When you refinance, you get rid of a bad loan and sign up for a better one. Ideally, you should look for a loan with a better loan term and lower APRs. But does refinancing start your auto loan over? Read to know more.
Does refinancing start your auto loan over?
If you consider refinancing your loan as a financial option, the new loan will help reduce your monthly auto loan payments. But you should be clear about the new loan’s conditions, so you won’t feel you are starting over even if you make timely payments.
For loan term length, select a period that is the same or shorter than the remaining term on your existing loan. For example, if your current loan has 36 months left for payments, you should opt for a loan with a term of 36 months or less. With a reduced interest rate, your payments will also get more manageable.
But, if you have less than 24 months left on your auto loan, refinancing may not be helpful. Often, you’ll have to pay the highest interest for the initial years, reducing the potential cost savings you’d earn if you refinance near the conclusion of the repayment period.
Does refinancing have an impact on your loan term?
When you refinance your loan, you will be offered a loan term that varies from 24 to 84 months. The longer the duration, the lower the monthly payment. But it’s not the same in terms of interest. You’ll have to pay more interest if it’s a longer term.
Although you can adjust your interest rate, the term change will impact resetting your loan. The term length can be shortened or extended, and the best option depends on your budget. To figure it out, you could use a car loan refinance calculator.
Can you refinance without restarting your loan term?
When you refinance, you are getting a new loan with different terms. This is like starting over from the beginning. But you don’t have to choose a term based on how long your original loan was or how long you still have to repay it.
Let’s say you are refinancing your loan; you may find that different refinance lenders offer different payment terms. It might be anything around 10, 15, or 30 years. You can possibly start over the new loan with the same term you had before, but you don’t have to. You can choose a shorter or longer term depending on the interest rate and monthly payment.
Also read: Can You Refinance a Car Loan With the Same Lender?
When is it ideal to refinance your car loan?
Refinancing your car loan is a good option if you have any of the following financial situations:
You can’t keep up with your timely monthly payments
Refinancing and rewriting the conditions of your current loan can provide you with extra time to pay off your vehicle or a reduced interest rate. You may, however, be able to request a loan modification from your present lender rather than refinancing.
You see a considerable improvement in your credit score
Better credit will help you get better loan terms. This is more relevant if you financed your purchase from a car dealership.
You financed your purchase via the dealership
You might be able to get better loan terms from an outside lender if you used dealer financing. Try to get more info on current auto loan rates to determine how much you might save by refinancing.
If you opt to refinance, double-check the purchase agreement. Contact your current lender to be sure there are no prepayment penalties if you pay off the loan early. If you miss out on anything, you may be charged a hefty price that negates the benefits of refinancing.
Also read: When should I refinance my car?
How to refinance your car loan
Before signing up for refinancing, understand the process and steps involved.
Evaluate your existing loan
Note down information on your existing loans, such as the interest rate, payoff amount, months remaining, and any fees or penalties.
Know your credit score
Your credit score should be excellent to get a reasonable interest rate. Go through your credit report and check if there are no mistakes.
Wanna improve your credit score and get out of a bad loan? Try refinancing. With Way.com, you get the best refinance options available to you. Use our refinance loan calculator, compare the loan rates, prequalify, and save up to $1850 a year on your refinanced auto loan.
Compare loan providers
Don’t go ahead with the first lender whom you find reasonable. Compare their qualifying conditions, penalties, and what rates and terms you qualify for. In the end, go for a lender who is in maximum alignment with your preferences.
Apply for refinancing
Apply online or in person once you’ve decided on a lender. The lender will then tell you if you qualify and how the rest of the procedure will operate.
Also read: Can You Refinance Your Car Loan Into Someone Else’s Name?
Refinancing and credit score
Refinancing does affect the credit score. The impact can be minor, but over a period of time, it gets reasonably evident in your credit report.
Opening new accounts
Adding a new account to your credit report will decrease the average age of existing accounts, which can have a negative impact on your credit score. But new payments paid on time can improve your credit score.
Closing accounts
Accounts that are paid off are often closed, which can occasionally have a negative impact on credit ratings. Yet, closed accounts may remain on your credit report for up to ten years.
Hard inquiries
While applying for a new loan, the creditor will verify your credit, prompting a hard inquiry to show on your credit report. They may have a minimal and transitory impact on your credit scores.
One exception is when credit card debt is refinanced or consolidated with an installment loan, such as a personal loan. As long as you don’t run up balances on the cards you’ve just paid off, transferring revolving debt to an installment loan can significantly improve your credit scores by reducing your credit utilization ratio.
Also read: How Many Times Can You Refinance a Car?
Bottom line
When you refinance your auto loan, you will receive a brand-new loan with the possibility of a cheaper monthly payment or interest rate. But before you apply, you should evaluate the pros and cons of refinancing. If refinancing isn’t the ideal approach to saving money, given your current financial condition, you should consider other methods.
FAQ
Does refinancing mean starting over?
Not exactly. Refinancing means you are starting a new loan with different terms and starting from scratch. The new loan might not be the exact replica of the loan you want to get rid of, but it will come with a set of conditions.
What happens to your old loan when you refinance?
When refinancing a loan, a private lender pays off the initial loan. You must then repay the private loan. This smart approach reduces your loan’s interest rate and makes it more bearable.
Also read: How To Refinance a Car loan with Bad Credit
Why do I owe more after refinancing my car?
If you refinance to a new loan with a longer-term length with the intention of lowering your monthly payment, you may end up paying more altogether due to the additional months of interest. Even a reduced rate may not be sufficient to offset the expense of paying interest for an additional year or two.
How does refinancing work for auto loans?
Often, refinancing involves applying for a new loan from a new lender. If you choose to remain with your current lender, you will need to obtain a top-up loan or pre-pay your current loan and apply for a new loan from the same bank.
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