When financing a car, you will opt for a down payment. Some lenders even make the down payment mandatory for them to approve your loan. A down payment can help you to lower your monthly payments. And make it less likely that your car will end up with negative equity. But do you really need a down payment to refinance a car loan? Read to know more.
Do I need a down payment while refinancing a car loan?
In short, no. When you refinance your car loan, most of the time you won’t need a down payment. But there are some situations in which you may need to pay cash upfront in order to be eligible for refinancing.
When do I need to make a down payment to refinance?
When you refinance a car loan, you sign up for a new loan while paying off the old one. You will only need to make payments on the new loan going forward. The old loan is repaid in full when you refinance. But there are instances where you actually need a down payment to refinance your car loan, like:
- You don’t have equity in your car.
- Your credit history is poor.
Also read: What Is a Down Payment? How Does It Affect Your Car Loan?
Is equity a requirement for refinancing?
The term “equity” describes the discrepancy between the value of your car and the balance of your auto loan. You have equity in the car if your loan balance is lower than its value. You have negative equity if your car is worth less than the amount you still owe on the loan. Lenders require equity in the vehicle in order to refinance for the following reasons:
Your current loan is replaced by a new one when you refinance
The new lender pays off your old loan when you refinance it. They wouldn’t want to pay off a loan that is greater than the value of the car. It’s financially risky for the majority of lenders.
Your car is used as collateral for your new car loan
If you fall behind on payments, the lender will seize the car and sell it to recoup their losses. The lender won’t be able to reclaim the whole value of the loan when they sell your car. Though, if its value is less than what you still owe on the loan, it’s not very comfortable for a lender.
Simply compare the balance of your loan to the market value of your car to see whether you have equity in it. Calculate the value of your car using websites such as Edmunds or Kelley Blue Book. To get an estimate, you’ll be asked to provide the year, make, model, mileage, and condition of your car.
As long as the amount you still owe on your loan is less than this value, you have equity. Even if you don’t have equity, you might be able to refinance. Yet, the lender will probably need you to make a sufficient down payment when you refinance so that you have equity in the car.
Poor credit history and down payment
The lender will take a look at your credit history when you ask to refinance your auto loan. When you want to refinance your car loan, you definitely need a good credit score. The better your credit score, the lower your interest rate will be.
If you have bad credit, the lender may see you as a risky borrower. But you might still be able to refinance, especially if you are willing to make a down payment. With a down payment, the value of the loan goes down, which should lower the risk for the lender. This will often make it more likely that you will be able to refinance.
This doesn’t happen as often as having negative equity. Since you were given the first loan, your credit must have been good enough at the time. If you’ve been on time with your monthly payments, your credit score may have gone up since the first loan. This will help you get approved.
If you’ve been making your payments on time, your credit score must have improved. An improved credit score will make it more likely for you to get a loan.
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Requirements to refinance your auto loan
To refinance your auto loan, your car must be worth more than what you owe. And here are some requirements to refinance your auto loan:
Having a good credit score
When it comes to refinancing your auto loan, having a solid credit score is crucial. With a poor credit score, refinancing your auto loan is more difficult and may not be as beneficial. Your payment history and accounts outstanding make up the majority of your credit score. Your credit history length, credit mix, and new credit all contribute to your current credit score. Good credit scores can get you low APRs.
Knowing your current loan’s terms
Your eligibility to refinance your auto loan will be influenced by a few of your current loan’s terms, such as the prepayment penalty, the remaining term, and your current payments.
Prepayment penalties
Prepayment penalties are a part of auto loan agreements. If you pay off your loan early, the lenders tack on extra fees to help make some extra money. Depending on your loan, this can change significantly. To ascertain whether the penalties will outweigh the benefits of an auto refinance, be sure to thoroughly double-check your contract.
Your current payments
Payments that are made consistently, fully, and on the schedule are crucial for your credit score. However, it is critical that lenders take this into account directly in relation to your auto loan. They want to know that you can reliably make your loan payments and manage your car payments.
Remaining term
Finding a lender to refinance your auto loan will be challenging if your current loan has less than a year left on it. Auto loans are amortized, front-loaded loans. This indicates that you pay primarily interest at the start of the loan and primarily principle toward its conclusion.
So, the interest you pay decreases as your loan nears its end. The closer you go to the end date, the less likely it is that you will find a lender who would refinance your auto loan, because lenders don’t want to refinance your loan when they won’t be making money off of you.
Also read: What does No Down Payment in car insurance mean?
Where to get the best auto loan refinancing?
If you are asking this question, it means that you are probably stuck with a bad auto loan. For starters, you should thoroughly research different lenders. Prior to applying, you won’t be able to compare actual rates and terms, but you can get a general idea from reviews online.
Apply to all of the lenders on your list. Before deciding on a lender, make sure you also consider factors like interest rates, hidden fees, payment terms, and prepayment penalties. Once you have chosen the best lender for you, you can proceed.
Also read: What Documents Do I Need to Refinance a Car Loan?
Bottom line
Down payments can certainly help you lower your monthly payment. But know that it’s not necessary all the time. When you are signing up for a refinance, make sure you communicate with your lender. This can avoid any further friction and help you pay off your loan while improving your credit score.
FAQ
What do you pay when you refinance a car?
Nothing. In the US, refinancing your car doesn’t cost anything, unless the lender you work with charges an application fee. But some parts of the process, like re-titling the car, may also cost money, depending on where you live.
What is the minimum amount to refinance a car?
It depends on the lender, but many won’t refinance a car if the loan balance is less than $5,000. Also, some lenders won’t refinance a car loan unless it still has at least 24 months left on it.
What’s needed to refinance a car?
Good credit history is an important factor. The new lender will need to know how much is still owed on the loan and what the terms and conditions are for the current loan. You will have to give information about your car, like the model number, the year it was made, the current mileage, any accidents it has been in, etc.
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