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What Does Refinance Your Auto Mean?

Refinancing your car loan means replacing your existing loan with a new one with different terms and interest rates.

If interest rates are low or your financial situation has improved, refinancing with a financial institution in Dallas could be a beneficial option.

However, auto refinancing may not always be the right choice for everyone. If interest rates are high or you’re close to fully paying off your vehicle loan, staying with your current auto loan might be wiser. Here are some important points to consider:

Save Money: Refinancing may help you save money on interest or lower your monthly payments.
Look for Opportunities: Consider refinancing when interest rates have dropped or your credit has improved.
Be Cautious: If you owe more than the value of your vehicle ("upside down" on your loan), it might be best to avoid refinancing.
Check Requirements: Review lender requirements to see if you and your vehicle qualify for Dallas refinancing.

By considering these factors, you can make a more informed decision about whether refinancing is right for you!

Questions to Ask When Refinancing a Car

Can You Refinance a Car Loan?
Do You Qualify for Car Loan Refinancing?
Does Refinancing a Car Affect Your Credit?
Does Refinancing a Car Loan Lower Your Payment?
What Will My New Interest Rate Be?
How Long Will My New Loan Term Be?
What Costs are Associated with Refinancing?
Can I Refinance My Car with the Same Lender?

When Should You Refinance Your Car?

Refinancing offers numerous benefits and can be particularly advantageous in specific situations. If it reduces your interest costs or lowers your monthly payments, it may be wise to refinance your car loan.

When Interest Rates Have Dropped Since Your Last Auto Loan - Refinancing can be beneficial when average interest rates are low. Throughout 2023 and into 2024, they have been steadily rising. Auto loan rates saw a slight decline in mid-2024. While we may not expect significant rate drops soon, you could still reduce your payments if the current rates are better than your original loan's.
When Your Credit Score and Debt-to-Income (DTI) Ratio Have Improved - Even if market rates have not changed significantly, an improved credit score may help you qualify for a lower interest rate. A lower debt-to-income (DTI) ratio can also lead to better rates and loan terms, which may decrease your monthly payments and overall costs.
When You Obtained Your Initial Loan from the Dealership - Dallas car dealerships often charge higher financing rates to increase profits. If you obtained your auto loan through a car dealer, refinancing with a different lender could lead to a lower rate.
When You're Struggling to Keep Up with Payments - Refinancing can make your car payments more manageable, even if you don't secure a lower interest rate. If you're facing a tight budget, consider extending the loan’s repayment term. However, be cautious: this could result in paying more interest over time. While it can provide a short-term solution, aim to contribute extra money toward your monthly payment to reduce overall costs.
When You Have Positive Equity in Your Car - Lenders consider positive equity—when the value of your car exceeds the amount you owe on it—a significant advantage when refinancing. This scenario decreases the lender's risk, which makes them more inclined to offer you a lower interest rate. You can use websites like Edmunds or Kelley Blue Book to estimate your car's value. After obtaining an estimate, divide your outstanding loan balance by your car's value to determine if you have positive equity. For example, if your car is valued at $20,000 and your remaining loan balance is $15,000, your loan-to-value ratio is 75%. This means you have 25% equity in your car.
When You Have Issues with Your Current Lender - Not all lenders will help you during financial difficulties or other challenges. Even minor issues can escalate into significant problems. Refinancing with a lender known for excellent customer service can help reduce your stress and potentially lower interest costs. However, be cautious: if your current loan has a prepayment penalty, refinancing might cost you more than the savings you would gain.

Evaluating these factors will help you decide if refinancing your car loan is the right choice.

When Not to Refinance Your Car.

Refinancing a car loan isn’t always the best option, especially if you won’t save any money, don’t meet refinancing requirements, or end up with worse terms. In such cases, refinancing and paying off your car loan early may not be advisable.

Most lenders have a minimum loan term of 24 to 36 months. If you have fewer months remaining on your car loan, you may have to extend your term when you refinance. Be cautious: while a longer loan term will result in lower monthly payments, you will pay more in interest over time.

Your remaining loan balance is also important. Lenders typically set a minimum balance for refinancing, usually between $3,000 and $7,500. You're unlikely to qualify if you owe less than the lender’s minimum balance. Although cash-out refinancing is an option, finding a lender that offers it can be challenging.

When you owe more than the car is worth - As you progress in your car loan, you may find that you owe more on the vehicle than it is currently worth. This situation is known as being "underwater" or "upside down." When you are underwater, refinancing your loan can be difficult. Lenders recognize that if you default on the loan in this situation, they might not be able to recover the full amount owed because the car secures the loan. This is the opposite of having positive equity, where your car's value exceeds your loan balance. While refinancing might still be an option, it is important to assess whether it will save you money. If refinancing doesn’t offer any savings or results in just breaking even, it may not be the best choice for you.
When interest rates are high - You may end up paying more if you refinance in the current market. The Federal Reserve is working to control inflation by maintaining a high federal funds rate, which leads to increased interest rates on various loans, including credit cards and car loans. According to Experian, the average annual percentage rate (APR) for used vehicles was 12.01% as of the second quarter of 2024. This is significantly higher than the average APR of 9.34% at the end of 2022.
When your car doesn’t meet lender requirements - Lenders have different criteria for determining eligibility. Before refinancing, it’s important to check the specific requirements for you, your vehicle, and your current loan. Most lenders will ask for the following:
- A regular source of income, a low debt-to-income ratio, and good credit.
- Proof of residence includes a lease agreement, mortgage statement, or utility bill.
- To assess your car's value, you need information about its make, model, year, vehicle identification number (VIN), and mileage.
- Details about your current loan, including the balance, monthly payment, and payoff amount, to ensure you meet the lender’s minimum requirements.
When fees outweigh your savings - Before refinancing your auto loan, it's important to consider how fees may affect your overall savings. If your current loan includes a prepayment penalty, paying it off early could be costly. You'll need to compare the interest savings from refinancing against the prepayment penalty cost to see if it benefits you financially. Both your old lender and the new one may charge transaction fees, which cover the administrative costs of closing the old loan and initiating the new loan agreement. It’s worth trying to negotiate these fees if possible. Additionally, some states require registration and title transfer fees when re-registering your car after refinancing.

Alternatives to Auto Refinance

If refinancing your car loan is too costly, there are still options available to you. One possibility is to request a loan modification from your lender, especially if your car payments are putting too much strain on your budget or you are facing financial difficulties.

Another option is to consider switching to a less expensive vehicle. You can either trade in your car for a more affordable model or sell your car privately and purchase a cheaper one.

Leasing a vehicle could also help reduce your monthly payments, though it might be more expensive in the long run. Leasing typically requires a down payment, along with interest and fees. Additionally, you won't own the vehicle at the end of the lease period. While you do have the option to buy it, that will incur further costs.

Understanding How Refinancing Affects Your Credit

When you apply for refinancing, your lender will conduct a hard credit inquiry on your credit report. This type of inquiry can cause your credit score to drop by up to five points and will remain on your credit report for two years. If you already have a strong credit score, this minor decrease is unlikely to affect you significantly. However, a hard credit inquiry could have a more noticeable impact if you have negative factors on your credit report, such as a history of missed payments.

The Bottom Line

The primary reason to consider refinancing is to obtain a lower interest rate, which can reduce your monthly payments or save you money overall. Before considering refinancing, make sure they are for the right reasons and make sense to your goals and budget.

America’s Credit Union Can Help

At America’s Credit Union, our experienced and knowledgeable lending team helps members determine whether a car or a truck refinance is right for them.

With our personalized car refinance approach, we offer flexible loan terms, great low rates, an easy and secure application process, and more. We are the place to start if you're considering refinancing from another lender.

Suppose you are interested in refinancing your car or truck. In that case, we encourage you to talk to one of our experienced lenders to learn what is needed for a car or truck refinance and learn more about applying today.

Banking with America’s CU in Dallas, Texas, opens opportunities to improve your financial journey today and in the future. We help our members find the right financial product to build a bright financial future.

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