All of the lingo associated with loans can be confusing, and auto refinance loans are no exception. To help steer you through the language of auto refinancing, we’ve assembled the following terminology that you’re likely to come across.
APR refers to annual percentage rate. This figure (such as 4.5%) is the amount you owe on a loan, including interest (see “Interest rate”), fees and other costs. When shopping for an auto loan, it’s important to consider the APR so that you fully grasp how much money you’ll be spending on your car.
Normally, the collateral for an auto refinance loan is your car. Collateral secures your loan, meaning that if you default on your loan, the lender can repossess your car and sell it to make up for the financial loss.
When two (or more) people apply for a joint loan and share equal payment, credit, and ownership responsibilities, they are considered co-borrowers.
A cosigner (usually a parent, friend, or other relative) agrees to cover your debt if you default on the loan but does not share ownership responsibilities. A cosigner can help the borrower get qualified for better loan rates and terms, or help them get approved for credit if the borrower has a lower credit score or high debt-to-income ratio.
Credit reports, produced by the three major credit bureaus (Equifax, Experian and TransUnion), lay out your history of making payments on loans, credit cards and other credit products, and they highlight negative things like bankruptcies and tax liens. When you apply for an auto refinance loan, a lender retrieves your credit report to figure out whether to extend a loan to you and, if so, what the interest rate and other details will be.
Your three-digit credit score determines whether you qualify for an auto refinance loan and, if so, how low the interest rate will be. The higher your credit score is, the lower the interest rate is likely to be. For instance, a credit score of 720 usually results in a lower interest than a credit score of 630.
Keep in mind that don’t have just one credit score. Rather, you have different credit scores based on which company created them and which type of credit product is involved (such as an auto loan, credit card or mortgage). The biggest provider of credit scores is FICO (see “FICO score.”)
This is the amount of money owed as it appears on your monthly loan statement. It’s not the same as the payoff amount. (See “Payoff amount.”)
FICO scores are the most commonly used credit scores (see “Credit scores”) in the U.S. These scores range from 300 at the low end to 850 at the high end. On this scale, a score above 670 is considered good.
This is another way of referring to the APR of an auto refinance loan.
When a lender checks your credit after you’ve applied for an auto refinance loan, your credit report (see “Credit report”) will show what’s known as a “hard inquiry.” A hard inquiry can cause a temporary drop in your credit score.
The interest rate is the amount you pay to borrow money; it’s shown as a percentage, such as 4.5%. Interest rate isn’t the same as APR. The APR represents the entire amount you pay to borrow the money, including interest and fees; it’s also shown as a percentage. (See “APR.”)
Kelly Blue Book value
The Kelly Blue Book or (KBB) value is one of the most popular ways to check the value of your car. This value helps determine whether it makes sense to refinance your auto loan; many lenders refuse to refinance loans with balances that exceed the value of the car.
In many cases, this refers to how long the auto refinance loan is. The bulk of auto loans are 60 months (five years) or 72 months (six years); auto refinance loans frequently are shorter, as the borrower already has paid off some of the loan.
If you refinance your auto loan with your current lender, that lender might report the modified terms of your loan (such as the length and balance of the loan) to the major credit bureaus. This won’t affect your credit score all that much, since you’re modifying the terms with your current lender and not starting from scratch with a new lender.
Original loan amount
This is the amount of money you borrowed when you took out your original loan. If you made down payment, the original loan amount is the sale price of the car subtracted by the amount of the down payment.
This is the amount of money it would take to wipe out the debt from your auto loan. Since the balance changes from month to month, the current balance (which is shown on your monthly statement) and the payoff amount likely aren’t the same. In many cases, you’ll need to contact your lender to find out the payoff amount. (See “Current balance.”)
Your original auto loan might contain what’s known as a prepayment penalty, meaning you’ll pay a fee if you wipe out what you owe before the end of the loan period. This should be considered when you’re refinancing an auto loan, since refinancing involves an early payoff of your original loan. Any savings you’d score from refinancing might be canceled out by a prepayment penalty.
Principal is the money that you originally agreed to pay back, while interest (See “Interest rate”) is the cost of borrowing the principal. For car loans, principal is the purchase price of the vehicle plus any other extras financed.
Generally, any payment made on an auto refinance loan is applied first to any fees that are due, such as late fees, according to the Consumer Financial Protection Bureau. Next, the remaining money from your payment is applied to any interest due. Finally, the rest of your payment is applied to the principal balance.
When you refinance an auto loan, you’re typically changing the interest rate, length and monthly payments that you had with the original loan. Once you’ve refinanced, the new loan replaces the previous loan, with the goal being to lower the interest rate or reduce the amount of the monthly payments. Your car still serves as collateral.
When a lender or company checks your credit as part of a pre-qualification process they sometimes do what is called a soft inquiry (also known as a “soft pull”). This may occur, for example, when an auto loan lender checks your credit without your permission to see if you qualify for certain auto loan refinance offers.
Unlike hard inquiries, soft inquiries won’t affect your credit score.
This happens when the balance of your loan is higher than the value of your car. When you’re “upside down” on a car loan, many lenders won’t refinance your loan. But some lenders are willing to do it. You might also hear this called an “underwater” loan.