Buying a new car is a big expense, so most people get financing to help them pay for the purchase over time. A loan is a useful tool to help you make a large purchase you can’t afford otherwise. Sometimes, your auto loan terms are ideal and fit your budget perfectly. Other times, you may not get the best deal at first because you have to build your credit and prove you can make your payments consistently and on time.
If you don’t have the perfect terms for your car loan, you may be considering refinancing. But does it cost anything to refinance a car loan? Knowing the answer to this question can help you understand the true cost of switching your car loan to another lender to get better terms and a lower interest rate. When you understand the fees associated with refinancing, you can calculate whether it’s the right choice for you and your budget.
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What Is Refinancing?
Refinancing a loan means switching one loan for another in hopes of getting a better interest rate, terms, or both. People often refinance loans to get lower monthly payments on the money they borrowed. It can benefit those who have improved their credit scores since they borrowed the money, as it proves their ability to make payments.
It may be easier to refinance through certain lenders, but most banks and lending institutions will provide refinancing if the customer meets the requirements. Loan providers consider a range of factors when determining whether to refinance your loan, including the following:
- Your credit score.
- The type of loan you want.
- Your payment history.
- The collateral for the loan.
- Your debt-to-income ratio.
With all your information, a lender can decide how risky loaning you money is and how likely you are to repay what you owe.
Can You Refinance a Car Loan?
Refinancing a car loan is just as possible as refinancing any other type of loan, but it will depend on how much you want to borrow and the vehicle you’re buying. Because the loan is backed by the lien on your car, the risk for the lender is low.
If you default on your payments, they can take the car and sell it for the amount left on the loan. Lenders may be hesitant to refinance a loan on a car that’s worth less than you owe on it, which is also called being upside down in your loan.
In some cases, lenders may be willing to take on the debt of an upside-down loan if you pay the difference between what you owe and the car’s current market value. This means they’re only loaning you the car’s value, which is less risky because they can sell the car for its market value later if necessary.
It can be beneficial to refinance a car loan if you have high monthly payments you can’t afford. Even if you can afford to make your payments, refinancing your car loan could help you save money every month. And who doesn’t want to save money? Nevertheless, it’s important to understand the fees associated with refinancing a car loan to ensure it’s the best financial choice.
Does It Cost Anything to Refinance a Car Loan?
The cost of refinancing a car loan will depend on the lender you choose. Some lenders may be willing to provide you with a new loan for very little, while others charge fees that could increase the cost of your loan, making it more expensive. You may have to pay the following fees if you decide to refinance your car loan:
- Termination fees: Your current lender may charge you a termination fee for paying off your loan early. Read your loan agreement carefully to check whether there’s a termination fee for refinancing your loan.
- Application fees: The new loan provider may charge an application fee when you apply for the new loan. You can get a quote for free, but you may have to pay to process your application to switch to a new loan provider.
- Registration fees: In some states, you must reregister your vehicle if you switch lenders when refinancing your loan. Check with your state’s Department of Motor Vehicles to find out whether this is a requirement where you live.
- Title transfer fees: Some states require you to pay a title transfer fee when refinancing a car loan. This is because the old lender has to transfer your car’s title to the new lender.
Although these fees can be low, they can quickly add up if you have to pay multiple additional fees. Before you decide to refinance, make sure you know all the fees that go along with it so you have an accurate idea of what your new loan will cost.
How Do You Refinance a Car Loan?
Refinancing a car loan is similar to shopping for your original loan. The first step is to get quotes from lenders that are willing to refinance car loans. You’ll need to provide the lender with basic information about your credit score, vehicle, and payment history. Once you choose a loan provider, you may have to give them more personal information about yourself and your current loan. Next, you’ll need to complete the paperwork to transfer the loan from the old lender to the new one.
Some lenders may incorporate the fees associated with refinancing into your new loan, while others want you to pay the costs out of pocket. After you refinance the loan, you may have to go to the Department of Motor Vehicles to reregister your car or handle the title transfer. The loan company might take care of the title transfer for you, but make sure you check this with them.
Should You Refinance Your Car Loan?
Refinancing a car loan is a big decision, so you need to think about it carefully and understand all the costs that go into the process. Refinancing your car loan can be a good idea if:
- You can get a lower interest rate than what you currently pay.
- You have a better credit score than when you took out your loan.
- You’re having trouble making your car payment each month.
- You want a new lender that provides better customer service.
- You want to shorten or lengthen your payment terms.
Sometimes, you might not want to refinance because:
- You owe more on your car than it’s worth and can’t afford to pay the difference out of pocket.
- Your car is older and has a lot of miles or wear and tear.
- You want to get a newer model or a different brand soon.
- You can’t get better terms than what you have on your current loan.
The best way to decide whether refinancing your car loan is right for you is to look closely at the numbers and costs. Refinancing might be the right move if you can get a better interest rate that translates to a lower monthly payment.
However, if you’re extending your loan term or the fees associated with refinancing will increase the interest you pay on the money you borrow, you may want to reconsider getting a new auto loan.
Refinancing a Car Loan Frequently Asked Questions (FAQs)
These answers to some FAQs about refinancing a car loan can help you decide whether it’s the right move for you:
Can I Refinance a Car Loan with Bad Credit?
Bad credit can negatively impact your ability to get a loan, and refinancing is no different. If your credit score hasn’t improved since you first took out your car loan, it’s unlikely that a lender will refinance it at a better interest rate.
In contrast, if you’ve worked hard to raise your credit score and made your payments on time each month, a lender may consider refinancing your loan. Most lenders want to see a credit score in the 700 range, which is detailed on the iLending website, but you can qualify for refinancing with a lower score.
Are There Alternatives to Refinancing a Car Loan?
If you want to lower your car payment but can’t refinance for one reason or another, you have a couple of options. First, you can talk to your lender about modifying your loan.
Not all lenders are willing to work with you, but many banks want you to keep making your payments and may be willing to work with you if you’re experiencing financial hardship. Asking to adjust your loan terms or interest rate could work under the right circumstances.
You could also sell your car for one that’s less expensive. For example, you could opt for the same make and model in an older version or switch to a less expensive competitor that makes a similar car to the one you drive now.
You may get similar features and a comparable ride quality at a lower price. Your other option is to sell your car and buy a less expensive model using the money you make as the down payment. The larger your down payment on a new car, the lower your monthly payments will be.
Will Refinancing a Car Loan Affect My Credit Score?
Anytime you have a hard credit check, it affects your credit score, and applying for a loan, even a refinancing loan, counts as a hard credit check. So refinancing will affect your credit score.
However, it shouldn’t have a negative impact for long, especially if you continue to make your car payments on time. Remember that a soft credit check, such as when you get quotes from multiple lenders, isn’t the same as a hard credit check and doesn’t affect your credit score.
Knowing what it will cost to refinance a car loan can help you decide whether it’s the right move for you. While refinancing a car loan may result in lower monthly payments, this isn’t always true. Read your loan agreement carefully, and discuss your options with your new lender to ensure you’re getting a good deal that will actually save you money each month.
Finance & Insurance Editor
Elizabeth Rivelli is a freelance writer with more than three years of experience covering personal finance and insurance. She has extensive knowledge of various insurance lines, including car insurance and property insurance. Her byline has appeared in dozens of online finance publications, like The Balance, Investopedia, Reviews.com, Forbes, and Bankrate.