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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 low credit scores.
Your credit scores are 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 some lenders may consider other factors when reviewing your application for an auto loan. If you don’t have good credit scores, he says you may still get approved if you meet other lender requirements.
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.How to refinance your car loan when you have bad credit
Myth #2: High credit scores guarantee approval.
Strong credit scores usually help, but as mentioned above, they’re only one factor in the application process. Some auto refinancing companies have other requirements that must be met, no matter your credit scores.
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 $50,000. You may want to check the lender’s terms and conditions before applying to be sure you meet the basic requirements.Credit Karma Guide to Refinancing Your Auto Loan
Myth #3: Underwater auto loans can never be refinanced.
You may be able to refinance even if you’re underwater on your auto loan. Vehicles lose approximately 10% 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.
If you’re able to refinance at a lower interest rate, it could help you lower your monthly payment and save money — as long as you don’t extend your loan term. If you lengthen your loan, you may pay more interest, and you could become even more upside down on your loan.How to get out of a car loan when you’re upside down
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.
But remember: A lower monthly payment doesn’t necessarily mean you’re saving money. If you’re extending your loan term, while you’ll likely receive a lower monthly payment you could pay more in interest over the life of the loan.
Consider using an auto loan refinancing calculator to compare the changes to your monthly payments and overall interest as a result of refinancing.
Beware, also, 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. But in others, the fees can be more than $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.When should I refinance my auto loan?
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.How to refinance a car loan in 5 steps
What’s next? / Next steps
Auto loan refinancing might make sense if you can score a lower interest rate and save money. Your credit scores are one factor lenders may use to evaluate your application. But regardless of whether they’ve changed since you took out the original loan, you may still find a better interest rate by shopping around and refinancing with a new lender.