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Thinking about refinancing a car loan as a retiree? Don’t worry — you can still qualify.
Retirement has evolved over the last few decades. Years ago, the financial lifestyle of the average retiree was somewhat uniform and predictable. Nowadays, “retiring” is a unique concept. It could mean having a less demanding but more enjoyable job. Or it could represent a period of total detachment from the workforce.
But what if you’re an auto loan borrower that’s retired? How does that impact your ability to refinance a loan?
Let’s explore the answer (spoiler alert: it’s “yes”) and the refinancing process for retirees.
Yes, you can refinance your car loan if you’re retired. Age will not prevent you from qualifying for auto loan refinancing unless you’re under the age of 18 and already retired. (If you are, please tell us your secrets). That remains true even if you aren’t working anymore and you’re relying on Social Security.
It might even surprise you to hear that retirees tend to have solid credit scores. According to RateGenius data, retirees who recently refinanced their car loans had a 724 credit score on average. That’s notably higher than the scores of younger generations, such as Gen Z (705) and Millennials (701). Having a longer credit history doesn’t hurt.
But that’s not the only qualification to consider. There are other aspects of your financial profile that will impact your chances of qualifying for a loan.
Unfortunately, just as age can’t keep you from qualifying, it also doesn’t guarantee approval. Lenders hold retirees to the same standards as any other refinance loan applicants. We’ve outlined the factors that lenders consider when evaluating refinance loan applications.
As noted above, retirees tend to have above-average credit scores. That’s a plus because lenders will assess your credit score and credit history to determine your reliability as a borrower. Your FICO score consists of five components:
There’s no such thing as a universal, all-but-guaranteed credit score for loan approval. That said, we can look at RateGenius’s 2021 state of the industry report for more insight. Per the report, the average credit score of an approved refinance applicant was 720.
So, if your score is around this average, that’s a good start. If your score could use some work, the easiest fix is paying down your credit card balances. Fortunately, there’s no minimum credit score requirement in order to refinance but a higher score can help.
Did you know you can check your credit report for free? You’re entitled to a free report from the major credit bureaus, such as Experian.
Credit scores aren’t the only metric that lenders look at. Your debt-to-income ratio (DTI) is another common metric. In essence, it helps lenders gauge whether you can afford to take on more debt. Your DTI compares your monthly debt payments against your monthly income.
According to RateGenius data, retirees who refinanced their auto loan had low DTIs on average (about 30%). In general, lenders prefer to see a DTI of 50% or less. So, 30% would be a strong percentage. But that doesn’t mean you’re automatically disqualified if your ratio is higher.
Lenders will evaluate your loan-to-value ratio (LTV) to determine if you qualify for refinancing. Your LTV compares your loan amount against the value of your vehicle. For example, if your car is worth $10,000 and your loan amount is $12,000, your LTV would be 120%.
Although this would imply that you have negative equity in your car, that won’t prevent you from qualifying for refinancing. (This highlights the importance of making a down payment when you buy a car.)
Retirees tend to be strong in this area though. According to RateGenius data, retirees tend to have positive equity in their vehicles with an average LTV of 95.2%.
Last but not least, your vehicle factors into the equation too. For the most part, vehicles are depreciating assets (unless you have a keen eye for exotic cars.) With use and time, vehicles lose value.
As you can expect, lenders prefer new cars over used cars. But that doesn’t mean older vehicles can’t qualify for a refinance loan. Generally speaking, lenders require vehicles to be:
If your car isn’t for commercial purposes and it falls below these caps, you’re in good shape.
Of course, just because you qualify for a refinance loan doesn’t mean it’s the right time to apply. To help you figure out if refinancing is right for you, let’s walk through the best and worst times to refinance an auto loan.
There are a couple of prime times to explore auto loan refinancing. Do you have a higher interest rate? Has your financial profile improved since you took out your current loan? For instance, maybe you had a bad credit score — or maybe your debt-to-income ratio was pretty high. If you’re in better financial standing now, it could be the right time for an auto loan refinance.
If market rates have dropped since you took out your original loan, refinancing could lower your monthly car payment and total interest. Approved refinance loan applicants reduced their interest rate by 5.5% on average last year. That rate reduction helped the typical borrower bank almost $1,000 of annual savings.
Or maybe you just want to work with a new lender. Some borrowers prefer to work with traditional financial institutions, such as a bank or credit union. That’s not an uncommon reason for refinancing either.
For starters, when you don’t qualify. From 2012 to 2019, Baby Boomers had the highest DTI of all applicants at 141%. That translates to significantly more debt obligations than money coming in the door. In comparison, approved applicants tend to have a DTI of less than 48%.
So, if you’re above this threshold, it might not be the best time to refinance.
Also, recall that your loan has to qualify too. If the remaining life of the loan is less than 24 months, lenders might not want to refinance it.
Moreover, refinancing is only financially beneficial if you can secure a better loan. If market rates are higher than your existing loan’s rate, refinancing wouldn’t necessarily improve your situation. Similarly, if your existing loan has prepayment penalties, this fee may eat into your interest savings.
In general, lenders will ask applicants to share the following documentation:
However, as you’re well aware by this point, retirees often have unique finances. (You’re retired, after all.) So, let’s dive a little deeper into your proof of income requirements.
Before they can issue a new loan, lenders need to make sure a borrower has the means to make repayments. So, they require applicants to submit proof of income. If “retired” means a less time-consuming job, pay stubs or a W-2 will suffice.
However, retirees may not have an employer anymore. So, what will you need instead?
If you receive Social Security benefits, you can use your Social Security Benefit Verification Letter. This document is also commonly referred to as a benefits letter. The same concept applies if you’re relying on disability checks or payments from fixed income securities. In those cases, you would need an award letter from the relevant institution(s).
What if you retired early and don’t receive the above benefits? For instance, maybe you’re self-employed or invested in real estate. (The FIRE movement is quite popular nowadays.)
For proof of income, you’ll need your tax return. Self-employed applicants can use their Schedule C (Form 1040). If you make money from rental properties, partnerships, or corporations, you can provide a Schedule E. If you earn money from farmland, you can provide a Schedule F.
If you don’t think you’ll qualify based on your financial profile, you aren’t stuck. There are several avenues you can take to strengthen your application.
Applying with a cosigner or co-borrower can help you get approved for car loan refinancing. It may even help you get better loan terms and save money. For instance, maybe your partner is still working. Their income could boost your application’s DTI.
Or, let’s assume you have bad credit. If your cosigner has good credit, it could offset yours and improve your chances of getting a lower interest rate or a longer term. That typically translates to lower monthly payments, which is less taxing on your income.
Paying off debt is easier said than done. But it helps improve your financial profile in a lender’s eyes. Why? Because reducing your total debt can lower your DTI and raise your credit score. This is a solid option if you have enough liquidity to pay down debt without hurting your financial stability.
Don’t sell yourself short. If you have more than one source of income, include it in your application. That includes less traditional sources. For instance, alimony checks and child support can still count toward your income.
If you have extra time on your hands and you’re open to part-time work, you could also leverage a side job to boost your application’s strength.
Based on all the above factors, it might seem like the stars have to align for you to qualify for auto loan refinancing. That’s not the case. Everyone’s financial situation is unique and lenders consider every facet of your application. A bad credit score won’t necessarily eliminate you from the loan pool and neither will an upside-down car loan.
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