Auto Refinance Tips

Auto refinance from an "insider's" perspective

What is Auto Refinance?
The author's of this site are former HSBC Auto Finance managers. We were continually amazed that many people have never heard of auto refinancing. Compared to mortgage refinance, auto refinance is not as well-known.

However, refinancing your car loan is very similar to refinancing your mortgage. Another auto lender evaluates your loan and terms and might conclude that they can offer a better rate than your current lender. The new lender will pay-off your current loan with your lender and assume the rest of the balance, presumably at a lower rate.

Unlike mortgage refinance, car loan refinance is much simpler, faster, and cheaper to do. Often times there are no fees at all to switch your loan to another lender. You can learn more about auto refinance at our website: www.autorefinancereview.com.

Why refinance now?
The Federal Reserve has slashed interested rates over the past 2-3 years. The Fed Funds rate is 0.25% (down from 1.00% last year), which is at 30 year low. This metric determines what banks charge consumers. The cost of money is cheaper for banks, so their rates are better now.

Reasons to refinance your car loan?

Decrease your interest rate
Lower your monthly car payments
Remove a party on the lien (divorce)
Potentially skip 1st payment with your new lender
Cash out – get a new loan for more than you currently owe on your current loan

Who should refinance their car loan?
Generally, we recommend that people paying more than 8%-10% interest on their car loan should consider refinancing their existing car loan.

Will I qualify for an auto refinance loan?
Many factors determine if you are eligible for a better rate. Some of the most important car loan refinance factors include:

Credit score: Your score is a reflection of your overall creditworthiness as determined by the big credit bureaus: TransUnion, Experian, and Equifax.
Debt to income ratio (DTI): A lot of debt relative to your income equates to high risk for banks.
Payment to income ratio (PTI): High car payment with low income puts a lot of stress on your ability to make payments.
Payment history: If you are not current, or haven’t made steady payments on the loan, then it hurts your chances of being approved for a loan.
Type of car you own: Make of vehicle, vehicle age, clean title (no salvage title), and non-commercial vehicle.

What is the process for auto refinance?
In most cases, applying is easy, involves no fees, and can be completed online in 10-15 minutes. Most lenders can provide a credit decision instantly or within 15 minutes after application submission. At that point, you will be presented with your loan terms, to include the available interest rate. If approved, then expect the bank to call you.

Can I negotiate to lower the interest rate that is presented to me?
You likely will not be able to negotiate your auto refinance loan terms. The rate you are offered is based off of the bank’s sophisticated risk model that assesses many factors that determines what rate of interest the bank can offer to you. The loan specialist will likely not have any leeway to offer you better interest rate.

Will my interest rate increase if I extend my term?
Probably. Lenders typically charge a higher interest rate as the term increases to compensate for the higher risk as the term increases. Lenders typically charge a higher rate for loan term that exceeds 60 months (5 years). For example, Bank of America will add nearly 1% to your rate for a term beyond 60 months.

Should I apply with more than one lender?
We think that it pays to shop around. The rate that you are offered might differ substantially from one lender to another. Because each lender has a different opinion about the factors that determine your particular risk profile, this will drive variance in the interest rate that you are offered. The variance in interest rate is usually within a 1-2 percentage points, could be as high as 7.

Is it really worth it to refinance my car loan?
We think so. A drop in your rate could translate into substantial savings. If you get a rate reduction and extend the term of the loan, then your monthly payment can drop dramatically. Even if you only saved $40 a month on your loan, then that gets you an extra trip to the grocery store or an additional fill-up at the gas station.