If you’ve been scrutinizing your budget lately, and considering ways to save money, your monthly car payment is probably an expense you’d be happy to shrink. Fortunately, there are options available to drivers seeking to rein in the cost of car ownership without letting go of their ride. Loan modification is one approach to a…
You can refinance your car loan with your current lender. But you should explore your options first.
Replacing your existing auto loan with a new loan (otherwise known as refinancing) can seem like a no-brainer. For instance, you can extend your loan term and lower your monthly payment. You might even qualify for a better interest rate and save hundreds, or potentially thousands.
However, if you decide to explore your refinancing options, you’ll likely face the following question: “Can I refinance my car with the same lender?”
In short, yes — in many cases, you can. Traditional institutions, such as banks and credit unions, typically offer refinance loans in addition to auto loans. But that doesn’t necessarily mean you should stick with your existing lender.
Should You Refinance With the Same Lender?
If you want to know if you can refinance with the same lender, chances are it’s a good relationship. Perhaps you’ve had a good customer service experience, or maybe it’s an online lender with an easy-to-use digital interface. Nevertheless, these reasons alone don’t justify refinancing with the same lender.
For starters, it’s possible that your current lender doesn’t provide auto loan refinancing. You might have decided to finance your initial car purchase through your dealership’s lending program, which might not offer refinance loans.
More importantly, it’s generally advisable to shop around and compare different lenders. In turn, you increase your odds of getting a lower interest rate and the best terms.
Why You Should Consider Shopping Around for a Refinance Loan
When you bought your car, did you choose the first one you saw? Or did you kick the tires and search for the best option? Although it’s not totally unheard of for drivers to commit to the first vehicle they come across, people tend to explore their options.
Why not approach a new loan the same way? Especially since rate shopping can help you save money in the long run. Using a marketplace can help you find the best rate and terms. Here are a few reasons to consider shopping around.
You can find the best rate.
Not all lending programs are created equal. One lender might give more weight to your vehicle’s value, whereas another lender might favor a spotless credit history. Along the same lines, loan rates can vary too. So, if you submit applications to several lenders, there’s a decent chance your loan offers will be different.
In this regard, rate shopping can help you avoid higher interest rates and maximize savings over the life of the loan.
You could get approved for better terms.
Not all lending agreements are created equal either. Some have more stringent provisions, such as limited grace days for car payments and prepayment penalties.
No one plans to miss a payment, but financial binds happen. If you find yourself short on funds and a payment due date is on the horizon, additional grace days can help you avoid late payment fees.
Credit scoring models account for rate shopping.
If you’re worried about hurting your credit score by submitting too many loan applications, first and foremost, we commend you for your financial awareness. It’s smart to be wary of how your actions impact your scores.
Fortunately, credit scoring models account for rate shopping. So as long as you submit your applications within a specific window of time (30-45 days, depending on the model), your credit report should only register one hard inquiry.
When Does It Make Sense to Refinance?
It’s never a bad idea to at least consider an auto loan refinance. But when does it make the most sense to actually apply? Let’s run through a few indicators that suggest it’s a good time to refinance.
You need to save money.
Sometimes, finances are tight. One way to tighten up your budget is to get a lower monthly car payment. In 2021, borrowers who successfully refinanced saved an average of $1,158 per year, according to the RateGenius State of the Industry report. Of course, simply needing to save some extra cash doesn’t guarantee you’ll qualify, but it’s a valid reason to explore refinancing.
Your LTV is 93% or lower.
Your loan-to-value ratio (LTV) compares your loan amount with the value of your vehicle. It essentially calculates whether a lender can be made whole by repossessing and selling a vehicle if a borrower ever defaults on their loan.
Why 93%? In 2021, the typical borrower who successfully refinanced their auto loan had an LTV of 93.1%.
Although it’s possible to get approved with a higher LTV, you might not get the best rate or terms. Moreover, you could put yourself in a tricky financial situation if you’re ever in an accident and your loan is higher than your car’s value. In other words, your car insurance payout might not cover your obligation.
Good news though, that’s where GAP waivers come in handy.
Car (LTV) Loan-to-Value Calculator
You’re making more money.
The more money you make, the more debt you can usually afford to take on. From a lending perspective, financial institutions use your debt-to-income ratio (DTI) to quantify this concept. Your DTI measures your monthly debt payments against your monthly income.
As you’d expect, the lower your DTI, the more likely you are to qualify for refinancing.
Your credit scores are higher.
If you had bad credit (or even average scores) when you first applied for your car loan, you likely didn’t get the best interest rate available.
Fortunately, credit scores aren’t static — you can improve them. Timely car loan payments would help your score, as would paying off high credit card balances. Even the passage of time can give your scores a little boost, since scoring models typically factor in account age (the older, the better).
So, if your scores have increased, you have a better chance of qualifying for a better loan.
When Refinancing Your Auto Loan Could Be a Bad Idea
Generally speaking, there are a few instances when it might not be wise to refinance your auto loan.
First, if you’re unlikely to qualify — whether that’s because your financial profile could use some work or simply not enough time has passed since you first took out your loan. (Yes, it’s possible to refinance too early.)
Second, if the costs offset the savings. Refinancing can save you money in the long run, but it’s important to consider the costs associated with closing and originating a new loan. For instance, if your current loan has a prepayment penalty and your monthly loan payment savings are negligible, it might not be worth it.
Third, if you’re close to paying off your existing loan, it might not be financially beneficial to refinance. Although debt helps people finance large purchases they couldn’t otherwise afford, it’s still an obligation and, in many cases, a burden.
If you’re only a few months away from repaying your loan balance and you aren’t strapped for cash, you might want to stick it out rather than opting for a longer term loan.
Do I Qualify for Refinancing?
Although I wish I could tell you individually that you qualify for refinancing, it’s a subjective matter that varies from lender to lender. However, it might help to look at a composite borrower profile based on industry benchmarks. That way you can see how you stack up.
Here’s a blended financial profile of a borrower based on industry data collected within the latest RateGenius State of Auto Refinance report.
- Credit score of 670. The average credit score for borrowers who successfully refinanced in 2021 was 670.
- LTV of 93.1%. The average retail LTV for borrowers who refinanced in 2021 was 93.1%.
- DTI below 48%. According to RateGenius data between 2015 and 2019, 90% of approved auto refinance loan applicants had a DTI below 48%.
- 16.7 months into the loan. Last year, approved refinance loan applicants were roughly a year and five months into their original loan on average.
- Loan balance of $26,005. As of March 2022, the average loan balance of customers approved for refinancing was $26,005.
Again, this is a broad representation based on averages and tendencies, but it should give you an idea of strengths and weaknesses in your financial profile.
3 Things to Know Before You Refinance
Whether you choose the same lender or a new lender, refinancing your auto loan can provide pretty clear benefits. That said, beyond playing the field for the best rates, there are some things you should keep in mind as you start the process.
1. Check your credit ahead of time.
Before you apply for a new car loan, check your credit scores. (Psst, it’s free.) First, you might find an error, which could hurt your scores and your chances of getting approved. Second, you can compare your scores with industry benchmarks and credit score minimums.
If you have exceptional credit, great. If your scores could use some work, then you’ve not only saved yourself the hassle of getting rejected but also protected your scores from getting dinged by a hard credit inquiry.
2. Your credit matters, but it’s not the only factor.
In the personal finance world, credit scores get plenty of attention, especially when it comes to applying for a new loan. But if you don’t have excellent credit, don’t fret.
As we’ve outlined, there are other factors that come into play — such as your DTI and LTV. If your monthly debt payments are minimal in comparison to your income, your DTI can help offset weaker scores. Similarly, if you’ve taken care of your vehicle and paid off your balance (potentially quicker than scheduled), your LTV could also support your case for a refinance loan.
3. Have your documents ready to save time.
Admittedly, paperwork is a boring subject — but you can save yourself some time by compiling the necessary documents before applying. Even if you decide to stick with the same financial institution, they might ask you to resubmit certain items.
Although lenders might differ in terms of what they need to see, here’s a relatively comprehensive list of the information they might request:
- Driver’s license
- Insurance card
- Cosigner or co-borrower (if applicable)
- Vehicle mileage
- Vehicle title
- W2, pay stub, or proof of income