Refinance your auto loan and save money.

What you need to know to refinance your auto loan

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 auto refinance requirements all lenders use to evaluate the quality of an application.

Loan to Value (LTV):
Loan to Value is an important factor in evaluating an auto refinance application. The numerical ratio is a representation over what you owe on the vehicle vs. what the vehicle is currently worth. As automobiles are depreciating assets (they decline in value over time), it is not uncommon for this ratio to be well over 100%. Consider this example:

Steve purchased a new 2007 Toyota Camry SE Sedan in late 2006 for $23,000 with a 72 month loan at a 15% interest rate and a monthly payment of $486.34. In the fall of 2008, when he applied to refinance his vehicle, he was told the value of his vehicle was $13,500, and the remaining balance on his loan was $17,475. Thus, his LTV was 129.5% ($17,475/$13,500).Please note this example is illustrative and not meant to describe an actual situation.

First, you may be surprised to see the dramatic drop off in value. Note that most lenders will use the wholesale or “black book” value for a vehicle (the value that could be attained at auction if the car needed to be repossessed). So while Steve could likely sell his car for more than $13,500, this is the value given to his vehicle. Also note the impact that a high interest rate—Steve has made payments for two years at almost $500 per month (almost $12,000!), yet has reduced his principal by only $5,500.

Vehicle Year:
Most lenders prefer more recent vehicles; few lenders will offer an auto refinance for older cars. if your model year is more than seven years old (2002 or older).

Vehicle Type:
Most vehicle types are eligible for an auto refinance, but check with your lender to see if your vehicle qualifies. You may have difficulty refinancing a vehicle used for commercial purposes, or one that has been customized significantly. The title must be current and the vehicle must have no major defects, such as a salvaged or flooded title.

Your credit:
Make sure that your establish a history of credit which is a very good indicator of your credit-worthiness. Auto refinance for poor credit consumers can be doable, but it is better to have a track record of making timely payments to a lender, creditor, or vendor. All lenders will seek your permission to run a credit report to assist in their decision whether or not to offer an auto refinance loan. Your lender will evaluate the following:

Recent payment history—Are you current on your existing auto loan? Are you current on your bills in general?
Historical credit problems—Have you recently declared bankruptcy? Do you have multiple accounts in collection?
Debt to Income (DTI) ratio—what percentage of your monthly income goes to debt payments (mortgage, cars, credit cards, and other debts)?
Payment to Income (PTI) ratio—what percentage of your monthly income goes to your automobile loan payment?
Length of established credit history—do you have a history of obtaining credit? Do you have multiple credit accounts (often referred to as “trade lines”)?

It is important to note that there is no “right” answer to any of the questions above, nor will lenders give all specifics about how they evaluate your credit to make a decision on your application. Don’t be discouraged if you don’t have great answers to all of the questions above. In fact, most customers that are able to successfully refinance their auto loan have at one time had credit problems.

Your Income and Employment status:
Lenders will ask for your monthly income before taxes (otherwise known as “gross income”). In addition, lenders will ask for other sources of income, and your type of employment (full-time, part-time, retired, etc.). Most lenders will publish their minimum income requirements on their application—some require at least $2000 in monthly gross income, while others go as low as $1600 per month.

Your income is used to determine the expense ratios that we mentioned above—your payment to income (PTI), which describes the percent of your monthly income that goes to your monthly car payment. Some lenders have maximum PTI limits, such as 15% or 20%. The higher your income, and the lower your PTI and DTI ratios, the more likely you are to be approved, and approved at a lower rate. Some lenders may require that you furnish “proof” of your income during the loan documentation process. You can often satisfy this requirement by sending in a copy of your most recent pay stub.

Finally, there are many different types of income sources—income from social security, a pension, child or spousal support, etc. Each lender will inform you how they calculate alternative sources of income into their credit decisions.

Your employment status also comprises an important factor to determine if you will be approved for an auto refinance. Most lenders require that you are fully employed, with some sort of continuous employment history (obviously, those who are retired and have income from retirement, social security, and other means are not required to be employed). Again, lenders will place different requirements on employment, so check with the lender for details. Some lenders will also require that they contact your employer to validate your employment status.

Now that you understand what lenders use to evaluate your application, let’s take a look at the benefits of refinancing your auto loan—many consumers can yield substantial savings in interest and in their monthly payments!

Ready to learn more? Continue to our next page: Auto Refinance Savings