Auto loan refinance tips: Avoid wasting time and money

Key takeaways

• Refinancing is a good way to potentially secure better loan terms and lower monthly payments, but these errors could cost you money.

• Check with your current lender first, but also shop around with multiple lenders and don’t give up after your first rejection.

• Also, be wary of extending your loan terms too much or trying to refinance with negative equity, both of which could be costly.

If you are having trouble making car loan payments, car refinancing — replacing your current auto loan with a new one — can be a great way to save. But some common mistakes may lead to yet another tricky financial spot. These tips for refinancing a car may help you avoid those traps.

Top 7 auto refinancing tips

Check out these common pitfall tips for refinancing a car.

1. Check refinancing requirements

Lenders have specific refinancing requirements you must meet to be approved. Be on the lookout for criteria around the vehicle’s age, miles and even the amount you have left on the loan. For example, lenders often require a minimum of six months paid on your loan and a remaining balance between $3,000 to $7,500 to refinance.

It’s important to check lender refinancing requirements so you don’t waste time applying for loans you can’t receive. Avoiding this also avoids hits to your credit score. Loan applications often involve a hard credit check, which can lower your score slightly.

Bankrate tip

You can find specific refinancing requirements on lenders’ websites or Bankrate’s reviews.

 

2. Check with your current lender first

While your current lender might not have the most competitive rates, it is still the best place to start. Before exploring refinancing options outside your current lender, it is wise to reach out and explain your situation to see if they can help. Some lenders offer loan modification, which changes the terms, payment due date or interest rate to provide borrowers with financial relief.

Bankrate tip

Even if you still follow through with refinancing your loan, it is possible that they can offer you a better deal than a new lender could.

 

3. Don’t extend your loan term too much

Refinancing aims to save money. But if you extend your loan too much, you could spend more money over the loan’s lifetime. While a longer loan term will mean a lower monthly payment, you will also pay more interest.

Bankrate tip

Before changing your term, use an auto refinance calculator to confirm you will save money.

 

4. Consider your credit

As with most cases regarding financing, your credit score matters for approval. So, work to improve and build your credit before refinancing your loan. You’ll be more likely to receive the most favorable terms and walk away with a better loan overall. A credit score of 670 or higher typically qualifies borrowers for most loan products.

The higher your credit score, the better rates you can expect. Refinancing rates tend to mirror used car rates. According to Experian data:

• Subprime borrowers with a credit score of 501 to 600 have an average used car rate of 18.89%.

• Near-prime borrowers (601 to 660) have an average used car rate of 14.12%.

• Prime borrowers (661 to 780) have an average used car rate of 9.73%.

 

5. Shop with multiple lenders

Bankrate recommends comparing at least three different lenders. While signing off on the first loan offer may be tempting, not all options are created equal.

Ultimately, the lower your interest rate, the more you’ll save on your car payment. You want to ensure you’re getting the best offer out there.

Consider using prequalification to preview rates. Prequalifying does not hurt your credit score the way a hard credit check would.

Bankrate tip

Compare current auto loan refinance rates offered by a range of lenders. Pay close attention to the approval requirements, repayment options and how it stacks up against your current loan.

 

6. Check whether you’re upside-down first

Before refinancing, check your equity with a negative equity loan calculator. Equity is the amount by which the vehicle’s value exceeds the amount you owe on the auto loan. If you owe more than your car is worth, or hold negative equity, refinancing is likely not a good idea.

You may roll the negative equality into the refinanced loan, perpetuating the problem, especially if you have bad credit.

Try to pay down the negative equity, if you are able. However, if you qualify for lower interest rates, refinancing could help pay off the negative equity quicker.

 

7. Don’t give up after your first rejection

Auto loan refinancing requirements vary from lender to lender. So, just because you were rejected by one doesn’t mean you’ll be rejected by all. If you’re wondering, “Why can’t I refinance my car?” you can ask the lender under the Equal Credit Opportunity Act (ECOA). They must tell you why your application was denied.

Bankrate tip

Understanding why you were denied can help you increase your odds of approval in the future. For example, if your credit score is too low, you can work towards improving it before you apply again.

The bottom line

While refinancing your car loan can come with risks, it is a great way to lower your monthly cost and continue affording your vehicle. Remember these common mistakes to help you walk away with the best loan for your needs.