refinancing Archives

What Credit Score Is Needed to Refinance a Car?

Posted on October 26, 2022November 7, 2022 by Autopay

If your car payment is high or you just want to take advantage of a better interest rate, the thought of refinancing your auto loan might have crossed your mind. When your credit score is less than perfect, refinancing might seem out of reach, but this is not always the case.

Your credit score is important when refinancing your auto loan, but it’s not the only factor. Lenders look at other aspects which could improve your chances of getting approved.

How Credit Scores Affect a Car Loan

Although credit isn’t the only factor that impacts your ability to get an auto loan, it still carries a lot of weight. Lenders use your credit score to determine the likelihood that you’ll repay the loan with no issues. Your credit score is a three-digit number used to quickly communicate whether you’d be a risky borrower to lend money to.

The higher your score, this demonstrates that you’d paid off debt in the past and continue to pay your other current bills on time. Meanwhile, a lower credit score can tell just the opposite. Credit scores typically range from 300 to 850, and according to Equifax, anything above 670 is considered “good” and a 740 to 799 credit score is “excellent.”

Even if your credit score is lower than 670, you could still be approved for an auto loan. The lender might just charge you a higher interest rate since you’d be considered a more risky borrower.

Both your FICO® score and VantageScore are based on a range of factors including:

The total amount of debt you owe
Payment history
Length of credit history
New credit you apply for (hard credit inquiries)
Type of credit accounts you currently have (account mix)

All of these factors hold some weight when the credit bureaus calculate your score, which gives lenders a good idea of if and how they should offer a loan. From a borrower’s standpoint, a lower credit score means you might not be approved for the loan terms you want, or you might pay more in total loan costs.

What Is the Minimum Score Needed to Refinance a Car?

There are hundreds of lenders that offer auto loans and auto refinancing. The list ranges from banks and credit unions to online lenders, dealerships, and more. Each lender has its own guidelines including the minimum credit score they accept.

This is why there’s no universal minimum credit score requirement to refinance an auto loan. Some lenders even focus on working with subprime borrowers who have a 600 credit score or lower. Meanwhile, a local credit union might not offer an auto loan or auto refinance to someone with a score that’s less than 660.

The good news is that there will likely be a lender who will be willing to offer you a loan no matter what your credit score is. Still, this doesn’t mean you should accept the loan – especially if the terms are not good or helpful to your situation.

According to RateGenius’ 2022 State of Auto Refinance Report, the average credit score of auto refinance borrowers the previous year was 670. However, this doesn’t mean borrowers who had a credit score below 670 weren’t approved to refinance.

Although credit scores are one concern, it’s also important to make sure that refinancing your auto loan makes sense for you financially. And even with an excellent credit score, there is no guarantee you’ll be approved to refinance your auto loan since lenders look at other factors as well.

Aside From Credit, What Else Do Lenders Look At?

Lenders look at more than just your credit score to determine if you qualify for a loan or not. Here are a few other important factors to be mindful of.

Debt-to-income (DTI) ratio (DTI)

Your DTI is a simple calculation that determines how much of your income is going toward current debt payments. DTI is expressed as a percentage and the formula is your total minimum monthly debt payments divided by your gross monthly income (before taxes).

Total debt includes all minimum payments for current loans and credit accounts such as student loans, personal loans, auto loans, mortgages, credit cards and so on. So, if you add up all your minimum debt payments and they total $1,000 for the month and your income is $5,000, your DTI calculation would be:

$1,000 / $5,000 = 0.20 = 20%

The lower your debt-to-income ratio, the better because it tells lenders you can afford to pay for your auto loan along with other current debt. Most lenders prefer to see a DTI below 36% but some mortgage lenders will allow up to 43% to 45%.

Loan-to-value (LTV) ratio

Your LTV ratio is used to evaluate the value of your vehicle. This is done during the application process by comparing the amount of your existing auto loan balance to the value of the vehicle. Since cars depreciate over time, the value of your vehicle will change and likely decrease as the years go by.

Since auto loans are secured, meaning a lender can repossess the vehicle due to nonpayment, your LTV ratio lets lenders know if they can cover the loss should they have to sell your vehicle to pay back the loan.

This means, lenders prefer cars that are newer and have a higher value than the loan amount. There is no set LTV since different lenders have their own guidelines.

Income

Your income is part of your DTI, but in addition to credit, lenders will evaluate your income to make sure you can financially afford to pay back your auto loan.

When you apply to refinance your auto loan, you’ll need to provide proof of employment, including check stubs or even a tax return if you’re self-employed. You can submit proof for all forms of monthly income you receive including salary and tips, social security, or rental income.

Ideally, you’ll want a higher income with less debt to maintain a low debt-to-income ratio.

Your current vehicle’s details

When you apply for an auto loan or auto loan refinance, you’ll need to provide certain details about your vehicle including the year and model, along with the mileage and current auto loan balance.

Lenders set their own maximum age and mileage requirements for auto loans, and this information will also help determine your LTV.

If your vehicle is older or has a lot of miles, a lender could deny you an auto loan refinance. However, you might notice the recurring theme that not all lenders are the same and another one might approve you with the same vehicle age and mileage. So don’t let the fact that you don’t have a new car keep you from applying for a refinance.

As you can see, a good credit score does not guarantee approval for an auto loan just as a lower credit score doesn’t guarantee a denied application. Weaknesses in any area discussed above can impact your approval and the auto loan rates you’ll get.

How to Increase Your Chances of Getting Approved to Refinance an Auto Loan

If you’re nervous about getting approved for an auto refinance loan, don’t worry. There are plenty of things you can do to strengthen your financial profile and reduce the risk to a lender. Remember that you don’t need a perfect financial situation to get approved, but making some of these improvements can help.

Improve your credit score

A higher credit score could help you save money on your auto loan if you can lock in a lower interest rate. To increase your credit score, start by reviewing your credit report to pinpoint areas for improvement. Make sure you’re paying bills on time and limit your hard inquiries. If you have credit cards with low or no balance, keep them open to extend your credit history length.

You can also use tools like Experian Boost to increase your score since it includes reporting for your phone and utility bills. Applying with a cosigner who has good credit can also give you a boost and improve your chances of getting approved.

Lower outstanding debt

Lowering your debt before applying for an auto loan has so many benefits. It can help increase your credit score, lower your DTI, and provide more peace of mind and cash flow. Choose one debt to focus on at a time and consider starting with the one that has the highest interest rate.

Add debt payments to your budget and set up autopay. Then, put any extra money toward the account to chip away at it faster.

Make a larger down payment

Making a larger down payment will lower your loan amount and total loan costs. When applying for an auto refinance loan, you can also choose to make a down payment which can help lower your LTV ratio.

Even if you’re upside down on your car loan (meaning you owe more than the vehicle is worth), you could still get approved to refinance with a new loan. Making a down payment can only improve your chances for approval and make lenders feel that their risk is even lower.

The same goes for making extra car loan payments when possible. If you know you plan to refinance in the future, it could make sense to lower your loan amount by making extra payments.

Increase your income

Increasing your income is another way to lower your LTV ratio. See if you can pick up extra hours at work or apply for a promotion. If you have time in your schedule, apply for a part-time job or consider a temporary side hustle that can raise your income. Just remember, you’ll need to show lenders that your income is consistent and validate it with pay stubs or a bank statement.

Shop around

You probably shop around before making a purchase more than you think. Since a car is a very costly purchase, you can benefit from shopping around for a new lender to compare rates and loan offers. Use the information you find to ensure you’re getting the best loan terms for your needs.

Don’t Give Up On Auto Loan Refinancing Due to “Bad Credit”

Refinancing an auto loan with a lower credit score is possible. There are so many lenders and each one sets its own guidelines and requirements for eligibility. Ultimately, your credit score will most likely not count you out for getting a new auto loan since there are other factors lenders look at.

Can You Refinance a Car Loan With the Same Bank?

Posted on October 19, 2022November 7, 2022 by Autopay

If you’re considering refinancing your car, you’re probably asking yourself “what is the easiest and cheapest way to refinance my auto loan?” If that leads you to wonder if you should ask your current lender to refinance your loan, there are some things that you should consider first.

Can I refinance a car loan with the same bank?

Refinancing your car loan with the same bank or credit union that issued you the original loan is often a possibility since lenders don’t want to lose your business to a bank offering more competitive rates.

However, not all lenders will allow you to do so, so you may need to check your lender’s policies. It may also depend on changes to your financial profile and credit score since you were granted your original loan.

How Long Do I Have to Wait Before I Can Refinance My Auto Loan?

With auto loan refinancing, there is no official waiting period required between taking out a loan and refinancing it. You can refinance your loan as soon as you can find a lender willing to do so.

However, you might have a hard time convincing your current lender to refinance your loan if you just recently took it out. That’s unless loan rates drop quickly and they are afraid to lose your business to a different lender.

The Pros and Cons of Refinancing With the Same Bank

When done responsibly, refinancing your car loan could come with many pros, like lower monthly payments, and very few cons. You most likely won’t even lose your car’s warranty should you decide to move forward with refinancing, but make sure to confirm with your provider beforehand.

However, refinancing your auto loan with the same lender offers a unique set of pros and cons that could affect your financial situation.

Let’s examine the pros:

You might have less paperwork to fill out. Since your lender already has you on record as a borrower, you might have to provide less information in order to refinance your existing loan. This could save you paperwork and time, but that all depends on the lender and their underwriting policies.

You might be more familiar with your current lender’s policies and customer service. If you’ve been using your loan provider for some time, you’re likely familiar with their policies and customer service. If you like your current lender, refinancing your loan through them ensures that you keep the same great service.

Your loyalty might be rewarded with discounts. In an effort to keep you as a customer, a bank might offer you discounts on fees and interest rates when you refinance with them. You will need to contact your lender to ask them if they offer any refinancing discounts for existing customers.

You might be able to keep your online account. Keeping your current lender usually means that you can keep your online account and the documents stored within it. This will keep you from needing to learn a new lender’s systems and keep all of your auto lending documentation in one place; that way you have less to keep track of.

Now, let’s examine the cons:

You might miss out on lower interest rates and loan terms. Refinancing with the same bank, although convenient, isn’t always best if you’re after a better interest rate. If your loan terms are the reason you’re refinancing, it’s likely that you can find a loan company that will beat the loan terms that your current lender will offer you in their refinancing offer.

Your current lender might charge prepayment penalties. Prepayment penalties help keep lenders from losing out on profits should you close the loan early. If your lender requires them, this will need to be paid before you can proceed with another loan.

If you don’t like your current lender’s service and policies, refinancing with them will prolong your bad experience. If you don’t like your current lender’s service or policies, refinancing your car loan with them will only mean that you have to deal with them longer.

Whether the pros or cons weigh heavier with you is based on your individual situation.

Is It Cheaper to Refinance an Auto Loan Through Your Current Lender?

Even though there is a possibility that refinancing your current loan through the same lender can save you some time, it might not save you much money. In fact, it might cost even more, since some lenders charge prepayment penalties.

A prepayment penalty ensures that the lender receives at least some of the profits that they would make off the interest of the original loan, should it be cut short because it’s paid off early.

These penalties are often 2% of the outstanding loan balance. So, if you refinance your $10,000 loan and your lender charges a 2% fee, you’ll pay $200 just to pay off your loan early and replace it with a new one.

Plus, even if your lender offers you a discount on fees required to close on your new loan, the savings might not outweigh what you’ll save on interest with a better loan.

It largely depends on factors like your financial profile and credit score, and whether or not they have improved since you originally took out the loan. You don’t need a perfect credit score to refinance your loan, but if it’s not very high, you should try to improve it even slightly before you consider refinancing.

To find out how much money you could save by refinancing your auto loan, you can use our auto loan refinance calculator to estimate potential savings.

Is It Easier to Refinance an Auto Loan Through Your Current Lender?

Whether or not refinancing with your auto loan’s current lender is any easier than doing so elsewhere depends on your experience with your lender. If you have made consistent, on-time payments throughout the life of the loan and have a positive credit history, refinancing with them will likely be straightforward.

Depending on your lender’s refinancing process, this could mean that you don’t have to fill out a lengthy application, provide as many financial documents, or learn an entirely different online platform for managing your loans.

On the other hand, if your lending experience has been difficult, especially if you have missed or late loan payments, you can expect that the refinancing process might be as well.

If your lender finds you to be a higher credit risk, your refinance offer from your current lender might not be the best. Luckily, you have many other refinancing options.

Should You Refinance Your Car Loan With the Same Lender?

Whether or not you should refinance your car loan with your current auto lender depends on if there is a better refinancing deal out there for you. To make sure that you don’t miss one or have to refinance more than once, you should compare loans offered by multiple lenders to your current lender’s refinance offer.

Shopping through a marketplace like AUTOPAY lets you compare loan terms from multiple lenders, so you can feel confident knowing that you’re getting the best deal. To find the best refinance loan for you, start by filling out our auto refinance form.

How to Know if You Shouldn’t Refinance With the Same Lender

You’ll know that you shouldn’t refinance with your current lender when you find a refinance offer that beats the one that your current lender offers. Since lenders are always looking to attract new customers, it’s likely that there’s a lender out there willing to give you better terms.

If the terms of your loan aren’t your reason for refinancing your auto loan, a negative experience with your lender might be. Whether that negative experience is a bad customer service experience or unexpected fees, you shouldn’t refinance with the same lender if you haven’t been happy with your lending relationship.

How to Refinance Your Auto Loan With the Same Lender

When you refinance your auto loan through the same lender, you can expect the process to be similar to that of applying for your original loan. However, each lender will be different. You can expect the refinancing process through your current lender to look something like this:

You will fill out an application. Your lender should have all of your personal, loan, and vehicle information on file, like the current loan amount and if you have a cosigner. So, the application process for current borrowers is often simple, but it kicks off the rest of the process. This is your chance to update any financial or personal information that might affect whether you will be approved or denied for refinancing.

Your lender will review your eligibility. Once your lender has received your application, they will work to figure out if you qualify for a new loan. To do so, they will review your proof of income, credit history, current auto loan standing, vehicle value and more.

You will receive your lender’s decision. Once your lender has determined whether or not you qualify, they will issue you an approval or denial. This can come by way of email, phone call, an in-person discussion or even a text, so make sure to confirm which method your lender will use before decision day.

If you’re approved, you’ll follow your lender’s instructions to close on the loan. Depending on whether you are working with an online lender or an in-person one, your lender will either instruct you to complete the loan process online or to meet them in person. During this process, you should be prepared to sign the loan contract and provide any last-minute documents that your lender might need.

Your loan funds will be distributed. If you’re refinancing through the same lender, they’ll handle paying off the old loan and bringing your balance back to current, so you won’t need to handle distribution.

All in all, refinancing an auto loan should not take more than a couple of weeks from start to finish.

Tag: refinancing