Are you one of the millions of Americans with an auto loan? If so, you may have considered refinancing your car loan. In this article, discover what refinancing entails, situations that may drive you to do so, and how you may benefit from refinancing.

How Does Refinancing Work?

Refinancing a vehicle is the replacement of your current auto loan with an entirely new one. The new lender will repay your old auto loan and provide you with a new loan and payment plan.

For many borrowers, auto refinancing can provide tangible benefits such as a new monthly payment plan and better interest rate.

When Should You Consider Refinancing Your Car Loan?

Many borrowers would like to pay off their car loans as quickly as possible, enjoying their fully paid off cars while still having value in the vehicle. However, there are some instances where refinancing the current loan rather than paying it off could make better financial sense.

So how exactly do you know that it’s the right time to refinance? Here are a few circumstances where refinancing may prove a good option:

1. You Would Like to Change Your Loan Terms

Loan terms are the guidelines and conditions you accept before taking your original auto loan. They outline terms such as the repayment period for the loan, monthly payments, interest rates, associated costs, and fees for late penalties or other expenses. Borrowers are advised to review loan terms thoroughly to fully understand any financial obligations before they borrow. At the same time, borrowers should look for any potential hidden fees or clauses that could end up costing them more money.

If you would like to change an aspect of your loan, refinancing may provide that opportunity. You may be able to acquire a lower interest rate, lower monthly payment, or a longer repayment period. However, while increasing your loan repayment period may lower your monthly payment, it could also increase the total amount of interest you pay over the life of the loan.

Meanwhile, reducing your repayment period will likely increase your monthly payments, but could also reduce the total amount of interest you pay on the car loan. This is especially true if you can negotiate a lower rate. Either way, refinancing may provide borrowers with an opportunity to adjust certain loan terms.

2. US Consumer Loan Rates May Fluctuate

The interest rate on your loan may depend on factors such as your income, credit score, loan term, and loan amount. Did you also know that the Federal Reserve can lower consumer loan rates to reduce borrowing costs for businesses and consumers? This often happens during financial downturns like the COVID pandemic. The Federal Reserve has the authority to increase loan rates too, as we witnessed in 2022.

3. Your Credit Score Has Improved

Your credit score is a numerical rating  used by creditors to predict your likelihood of repaying debts in full and on time. The scale typically ranges between 300 and 850. Higher scores indicate that you are a lower credit risk, increasing your likelihood to be approved for a loan. Your credit score also typically plays a role in determining the interest rate you’re offered. 

If your credit score has improved significantly since purchasing your car, you may be able to qualify for a better interest rate. However, be aware that credit inquiries, especially a large number of inquiries in a short period of time, can negatively affect your credit score.

4. You Have Positive Equity

Do you know the market value of your car? If you have made enough loan payments so that the value of the car is higher than the remaining amount of the auto loan, then you now have positive equity.

This means that the vehicle’s market value has now exceeded the principal amount on the loan. If so, you may be able to get favorable terms if you refinance, since lenders are looking to secure their loans with an asset with strong market value.

5. You Want a New Auto Lender

Other than financial considerations, you may also choose to refinance your car if you are dissatisfied with your current lender. This can include poor record-keeping or a desire for better customer service. If your current lender isn’t meeting your expectations, refinancing can allow you to shift to a new financial institution.

Benefits of Refinancing a Car Loan

Now that you know some of the situations and circumstances where refinancing your vehicle may prove beneficial, consider some potential benefits to refinancing:

As you research your refinance options, consider whether these benefits outweigh any potential drawbacks. Think about whether your budget will be able to handle any changes in payment or the length of a new loan.

Does Refinancing Your Auto Loan Make Sense for You?

After housing, buying a car is often the second-largest purchase Americans make in their lives. Since refinancing an auto loan can impact your finances, it requires planning and consideration.

Here are some other factors that help determine the right time to refinance:

1. Does Your Car Have Negative Equity?

Negative equity is when the outstanding loan amount on your vehicle is greater than its value. A common phrase you may hear is that someone is “upside down” on their loan, meaning they have negative equity. For example, if you purchased a car for $23,000 and you’ve paid $5,000 towards your auto loan, you have a loan balance of $18,000. Should the vehicle be worth $15,000 in the market, then you have $3,000 of negative equity in that car. 

Some borrowers may have a harder time being approved for new loans or getting loans with favorable terms, since lenders want their loan security (the collateral) to be valued higher than the amount they lend. In the example provided above, you may be asked to cover the $3,000 difference before entering into a new loan.

2. How is Your Credit Score?

Has your credit score improved since you took out the auto loan? A higher credit score can help you qualify for a lower interest rate, especially if market rates haven’t changed. It’s a good habit to check your credit reports on a regular basis (at least annually) to ensure you are on the right track and that there are no errors that can impact your score. Federal law allows you to get a free report from the three nationwide credit bureaus (Equifax®, Experian® and TransUnion®).  Visit AnnualCreditReport.com for more information.

3. How Old Is Your Car?

Overall, a vehicle's age and mileage play a significant role in the refinancing process. Before refinancing, it's essential to carefully consider these factors and their potential impact on loan terms and affordability. Researching multiple lenders and comparing offers can help you find the best refinancing option for your vehicle and financial situation.

Note that some lenders may limit refinance options for cars with higher mileage or older model years. Newer vehicles with recent loans can also be limiting. This is because the vehicle’s value could be lower than the current loan amount (taking us back to negative equity position).

As a car ages and accumulates more mileage, its value typically decreases. Lenders consider the vehicle's value when determining loan terms, including interest rates and loan-to-value ratios. If your car has high mileage or is older, it may be valued lower by the lender, which could affect your ability to refinance. Lenders often hesitate to offer favorable terms for vehicles with lower values, potentially resulting in higher interest rates or stricter loan requirements.

Your vehicle's age and mileage can also affect refinancing loan terms, potentially resulting in shorter repayment periods or higher monthly payments. Lenders may have restrictions on the maximum mileage or age of vehicles they are willing to refinance and may impose stricter requirements, such as higher credit scores or larger down payments, for refinancing older or higher mileage vehicles.

Researching and comparing lenders is essential to find one that offers favorable terms for your vehicle's age and mileage.

When refinancing, it's crucial to consider the overall cost of owning the vehicle, including potential maintenance expenses. If the car requires significant repairs or maintenance soon after refinancing, it could strain your finances and make it challenging to keep up with loan payments.

4. Will You Have to Pay a Prepayment Penalty?

Depending on the terms of the first loan, you may also be subject to penalties if you refinance your vehicle and pay off the loan before the repayment period elapses.

5. Possible Additional Fees

You may have to pay fees to reregister and transfer your vehicle’s title after refinancing. Since these fees typically vary on a state-by-state basis, you should look at the auto refinancing fees charged in your state before you pull the plug on your current loan.

6. How Long Should You Wait to Refinance a Car?

Did you know that you could refinance your vehicle as soon as you purchase it? When attempting to refinance a car loan, consider the logistics. 

Waiting a few months post-purchase is often a wise choice. This not only allows paperwork to settle but also provides a clearer financial picture, potentially boosting your refinancing options. Ensure the title has successfully transferred to your name before diving into refinancing. 

Take stock of your current loan terms, credit score, and market rates. Have they shifted since you bought your car? A lower credit score or unfavorable market rates might mean waiting could yield better refinancing terms down the road.

Additionally, evaluate any potential penalties for early loan payoff. Some lenders impose fees for closing out loans prematurely, which could negate the benefits of refinancing too soon.

While it may be beneficial right away due to rate changes or sudden changes to your personal situation, it may make more sense to wait. 

7. Will Refinancing Affect Your Credit Score?

Refinancing a car can potentially affect your credit score in both positive and negative ways. Initially, when you apply for refinancing, the lender will conduct a hard inquiry on your credit report to assess your creditworthiness. This hard inquiry can lower your credit score by a few points. However, if you shop around for refinancing offers within a short period, typically around 14 to 45 days, depending on the credit scoring model, these inquiries may be treated as a single inquiry, minimizing the impact on your score.

The overall impact of refinancing on your credit score will depend on various factors, including how you manage the new loan and your overall credit profile. Making timely payments and avoiding new negative entries on your credit report is essential for minimizing potential negative effects and maintaining or improving your credit score over time.

How To Refinance a Car

If you have reviewed and considered all the factors surrounding refinancing – including your credit score, market interest rates, and your vehicle’s age – you can jump into the actual process of refinancing your car.

1. Collect Necessary Documents

You will need the following documents before you can start the auto refinancing process:

2. Weigh Auto Loan Options and Prequalify, if Available

A prequalification is a soft inquiry that may or may not impact your credit score – ask the lender to confirm. While prequalification isn’t available with all lenders, it allows them to look at your information and inform you of any offers for which you may be eligible. However, note that even if you prequalify for a loan, you must still submit a full application.

Either way, prequalification is a great way to shop for offers without committing. Once you have looked at different lenders and seen what they have to offer, you can go to the next step.

3. Apply for a Car Refinance Loan

Once you have collected all the necessary documents and shopped around for the best terms, it’s time to apply for the auto refinancing loan. This typically involves submitting a loan application and supplying information from the personal documents you have gathered.

If approved, the lender will provide you with a document outlining the terms of the new loan. Review any document you receive thoroughly to ensure there aren’t any additional fees or clauses that require explanation. Once you sign the loan document, make sure you store a hard copy of all paperwork for reference.

4. Clear Your Original Auto Loan and Start Paying the New One

Although your new lender typically handles the loan payoff, you should contact your previous lender to make sure your original auto loan has been cleared and that the lien has been transferred. Now, you can start making payments on the new auto loan while continuing to enjoy your existing vehicle.

Refinancing Next Steps

Considering the various factors and benefits associated with refinancing your car loan, it's clear that this financial decision can significantly impact your overall financial well-being. Whether you're looking to lower your monthly payments, get a lower interest rate, or change your loan terms to fit your current situation, refinancing can offer numerous advantages.

However, it's crucial to approach the refinancing process with careful consideration and thorough research. Understanding your loan terms, evaluating your financial situation, and assessing the potential impact on your credit score are essential to determining whether refinancing is the right choice.

Contact us today to learn how refinancing may benefit you and discuss personalized solutions

Are you looking to refinance your auto loan? Consider PNC Bank. We provide a wide variety of finance options for new or used vehicles, including refinancing. Visit our website to learn more about how to refinance your car with us.