Why
do people refinance their car loan? If
you want to lower your monthly payment or lower your interest rate and
does not cost anything, it's a great idea for almost anyone.
Typically,
when you refinance, what you do is pay off the existing balance and then
sign a new loan with new terms. Before you even apply for auto
refinancing, you can do the homework to see if it will work for you.
First, call your lender for a 10-day payoff on your
vehicle. Since interest accrues on a daily basis, the amount to pay
off your vehicle also increases until you make your next payment.
The reason for getting a 10-day payoff is typically the lender who will be
paying off the loan has time to cut the check and mail it to the lien holder.
If the lien holder receives the check before the 10-day grace period,
there will be an overage check cut which then should be mailed to the
person on the loan.
Once
you have the payoff amount, you now need to figure out the value of your
vehicle. The
value of a vehicle can be found by consulting an auto industry-pricing
guide such as NADA or Kelley Blue Book or by calling any bank or finance
company that offer auto loans . They will ask you what year,
make, model, miles and an additional options on your vehicle.
Additional options can include:
This
is called the loan-to-value ratio or LTV a
comparison of the loan amount to the value of the vehicle. For
example, one bank may refinance up to 150% LTV and another may only do
125% LTV. You calculate this by taking your payoff amount and dividing it
by the wholesale bluebook value. Now, depending on the bank or finance
company, their guidelines can differ.
For
example:
Your
lender gave you a 10-day pay off amount of $11,537.23 and the wholesale
bluebook on your vehicle is $9,637.50. By dividing these 2 numbers, you
will know the LTV which in this case I came up with 1.197..... which is
119% LTV.
Now,
typically the lender will look at the year and miles of the vehicle to
determine the term of your loan they are willing to extend out to
and the interest rate will obviously be determined by how you paid your existing
car loan and your other bills that report to the credit bureau.
If
you choose to refinance to get a lower interest rate, find out how many
months you have left on your existing loan. This will determine the
term for you new loan unless you are struggling making your regular
monthly payment and would like to lower your monthly payment.
However, it may end up doing more harm than good. For example, if
the total term of your loan was 48 months and you made 24
payments. By refinancing, the bank may be able to give you the same
term as your existing loan which is 48 months. This will give you a
much lower payment but in the long run even with a lower interest rate,
you will end up paying a lot more. Basically extending the term of
the loan for 2 more years is also adding 2 more years of interest you will
also be paying on. Not only that, but your vehicle may start have
mechanical problems as you are adding more miles on it.
No,
there is no certain required waiting period when it comes to refinancing.
You may even refinance more than once in a matter of months.
However, typically with a customer that has bad credit is paying a much
higher interest rate on a car loan might find that he won't be able to
refinance for a couple years or more because he owes too much money on his
current loan. It is also the case if you try to trade your
vehicle into the dealership. Since the dealership has to pay off
your existing loan, they are at a loss unless they can sell you a vehicle
that they purchased far below wholesale bluebook. Then in turn will
cover the difference of the LTV of your existing vehicle. Since
banks or lenders will only lend up to 110% LTV plus Tax, Title, License
and Warranty. Gap Insurance, Disability and Life Insurance can also
be added however this is totally optional to you and may consider
depending the kind of work you do. You do need to consider how much
your payment will increase by adding these as well.
