Auto Loan Refinancing – What You Should Know
Are you thinking about refinancing your auto loan? If so, you’ve come to the right place. Below, we will address four refinance-related topics:
- Does refinancing my car loan make sense?
- Six things to consider before applying for auto loan refinancing.
- An overview of the refinance application process.
- Will refinancing hurt my credit?
Topic 1: Does refinancing my car loan make sense?
This is the most important question to ask, and the short answer is simple: Yes, refinancing your auto loan makes sense if it saves you money. The long answer is a bit more complicated, depending on:
- How much money you’ll save (If you only save a little, it might not be worth the time and effort.)
- Your credit history
- Your budget, and more
Use Bankrate’s auto refinance calculator to figure out how much you might save by refinancing. If it looks like you might save a good amount of money, move on to topic 2.
Topic 2: Six Things to Consider Before Applying for Auto Loan Refinancing
Before you apply for refinancing, consider these six factors.
1. Refinancing requirements
Some lenders have specific refinancing requirements relating to loan balance, remaining length of loan, vehicle age and milage, and many other factors. Be sure to understand these requirements for each lender.
2. Prepayment penalties
Check to see if your current loan is subject to a prepayment penalty for paying it off early. If it is, make sure the amount you’ll save by refinancing is enough to justify the prepayment penalty and any other associated fees.
3. Annual percentage rate (APR)
If the refinance APR is lower than your current loan rate, it may be a good time to refinance. If not, refinancing might not be worth it.
4. Your credit score
If your credit score has improved since you applied for your current car loan, you may qualify for a lower APR, and therefore, a potentially lower payment.
5. Your income
If your income has dropped since you financed your current loan, refinancing to get a lower monthly payment can make sense. Just try to avoid exchanging short term-gain (lower monthly payment) for long-term pain (higher overall cost due to a longer loan term.)
6. Time remaining on your loan
To see the best results from a refinance, you should have at least two years left on your auto loan. This is because most interest is paid in the earlier part of a loan term, so there's less potential for savings if you refinance with less than two years remaining.
Topic 3: Overview of the Refinance Application Process
Here are five steps to follow when refinancing a car loan.
- Check your credit score. The refinance loan rate will depend on your credit score. In general, a score over 700 will give you access to the best interest rates.
- Compare rates and prequalify with several lenders to save your credit from taking multiple hits.
- Review the terms of the refinance application and get clarification on anything you are unsure of before you move forward.
- Submit your application online, by phone or in person.
- If approved, continue making payments on your current loan until you verify that it has been paid off.
Affinity offers auto loan refinancing with no application fees or prepayment penalties, and we'll even give you a 0.25% APR rate discount1 for setting up automatic monthly payments. Save money and pay your loan off faster with an auto refinance loan starting at 7.27% APR 1. Learn more.
Topic 4: Will refinancing hurt my credit?
Getting a refinance preapproval requires a hard credit inquiry, which may lower your credit score slightly. If your refinance application is approved and you accept the loan, that will lower the average age of your accounts, which may also lower your credit score.
However, when it comes to calculating your credit score, both factors are far less important than your payment history. Plus, making timely payments on your refinance loan will increase your score over time. As a result, unless you applied for other credit recently or don’t have a long credit history, refinancing may not hurt your credit in the long term. Learn more about how refinancing a car loan affects your credit.
1APR = Annual Percentage Rate. Rate is effective as of 06/12/23. Advertised rate includes 0.25% reduction off the standard interest rate for setting up automatic payments from your Affinity account. The rate without automatic payments will be higher. Other rates and terms available.