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What Questions Should You Ask When Refinancing a Car Loan?

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Sheryl Nance-Nash

Sheryl Nance-Nash

Updated August 10, 2021
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What Questions Should You Ask When Refinancing a 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.

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 lien holder 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. Afterall, it’s the honeymoon stage, so it might 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. Do 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. Lantern by SoFi can help. Fill out one simple form and receive offers from multiple lenders in our network.
Image credit: iStock/tommy
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website on credit (https://www.consumer.ftc.gov/topics/credit-and-loans)The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.SOLC0621108

Frequently Asked Questions

Do I qualify for refinancing?
What will my new loan payment be?
What will my new interest rate be?
How long will my new loan term be?

About the Author

Sheryl Nance-Nash

Sheryl Nance-Nash

Sheryl Nance-Nash is a freelance writer specializing in personal finance, business, and travel. Her work has appeared in Money Magazine, Newsday, The New York Times, Business Insider, BBC.com, AARP the Magazine, ABCNews.com, Forbes.com, among others.
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