By LOUIS DENICOLA
If you're considering refinancing your auto loan but you're unsure, don't let these five myths hold you back. Refinancing can be a quick and easy process that could save you money by lowering your monthly payments and decreasing the overall amount you pay in interest.
Myth #1: You won't be approved if you have a low credit score.
Your credit score is usually one of the main factors that lenders take into account when considering your refinancing application, but it's not the only one. Jordan Perch, contributor to automotive website DMV.com, says that banks can consider consumers' recent payment history on various accounts as another important factor. If you don't have a good credit score, he says you may still get approved if you made all your recent payments on time.
In addition, even if your credit hasn't improved since you took out the original loan, you may still want to consider refinancing if interest rates have dropped in general.
Myth #2: A good credit score guarantees approval.
A good credit score usually helps, but as mentioned above, it's only one factor in the application process. Some auto refinancing companies have other requirements that must be met no matter your credit score. Capital One, for example, won't refinance a vehicle that's more than seven years old and generally only refinances current loans of $7,500 to $40,000. You may want to check the loan's terms and conditions before applying to be sure you meet the basic requirements.
Myth #3: Underwater auto loans can never be refinanced.
Vehicles lose approximately 10 percent of their value the moment they're driven off the lot, according to vehicle history database website Carfax. Accidents and high mileage can further reduce the value of a vehicle. If the car is worth less than the outstanding loan, the loan is considered underwater or upside down.
However, Carroll Lachnit, a consumer advice editor at Edmunds.com, says that even if your loan is underwater, refinancing might be possible if you can make extra payments and pay down the original loan to bring the balance in line with the vehicle's current value.
Myth #4: Refinancing an auto loan won't save you a lot of money.
Depending on your situation, you may be able to save a lot of money by refinancing. You're probably a good contender if interest rates have dropped since you took out the original loan, your credit has improved and/or your original loan didn't have good terms. Keep in mind that saving just $25 a month would add up to $1,200 over four years.
Consider using an auto loan refinancing calculator to compare the changes to your monthly payments and overall interest as a result of refinancing.
However, beware of fees that may complicate the calculations. For example, you may have to pay the state to re-register the vehicle and transfer the title. This cost is usually less than $100, and in some states it's less than $25. However, in others, the fees can be over $250. Some lenders may also charge an origination fee for the new loan.
In addition, if your original auto loan has a prepayment penalty, you may have to pay part or all of the remaining interest if you pay off the loan early. If this is the case, it may not be worth refinancing.
Myth #5: It's not worth shopping around when refinancing auto loans.
Interest rates can vary widely from one lender to another, so it may be worth searching for the best terms before refinancing. Shopping around for the best rates may not necessarily hurt your credit, and if it does, it may only drop a few points, as Fair Isaac Corporation (FICO) considers multiple inquiries for the same loan as a single hard inquiry if they're made within 45 days. VantageScore gives you a 14-day window.
When comparing auto lenders, you may want to look at the interest rate they offer, potential fees and credible reviews or recommendations of the lender. You can often receive a decision and quote on your application within a day and sometimes within minutes.
Auto loan refinancing might be a way to lower your monthly payments and save you money. Your credit score is one factor lenders may use to evaluate your application, but regardless of whether or not it has changed since you took out the original loan, you may still be able to receive a better interest rate by shopping around and refinancing with a new lender.
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