Thinking about refinancing your car even though you have done it before? You can technically refinance a car as many times as you would like. Your finances, income, car, and lenders will ultimately decide whether that is a possibility. Keep reading for more information on refinancing your vehicle multiple times and whether it is the right choice for you.
How Does the Refinancing Process Work With a Car?
When you take out a car loan/auto loan to purchase your vehicle, that car is being financed. You can find auto loans (types of installment loans) through banks or credit unions, private lenders, or through car dealership financing. When you refinance your vehicle you take out a new loan to pay off whatever amount you have left on your existing loan. With refinancing you’ll have different repayment terms and a new lender if you made that switch.
You can complete the refinancing process more than once, but it may not be the best choice, and depending on your vehicle and credit score it may not even be a choice you can consider.
Different Reasons People Refinance Their Vehicle
If you are thinking of refinancing for the first or even second time, here are some of the best and common reasons for refinancing:
When Facing a Financial Setback You May Want To Refinance Your Car Loan
An unexpected financial situation can happen to anyone and if you don’t have a solid savings account built up, you may be having trouble paying your monthly bills, including an auto loan payment. Missing even a single payment on an auto loan can be expensive, and in some cases can even put your car at risk for Repossession. If you cannot afford to make your monthly minimum payment on your auto loan then refinancing your loan with your current lender or a new one makes sense. Refinancing a loan can make repayment more manageable, by getting a new auto loan with lower minimum monthly payments.
You Want Lower Interest Rates and Better Repayment Terms To Save Money
The interest, loan terms, and monthly payment of your car loan will largely depend on your lender and your finances. Let’s say you take out a loan with bad credit, however overtime you work to build your score. With a better credit score that is good or excellent credit, you know that you could definitely get better interest rates and more flexible repayment terms. In that case, you may want to consider refinancing your car loan.
You Need More Time To Repay Your Car Loan
Although an auto loan may seem like a good fit at first, when repayment starts you may realize you need more time to repay your loan. Auto loan refinancing can provide you more time to repay your loan by providing a longer loan term. With a longer loan your minimum monthly payments will go down, and you will have more time to repay your car loan.
How Auto Loan Refinancing Multiple Times Can Negatively Impact Your Finances and Credit Score
Refinancing your car loan multiple times can definitely have a negative impact on your credit score and finances. Here are some potential ways in which refinancing can hurt your finances:
Refinancing a New Car Loan Could Mean Paying More
Switching from one auto loan to another will likely come with a cost. No matter what state you are in there will be title fees. When it comes to your current lender there may be prepayment penalties and balloon payments. With your new lender there may be costs like origination fees you will have to pay up front. On top of that, even if you get lower monthly payments and better interest rates, having a longer loan will mean paying more interest overtime.
Now if you do this multiple times, you can double, triple or quadruple the cost which is the opposite goal of refinancing—saving money! This overall cost may not even be worth the cost of your vehicle! And so, really consider the overall cost of refinancing whether doing it for the first time or second.
The Search for a New Car Loan Can Hurt Your Credit Score
Searching for new auto loans will mean applying for loan options. Every time you go forward for final approval with auto loans or other loan options there will be a hard credit check. Each hard credit check that a financial institution performs will show up on your credit report and will have a small negative impact on your credit score.
If you already have bad credit, multiple credit checks in a small amount of time can hurt your score. And so, really think about every loan you apply for, ask about pre-approval with car loans as those have soft credit checks, which do not impact your credit.
What Do Lenders Look at For Approval To Refinance Your Car Loan?
When you go to a lender for auto refinancing they will look at a few different things for approval. Because a car is involved with the process, lenders will also want to know more about the car. Here are some of factors lenders will consider for a new loan approval:
The Value of the Car When Refinancing a Car Loan
The value of your car will be based on the make, model, year, condition, and mileage of the car. Your car’s value will have a huge impact on whether you will be approved for a new loan. Your lender will need to ensure that the car is worth at least the loan amount they are giving you, in the case that the loan is not repaid. That way if they need to sell it as a last resort they will get their money back.
Valid Car Insurance and Other Legal Road Safe Features
Another major requirement for a lender when considering whether they want to give you a loan to refinance your car, is that you have a valid driver’s license, car insurance, and are ready to pay for a title transfer. Your car has to be road safe!
The Amount of Car Payments Due on the Original Loan
Another thing that lenders look for when you apply for Refinancing is the amount of money you have left to pay on your previous loan. Sometimes there may be a minimum or maximum loan amount they give out, and if you don’t fall within that range with what is left on your initial loan you may not be approved.
The Age of Your Original Car Loan
Some lenders may require that your first car loan is at least a year old, while others may want to work with a newer loan. And so, keep that in mind when searching for loan options.
Your Repayment History on Your Original Loan
Your payment history shows up when a lender pulls up a credit report. When you apply to refinance a car loan, your lender/financial institution will definitely pull it. If you don’t have the best payment history on your current car loan or with multiple lenders and other loan types, then your chances of approval go down. While positive monthly payment history and credit history can help your chances of approval.
Your Income and Credit Scores
Your income and credit scores will also play a huge role in approval for refinancing a car loan. Credit scores are calculated with several different factors that help lenders determine your reliability. With a bad credit score the interest rate will go up, and loan amount will likely go down. Your monthly income will also be considered, as it gives a potential lender an idea of what kind of monthly payment you can afford.
And so, as you can see many factors go into determining whether an applicant will be approved to refinance a car loan. You may be able to go through financing at least once or twice, and when done right it can definitely help you save money and get better repayment terms.
What Factors Should You Consider When Refinancing Your Car Loan?
Let’s say you are on the fence when considering whether refinancing is the right option for you, and you have a few auto loan lenders in mind. Here is what you should consider before making your choice with refinancing itself, and the auto loan lender you choose to work with:
The Overall Cost of the New Loan
As mentioned above, switching from one car loan to another will come with expenses. To determine whether a loan is worthwhile you should determine the overall cost of the process. To do so, add any fees from your previous lender and title fees with any costs with your new loan. Here are some of the key costs to run through with a potential new loan option.
The Actual Interest Rate vs. The Interest Rate Advertised
Most lenders may advertise a low interest rate, but your actual interest rate will be given to you after you apply. And so, make sure that you consider the interest rate you are actually going to pay when determining interest costs. If you need some help understanding interest types better you can ask your lender or do some research yourself.
The Repayment Terms
Repayment terms or loan terms will encompass everything about loan repayment, i.e. your monthly payments, default terms, the length of the loan, conditions for fees and more will all play a huge role with your overall loan cost. Using a loan payment calculator can be a great tool when determining your monthly payment, you can then add that to other expenses.
The New Lender vs. Your Existing Lender
You will also want to compare your new potential lender with your existing one. Be sure to compare flexibility, terms, reputability, and past customer experiences before switching to another lender.
Consider Other Methods of Paying off Your Loan, Especially if You Only Have a Few Payments Left
When refinancing a car loan most people will look at other car loans. However, if you only have a few payments left, or your car doesn’t qualify for a car loan, another loan option may work better. And you can definitely use a different kind of loan to refinance a car loan. Here are some other loan options to consider:
- A Personal Loan — A personal loan is an unsecured loan option repaid in steady monthly payments. These loans are extremely flexible and versatile even for borrowers with bad credit.
- Credit Cards — Most people have a few credit cards they can use. If you only have a few payments left on your car loan, consider using a credit card. If you need to apply for a new credit card option, you will likely need good credit. Additionally, credit card debt is a real thing, so make sure you learn how to use your credit cards wisely!
- Payday Loans — Payday loans are a bad credit loan option that make a small amount of money available. They are fast but they come with high interest rates and fees.
- Title Loans — Title loans use the borrower’s vehicle as collateral. Funding is fast and bad credit is okay, but interest rates are usually high and there are a ton of fees.
Would Selling Your Car Be the Better Option?
In a general sense, there are many circumstances in which selling your car makes sense and others where it doesn’t. However, with car loans, there is really only one circumstance that makes sense. If refinancing is not an option or does not make financial sense, simply paying off your loan and selling your car may be a solution. Depending on your car’s value and the amount of money you have left on your loan you could even have money left over with this process.
The Bottom Line
Legally and technically you can refinance a car multiple times, however, that may not make the most financial sense. In most cases, a single refinance option makes sense. When considering refinancing a car loan make sure to review the overall cost of the process, and repayment terms.