Top 10 Auto Refinancing Myths

Auto Refinancing misconceptions are cleared up below

Myth 1: This is a bad time to apply for auto refinancing
Untrue. While banks are being careful with who gets loans, it easy to lose site that interest rates are really low. Auto refinance rates are at historical lows. The Federal Reserve slashed the Fed Funds Rate to 0.25%. What this means is that the bank’s cost of capital is cheap. Lenders can borrow short term money at incredibly low rates and make long-term loans with that “cheap” money at attractive rates. Bottom line: Lock in your refinance rate before interest rates rise.

Myth 2: Bad credit consumers will be declined for car refinancing
False. Many auto refinance banks consider “non-prime” customers with a record of making on time payments on their auto loan excellent candidates for refinance. Even better, consumers with verifiable income, stable job history, and current on other credit accounts stand a good chance of being approved for a refinance auto loan. So while your credit score may not be 700 or higher, that shouldn't stop consumers from applying for a refinance loan. Bad credit scores may not preclude you from doing auto refinance. Your recent payment history on all of your accounts is also important.

Myth 3: Lenders decline an “underwater” auto loan for auto refinancing
Incorrect. Fact is that most consumers are underwater on their current auto loan. The reason is that your car depreciates far faster than you can pay down the principal on the loan. This is particularly true in the early years when the vehicle depreciates 10%-20%. While the car value has dropped to 80% of its original value, the loan has only depreciated 2-7%. Further compounding this phenomenon is that many consumers do not put down very much money at signing. As a result, auto refinance loans often have loan-to-value above 100%, which means that the consumer is upside down on the loan. The good part is that banks understand that LTV will be high for auto refinance. That is why banks allow for 120-130% LTV for loans. Reason being is that the bank is “buying” your ability to make your payments on time more and less concerned with loan-to-value.

Myth 4: Shopping around for a better loan rate is a waste of time
Totally bogus. It pays to shop around. This transaction is no different than many others. Price shopping for a good interest rate is just like pricing shopping for a pair of new shoes. Some people shy away from rate-shopping because they fear their credit score will decline from filling out multiple applications – but this isn’t the case. The bureaus count all pulls of your credit for an auto loan over the course of 1 month as 1 pull. So your score will not change very much. More importantly, your goal is to get a better rate, so test the waters. The interest rates offered by one bank can dramatically differ than the rates offered by another bank. In our experience, we’ve seen the rate disparity as high as 7%. This is because banks calculate risk differently than others, which determines your interest rate.

Myth 5: The costs involved to do auto refinancing is a non-starter
Not true. Most lenders offer a no-cost auto refinance. Unlike mortgage refinance, auto refinance involves little out-of-pocket expense. Banks have a free application and do not charge document handling fees. The only fee that is involved is tax, title and licensing to change over the lien – but that is strictly a DMV charge. Moreover, those fees are nominal and range between $5 and $65, depending on your state of residence.

Myth 6: I won’t save enough money to make this worth my time
Off-base. Many consumers shave $50-$120 per month off of their car payment. Lenders will advertise that the average rate savings is around 2-5%. For a $20,000 loan this means that you can save $20-$40 per month. Plus if you extend your term to 60 months or greater, then the savings per month can be even greater. Considering the application process takes 10-15 minutes, we think that this is definitely worth your time.

Myth 7: Self-employed applicants cannot get a refinance auto loan
Wrong. A few years ago lenders got burned by “liar” loans, where applicants lied about income, and now banks closely scrutinize applications. However, this doesn’t mean that 1099 applicants can’t get an auto refinance. Applicants with 1099 income and who make a legitimate living can get approved for a loan. Generally banks expect more paperwork to verify income, such as prior two years federal tax returns and require professional references to verify your income.

Myth 8: Previous bankruptcy will prevent me from being approved
Maybe, but maybe not. Some banks will approve applicants with a prior bankruptcy. But Chapter 7 or Chapter 13 bankruptcies must be discharged. Multiple bankruptcies almost always result in a declined application.

Myth 9: Good credit score guarantees approval for car loan refinance
Erroneous assumption. There are 2 components that the auto refinance lender will evaluate on your application: credit and vehicle. It is advantageous to have a good credit score, low levels of debt, and enough income to meet the lender’s requirements. Just as important, consumers need to have a car that meets the lender’s requirements. High mileage, older cars, and some makes and models will be excluded from refinance.

Myth 10: Getting my car appraised for auto refinancing is a hassle
Not relevant. Auto refinance does not involve any professional, on-site automobile appraisal. The lender will use Kelly blue book, NADA or similar agency to value your car based on year, make, model, mileage, features, etc...