any other discounts available, especially if you are already a customer of that lending institution.

I own a vintage / classic car. Can I get an auto loan refinance?
We doubt it.  First, we’re surprised you even have an auto loan on your classic car!  That said, most lenders have a “vehicle age” requirement in order to lend.  Our research of the major lenders shows that the typical vehicle requirement is 2002 or newer (8 model years old).

How do I know if the auto loan refinance offer is a good one?
Ultimately, only you will be able to determine if the offer you receive is “good”. It boils down to lower interest rate or lower monthly payment. 

For some individuals, a lower monthly payment is the most important item, regardless of the interest rate savings or extension of term.  For others, a new auto loan that reduces interest rate and monthly payment is equally important.  Regardless of your financial situation and needs, consider the following factors when evaluating the offer on your auto loan refinance.  You may not find an auto loan refinance offer that  shortens your team, lowers your interest rate, and lowers you monthly payment.  Thus, you’ll need to determine which of the factors (term, rate, payment) is most important to you, and seek out loan terms that best meet your needs. 

Consider the following:

• Does my auto loan refinance offer extend the term of my loan?  If so, how much?
• How much has my interest rate gone down? 
• Does the new monthly payment amount create a meaningful change in my personal finances?

In addition to thinking through the terms of your car loan, you should evaluate the following from any reputable lending company to ensure you have a “good” auto refinance offer:

• Are there upfront origination fees?  (You should look for a company that does not charge you to originate a loan with them)
• Are there any prepayment penalties? (Again, make sure you avoid any loan that charges a fee to pay off the balance early).
• Are there flexible servicing and payment options?  Most lenders allow you to pay by check, or online, or through automatic withdrawal.  Investigate these options to see what payment method best suits you.

What’s better—an car loan refinance offer with a good interest rate and my original term, or an even lower interest rate but a term extension?
As we discussed in the question above, the answer to this question is entirely dependent on your situation and what works best for your financial needs.  So while we won’t answer this question directly, we will point out a few things that you should consider. 

First, think about what happens when you extend your current loan term.  By extending your term, you will lower your monthly payments, which can be great for your monthly budget.  However, you will increase the total amount of payments you will make over the life of your loan, and thus you will increase the amount of total dollars you pay in interest expense.  In addition to the increased interest expense, you will likely be required to own the car longer than you may intend.  As you extend the term, the likelihood that you will owe more than the car is worth will increase as your vehicle ages, which may limit your ability to sell the vehicle, or trade it in when purchasing a new car. 

Secondly, consider that older vehicles will likely cost you more money to maintain.  A six month term extension probably won’t add a noticeable change to your vehicle costs, but if your vehicle is already a few years old, adding a few additional years can prove to be an expensive proposition in the long run.

Should I apply with more than one lender?  Will every lender treat me the same?
We’ll answer the second question first—lenders will absolutely treat you differently!  Each lender has their own set of lending criteria, credit policy rules, and proprietary risk models to determine if you will be approved, and if so, at what terms. 

The answer to the first question is yes. Shop around. But not that you shouldn’t expect wildly different responses from lenders (after all, they will all be evaluating the same data provided in your application and on your credit bureau), but they won’t be completely aligned in how they evaluate your information.  Any reputable lender does not charge for you to submit an application, so there is really no downside to applying to multiple lenders. 

You may be concerned about how multiple applications impacts your credit scores.  While we are not qualified to give specific advice on how your credit score is impacted (only the credit bureaus truly know how their own internal score calculations work), we can share that credit bureaus group and consolidate inquiries on a similar product (like an auto loan).  In our experience, it doesn’t matter if you apply for an auto refinance loan from one provider, or from five providers within the same week—the credit bureaus will treat both scenarios equally.

How will my interest rate and auto loan terms be determined?  Here is one “insider” perspective.
One of the questions we receive more than any other is how an interest rate is determined on an auto loan refinance. To get the best answer possible, we asked a member of our team, who has previous experience in the risk department for one of the nation’s largest auto lenders.  Below is his response:

At my prior company, when we first received an application, we would evaluate the application against specific policy criteria.  If the application failed any of these criteria, we would immediately decline the application, sometimes even before we viewed the applicant’s credit bureau.  An example would be if the customer failed the minimum income requirement, or had a vehicle year outside of the range we allowed.

Once the application passed this “pre-bureau” application criteria, we would then pull a credit bureau to evaluate the applicant’s credit history.  We used several hundred variables in the credit bureau to determine our own internal score.  Rather than simply use the score provided from the credit bureau, we created our own score.  You don’t need to worry about the score or how it is calculated (almost no one in our company knew all of the components).  Instead, you should know the general types of things we used to create this score. 

In no particular order, we evaluated:

• Your recent auto loan payment history
• Your recent payment history on all trade lines (accounts)
• Your utilization ratio—of the available credit you have (from credit cards, lines of credit, etc.) we evaluate how much credit you have available.  For example, if you have credit cards totaling $10,000 in available credit, and currently owe $3,000, your utilization rate is 30% ($3,000/$10,000).
• Any recent accounts that went into a collection status—either greater than 30 days past due, greater than 60 days past due, etc.
• Any public record filings
• Any declarations of bankruptcy

After evaluating specific credit bureau criteria, we then calculated some additional ratios based on your monthly income and/or vehicle information:

• Your payment to income ratio (PTI)—this is a ratio of your monthly auto loan payment divided by your gross monthly income.  The lower the PTI, the better.
• Your debt to income ratio (DTI)—this is a ratio of all current monthly debts (auto, plus mortgage, student loans, or anything else) divided by your gross monthly income.  The lower the DTI, the better.
• Your loan-to-value (LTV)—this ratio evaluates the current principal balance on your auto loan to the predicted value of your vehicle.  Lenders will calculate your loan value differently, but most will use the “wholesale” value of the vehicle from a company like Kelley Blue Book, Black Book, NADA guides, etc.  Most customers will have an LTV above 100%.  Each lender has its own maximum LTV requirements, somewhere in the 110%-150% range.

All of these calculations are used to determine a predicted loss rate for the customer.  In other words, after evaluating a customer’s credit history, current income, vehicle structure, and loan amount, we created a probability of how likely that customer was to default on their loan.  Don’t take this personally—we were simply evaluating thousands of historical accounts to determine how other people with similar statistics performed.

If we felt like we understood the risk well, we could then price for that risk, and offer the customer car loan terms with a specific interest rate.  If we didn’t have confidence that we understood the customer’s risk, we would decline that loan.  Sometimes, the customer was so risky, that we couldn’t find a price to offer that would compensate for that risk, and then too we declined the customer.

In some cases, we were not able to approve the loan, even if we like the customer’s risk profile.  The PTI or DTI ratios could be too high, or the LTV could be too high.  Sometimes, the structure of the deal led to a decline—not the customer’s risk.

Finally, we needed to determine an interest rate.  Several different factors led to the actual interest rate.  First, we looked at our own internal costs—how much were we paying to borrow the money we’d eventually lend out, and how much did we spend on marketing, operations, and servicing in order to attract a loan.  We would then evaluate how much price we needed to charge to compensate for that customer’s risk.  Finally, we would add in some additional rate to the loan for our profit expectation.

Hopefully, after all of the steps above, we were able to approve the customer at an interest rate favorable to the one the customer was currently paying on his/her auto loan.  After all, our auto loan refinance program would only be competitive if we could offer savings to our potential customers.

Reading through this process, you may think it takes a long time to evaluate an application.  Most of it is performed automatically through sophisticated computer risk systems designed to provide an immediate answer to the customer.  Some auto loan refinance applications took less than 10 seconds to decide.  Others required a loan officer to evaluate the details more carefully; in those cases, we always tried to respond within 30 minutes.”

Will my auto loan refinance application degrade my credit score?
You may be concerned about how multiple applications impacts your credit scores.  While we are not qualified to give specific advice on how your credit score is impacted (only the credit bureaus truly know how their own internal score calculations work), we can share that credit bureaus group and consolidate inquiries on a similar product (like an auto loan).  In our experience, it doesn’t matter if you apply for an auto refinance loan from one provider, or from five providers within the same week—the credit bureaus will treat both scenarios equally.  Applying to multiple auto lenders over a thirty day period is very similar to applying to one auto lender over that same period.

Someone told me I am “upside down” on my auto loan.  What does this mean and what can I do about it?
Phrases like “upside down” or “under water” are similar—they both refer to you owing more for the vehicle than it is worth. 

For example, if you owe $12,000 on your auto loan, but the vehicle could only get $10,000 if traded in/sold, then you are “upside down”, and you have a loan-to-value (LTV) of 120%.  This isn’t all that uncommon with automobiles, so don’t feel like you did anything wrong.  

You may not have to worry about this when considering an auto loan refinance application.  Most lenders will approve a customer above 100% loan-to-value (LTV) and depending on your credit performance and payment history, some lenders will go as high as 170% LTV!  If you are told that you do not qualify for an auto loan refinance due to a high LTV, you may consider putting a down payment on your auto loan to reduce the principal balance.  If you are offered substantial cash savings with your auto refinance loan application, you may consider making this payment to enjoy the long term monthly payment benefits.

Ready to Refinance?  Continue to our next page:   Refi Now!