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What questions should you ask when refinancing a car loan?

Mediafeed logo Mediafeed 10/21/2021 Sheryl Nance-Nash
car loan © Burhanuddin Helmi/istock car loan

Refinancing your car is a big decision. You stand to gain significant advantages if you can refinance to a better loan that lowers your interest rate and/or monthly payments. But it’s important to figure out what options make the most sense for you so that you do benefit. For example, in a refinance, you’ll have the opportunity to change your loan term. Ideally, you would go for the shortest period of time so that you can pay off your debt sooner. But it could be that a longer-term loan that has lower payments might help you stay on top of your monthly bills. In that case, even if you pay more in the long run, it could be worth it to lengthen the term if it gives you more financial stability. And that’s just one example. 

Refinancing your car loan definitely gives you a lot to think about. That’s why you should take some time to ask lots of questions and get the facts, both about refinancing generally and about specific loans that you might be looking at. Here are a few questions to help get you going.

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Will refinancing impact my credit score?

As you’re thinking about the pros and cons of refinancing a car loan, this question is likely to loom large. Any new commitment changes your financial picture and can be reflected in your credit score. And yes, that includes refinancing. For one thing, refinancing can hurt your credit score because it requires a hard credit inquiry. This means that when you apply for a refinancing loan, your credit score may for a time drop by as much as five points. 

And while you’ll likely want to shop around for the best loan terms, submitting multiple applications over several months can ding your credit score. However, timing is everything. If you submit all your applications within a short window (typically 14 days or 45 days), the impact on your credit score should be the same as if you’d only submitted one application. 

Keep in mind, too, that age of debt is a factor in your credit score. Taking on the refinancing debt increases your amount of newer debt, which may also temporarily ding your credit score. In the aftermath of acquiring your loan, much of what happens to your credit score depends on you. For example, if you use the savings from your lower monthly payments to pay off higher interest debt, reduce your credit utilization ratio on your credit cards, and/or pay off old collections accounts that drag down your score, these actions may help rebuild your credit record. And, of course, if you pay your loan back in a timely fashion, that can work toward building a positive credit history, too. 

What will my new payment be?

That’s the $64 million question. You need to know the answer to determine whether a refi is a smart move or not. After all, when you refinance, one of the main goals is usually to walk away with a lower monthly payment. There are several factors that will determine what your new monthly payment will be. These include your interest rate, the length of the loan term and the total loan amount. But each potential refi lender should let you know exactly what the payment would be so that you can compare it to what you’re presently paying and to other offers. 

What will my new interest rate be?

Ideally, your new interest rate will be lower than the one you’re paying now. If you can’t get a lower interest rate, refinancing will likely lose much of its appeal.  The odds are in your favor if your credit score has improved since you got your first loan. If interest rates generally have dropped, too, you may also qualify for a better deal. On the flip side, if your credit score has dropped, you’re likely to face the consequences, meaning you won’t necessarily qualify for the best interest rates or even the same one you got before. Also, if the value of your car has declined significantly, you’re likely to receive a higher interest rate.

How long will my new loan term be?

When it comes to loan terms on a refi, typically less is more. Go for the shortest term that you can afford (remembering that the shorter the term is, the higher the monthly payments are likely to be). This could save you money over the life of the loan. Why? The difference between a loan that you pay off in three instead of five years could be huge in terms of the interest you pay. On top of that, the peace of mind from being done with the loan sooner rather than later can be priceless. 

Understand, too, that extending the life of your loan can lead to your loan being upside-down. That means that you might owe more on your car than it’s worth, which is not an ideal situation. However, if you’re unable to afford your monthly payments, extending your loan term may help you bring them down to a manageable level. In that case, extending your term may make sense.

How soon can I refinance a car loan?

There are no time constraints on how long you have to wait after taking out a car loan to refinance it. You can apply for refinancing any time after you buy your car. Just bear in mind that realistically, it will probably take up to a month for the DMV to process your paperwork. That said, there are certain particular times when you might consider refinancing. These may include when interest rates are significantly lower than what you’re currently paying and/or when your credit score is now higher than when you got your current loan (since you will likely be offered a more favorable interest rate this time).

What fees are associated with auto refinancing?

There are usually some fees involved in refinancing. What they are exactly may vary by lender, your state of residence, or the state your refinancing lender is based in. Some fees are relatively standardized. Expect the standard transfer of lienholder fees and state re-registration fees (which can vary from $10 to around $180).  However, other fees may depend on your old and new lenders. They can include the following:

  • Prepayment Penalties: Your existing lender might have prepayment fees. This is a penalty for paying off your loan early. Many lenders don’t charge these, but if yours does, calculate whether those fees will cost you more than you’d save with a new loan.
  • Application Fees: Your new lender might charge you an application fee for filing the papers. Don’t be shy about asking the lender to waive the application fee. After all, it’s the honeymoon stage, so they may be generous.
  • Transaction Fees: There could also be a “transaction” fee, an administrative or processing fee charged when you terminate your loan.

What should I be aware of in the fine print?

You have to be a bit of a sleuth when you’re thinking about signing any sort of contract. You want to be on the lookout for disclosures and details about any and all fees to ascertain whether there are prepayment penalties for early payoff of the loan, for example. And be aware that your loan could include stuff you might have no interest in, like GAP or collateral protection insurance, which could add more costs to your refinance. Take your time and go through the tiny type. It could save you money and costly misunderstandings.  

The takeaway

Refinancing your car loan can mean a positive difference to your finances if you get a lower interest rate and lower monthly payments. Asking questions can help you be sure you’re making your decision based on good information. If you’re considering refinancing, having a range of loans to compare can let you understand your options.

 Learn more:

This article originally appeared on lanterncredit.com and was syndicated by MediaFeed.org.

Lantern by SoFi:

This Lantern website is owned by SoFi Lending Corp., a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license number 6054612; NMLS number 1121636. (www.nmlsconsumeraccess.org)

All rates, fees, and terms are presented without guarantee and are subject to change pursuant to each provider's discretion. There is no guarantee you will be approved or qualify for the advertised rates, fees, or terms presented. The actual terms you may receive depends on the things like benefits requested, your credit score, usage, history and other factors.

*Check your rate: To check the rates and terms you qualify for, Lantern conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender(s) you choose will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

All loan terms, including interest rate, and Annual Percentage Rate (APR), and monthly payments shown on this website are from lenders and are estimates based upon the limited information you provided and are for information purposes only. Estimated APR includes all applicable fees as required under the Truth in Lending Act. The actual loan terms you receive, including APR, will depend on the lender you select, their underwriting criteria, and your personal financial factors. The loan terms and rates presented are provided by the lenders and not by SoFi Lending Corp. or Lantern. Please review each lender's Terms and Conditions for additional details.

Personal Loan:

SoFi Lending Corp. ("SoFi") operates this Personal Loan product in cooperation with Even Financial Corp. ("Even"). If you submit a loan inquiry, SoFi will deliver your information to Even, and Even will deliver to its network of lenders/partners to review to determine if you are eligible for pre-qualified or pre-approved offers. The lenders/partners receiving your information will also obtain your credit information from a credit reporting agency. If you meet one or more lender's and/or partner's conditions for eligibility, pre-qualified and pre-approved offers from one or more lenders/partners will be presented to you here on the Lantern website. More information about Even, the process, and its lenders/partners is described on the loan inquiry form you will reach by visiting our Personal Loans page as well as our Student Loan Refinance page. 

Student Loan Refinance:

SoFi Lending Corp. ("SoFi") operates this Student Loan Refinance product in cooperation with Even Financial Corp. ("Even"). If you submit a loan inquiry, SoFi will deliver your information to Even, and Even will deliver to its network of lenders/partners to review to determine if you are eligible for pre-qualified or pre-approved offers. The lender's receiving your information will also obtain your credit information from a credit reporting agency. If you meet one or more lender's and/or partner's conditions for eligibility, pre-qualified and pre-approved offers from one or more lenders/partners will be presented to you here on the Lantern website. More information about Even, the process, and its lenders/partners is described on the loan inquiry form you will reach by visiting our Personal Loans page as well as our Student Loan Refinance page. Click to learn more about Even's Licenses and DisclosuresTerms of Service, and Privacy Policy.

Student loan refinance loans offered through Lantern are private loans and do not have the debt forgiveness or repayment options that the federal loan program offers, or that may become available, including Income Based Repayment or Income Contingent Repayment or Pay as you Earn (PAYE).

Notice: Recent legislative changes have suspended all federal student loan payments and waived interest charges on federally held loans until 01/31/22. Please carefully consider these changes before refinancing federally held loans, as in doing so you will no longer qualify for these changes or other future benefits applicable to federally held loans.

Auto Loan Refinance:

Automobile refinancing loan information presented on this Lantern website is from MotoRefi. Auto loan refinance information presented on this Lantern site is indicative and subject to you fulfilling the lender’s requirements, including: you must meet the lender’s credit standards, the loan amount must be at least $10,000, and the vehicle is no more than 10 years old with odometer reading of no more than 125,000 miles. Loan rates and terms as presented on this Lantern site are subject to change when you reach the lender and may depend on your creditworthiness. Additional terms and conditions may apply and all terms may vary by your state of residence.

Secured Lending Disclosure:

Terms, conditions, state restrictions, and minimum loan amounts apply. Before you apply for a secured loan, we encourage you to carefully consider whether this loan type is the right choice for you. If you can’t make your payments on a secured personal loan, you could end up losing the assets you provided for collateral. Not all applicants will qualify for larger loan amounts or most favorable loan terms. Loan approval and actual loan terms depend on the ability to meet underwriting requirements (including, but not limited to, a responsible credit history, sufficient income after monthly expenses, and availability of collateral) that will vary by lender.

Life Insurance:

Information about insurance is provided on Lantern by SoFi Life Insurance Agency, LLC. 

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