Life happens. Unemployment, divorce, and unexpected expenses can throw a wrench in your financial plans. If you are no longer able to afford your auto loan payments, you may want to consider refinancing.
Refinancing is the process of paying off your existing auto loan with a new auto loan offering better terms. In other words, refinancing involves replacing your existing auto loan with a more favorable auto loan.
If you’re thinking about refinancing, you may be wondering how your credit will impact your eligibility. You must consent to a credit check to refinance your auto loan. The question is, do you need perfect credit to qualify for refinancing? Here’s what you need to know:
Is An Auto Loan Secured or Unsecured?
It’s important to understand how auto loans work. An auto loan is money that a borrower obtains from a lender to buy a car. If you take out an auto loan, the money you borrow must go toward the purchase of a vehicle.
Auto loans are secured loans. In other words, the vehicle you purchase with the money you borrow is used as collateral to support the auto loan. Your lender will put a lien on the title to your vehicle or hold onto it until your loan has been completely repaid. You can continue to drive the vehicle while you make payments on your auto loan. However, if you fail to repay the loan, the lender can repossess the vehicle to satisfy your debt.
Am I Eligible to Refinance My Auto Loan?
The eligibility requirements for refinancing an auto loan are typically the same as the eligibility requirements for a new auto loan. Lenders may consider a number of factors when determining your eligibility for refinancing, including:
- Your ability to repay the loan
- The value of your vehicle
- The terms of your existing loan
- Your credit
Eligibility requirements can vary depending on the lender, so it’s best to contact your lender directly to find out if you qualify for refinancing.
What Credit Score Do I Need to Qualify for Auto Loan Refinancing?
Many people assume that they won’t qualify for auto loan refinancing unless their credit score is perfect. However, that’s not the case.
If you’ve ever applied for a traditional personal loan, you know that your credit score has a major impact on your eligibility. Your credit score can impact your eligibility for auto loan refinancing but is not the only factor that is taken into consideration when determining your eligibility. Lenders also consider monthly income, ability to repay the loan, and the value of your vehicle.
The bottom line? You don’t need perfect credit to qualify for auto loan refinancing. Most credit types are accepted by lenders.
What Are the Benefits of Refinancing?
Refinancing your auto loan offers a number of benefits, including:
- Lower interest rate. You may be able to secure a lower interest rate on your auto loan if you choose to refinance. The lower the interest rate, the less you will pay in interest over the course of the loan. The difference in interest rate doesn’t need to be significant for you to save money. Even a minor difference of one or two percentage points could save you hundreds or thousands of dollars.
- Lower monthly payment. Every month, a portion of your monthly auto loan payment goes toward interest. If you are able to secure a loan with a lower interest rate, this could lower your monthly payment.
- Longer term. You may want to refinance to extend your loan term, which is the amount of time you have to pay off the loan. Extending your loan term will lower your monthly payments even if you aren’t able to secure a lower interest rate.
- Shorter term. Another option is refinancing to secure a loan with a shorter term. Shortening the term of your loan can increase your monthly payments. However, the shorter the term, the less you will pay in interest, so you may end up saving money over the course of the loan.
Should I Refinance My Car Loan?
Refinancing is not right for everyone. Before you refinance, it’s important to understand whether you will benefit from this decision. Everyone’s situation is unique, but in general, you may benefit from refinancing your auto loan if:
- Interest rates have fallen. Keep an eye on the news to see if interest rates are going up or down. If interest rates are lower than they were when you initially took out the loan, you may want to refinance to secure a lower rate.
- You can’t afford your current payments. In this case, refinancing might help you lower your monthly payments. Even if you don’t qualify for a lower interest rate, you can still refinance to extend the term of your loan, which will lower your monthly payments.
- Your credit has improved. Monitor your credit score to see if it has improved since you initially took out your auto loan. If your credit score has increased, you may now qualify for a better interest rate, so refinancing could save you a lot of money.
- You didn’t shop around. Experts recommend getting quotes from multiple lenders when taking out an auto loan. This gives you the chance to compare offers and choose the one with the best terms. But if you didn’t shop around when you took out your auto loan, you may want to consider refinancing it now to see if you can get better terms.
What Should I Do If I Don’t Qualify for Auto Loan Refinancing?
There are two things you can do if you don’t qualify for auto loan refinancing on your own.
The first is adding a co-signer to your application. A co-signer is an individual such as a friend, family member, or colleague who agrees to repay your debt in the event you fail to do so. Adding a co-signer with good credit to your application could improve your chances of getting approved. It could also help you secure more favorable terms.
Your co-signer will need to consent to a credit check and provide proof of income and residence. All information is kept confidential. This means you won’t see your co-signer’s data and they won’t see yours.
Your second option is taking the time to improve your credit before reapplying for refinancing. If you weren’t approved due to your credit–and you don’t know anyone who can co-sign your application–this is the right option for you.
How Can I Improve My Credit Before Refinancing My Auto Loan?
Making an effort to improve your credit before refinancing could help you secure better terms. Fortunately, there are plenty of ways to improve your credit. Follow these tips:
- Don’t make any large purchases. Unless you can pay it off before your next statement is due, you should avoid using your credit cards to make large purchases. A large purchase will increase your credit card balance, which could negatively impact your credit utilization and credit score.
- Avoid opening new accounts. You should also avoid applying for new lines of credit. Every time you apply for a new line of credit, a hard inquiry will appear on your credit report, which will lower your score.
- Make on-time payments. Payment history has a huge impact on your credit. In fact, it accounts for about 35% of your total credit score. This is why it is so important to make on-time payments on all of your accounts if you want to improve your score.
- Identify errors. Take the time to carefully review your credit report. If you see an error, contact the appropriate credit bureaus right away. Getting errors removed from your report could increase your score.
- Ask for a higher limit. Request a higher limit on one of your credit cards. If your credit limit increases but your balance remains the same, this can have a positive impact on your credit score.
How to Apply for Auto Refinancing With LoanCenter
Don’t let a less-than-perfect credit score stop you from refinancing your auto loan. Follow these steps to apply for auto refinancing with LoanCenter:
- Start the application process. Call 1-866-553-3840 to speak to a loan officer directly. If you want to apply online, submit your information using the form on our website.
- Review your offers. You may be presented with a list of offers based on the information you provided. Review the terms of these offers to determine which one is right for you.
- Select your loan terms. The next step is customizing your loan terms. This is your loan, so you should get to choose which loan terms you want. For example, some people may prefer a higher monthly payment with a shorter loan term, whereas others may prefer a lower monthly payment with a longer loan term.
- Enjoy the benefits of refinancing. The only thing left to do is to enjoy all of the benefits that refinancing has to offer!
If you’re ready to reap the rewards of refinancing, start the application process with LoanCenter today.
Loan approval is subject to meeting the lender’s credit criteria. Not all applications will be approved.