Is it possible to lower my car payments?
It is natural to consider refinancing as a possible way to reduce monthly car payments but it may not always work as expected.
Under the right conditions, you can lower your payments as well as reduce your total finance charges.
Under other conditions, refinancing may not make sense.
In some cases it might not even be possible.
What does it mean to refinance a car loan?
There’s nothing really special about refinancing. It’s simply getting one loan to pay off another loan on the same car. It’s a normal used-car loan like any other used-car loan. the process is exactly the same.
The new loan can come from the same bank or loan company that provided the old loan, or it can come from a totally different bank or loan company. Hopefully, the terms of the new loan will be better than the old loan such that it reduces the monthly payment amount.
It is sometimes overlooked that when a car is refinanced, the loan is a used-car loan, which has higher interest rates than new car loans. If the original loan was a new-car loan, it might actually have a better rate than a current used-car rate, especially if you originally received a special promotional rate.
Used cars never have promotional loan rates, as do new cars. For example, you may have gotten a nice 1.9% rate for your new car a year or so ago, taking advantage of a manufacturer’s incentive program. Now, if you refinance, you might get something like a 5.9%, which is a standard non-promotional used-car rate.
Does it make sense to refinance your auto loan?
Let’s look at an example of how it might make sense to refinance your car loan.
Let’s say you bought a used car a year ago and are paying high 12% interest rate due to a less-than-perfect credit score. You now wonder if refinancing will help you lower your payment amount.
If your credit score has not improved significantly in the past year, you may not be able to lower your interest rate on a new loan. Credit scores take a long time, often many years, to improve even if your bill-paying record is perfect. Negative information on your credit record takes years to disappear.
For example, if you had a previous car repossessed, it stays on your record for seven years. A bankruptcy affects your credit for ten years. Even a couple of late bill payments drops your score for years. Special auto loan companies such as Auto Credit Express can provide refinance loans to people who have credit problems.
Credit scores are grouped into “tiers” — Tier 1 (best), Tier 2, Tier 3, Tier 4, and so on. For example, Tier 3 scores range from 620 to 679. So, even if your score improved from 620 to 670, you are still in Tier 3 and your ability to get a lower loan rate won’t change.
What if your credit score hasn’t changed?
The only way to lower your monthly car payments if your credit score hasn’t significantly improved, and you can’t get a lower interest rate, is to refinance and get a new loan for a longer loan term — add months to your loan.
For example, if you currently have 3 years remaining on your loan, you could lower your payments if you get a new loan and extend the term to 5 years.
But do you want to still be paying on an old car for five more years? It is almost guaranteed that you will be “upside down” during that time, meaning you will always owe more than the car is actually worth. That means you will have problems selling or trading the car during that time.
What can prevent you from refinancing your car loan?
Many people who are considering refinancing are “upside down” on their current loan. This means the car is not worth the amount of remaining loan balance. When you go to a bank or loan company, they will look at the amount your want to borrow (your old loan balance), and the current value of your car (you can check your vehicle’s value at KBB.com).
Loan companies won’t lend you more than a car is worth. So, if your old loan balance is higher, you won’t get approved for your refinance loan. The only way to get the new loan is to make a down payment equal to at least the amount of your “negative equity.”
Of course if your credit has worsened, you will have problems getting your loan. Furthermore, if your income has decreased due to a job loss or change (which is frequently the reason for considering refinancing), you might find this to be a reason to be denied a new loan.
What to do?
We have discussed a lot of “what if” situations in this article and have informed you of some of the reasons that refinancing your car loan might not work or make sense. However, the only way to know for sure if it will work in your particular case is to go to some banks, credit unions, and loan companies and ask. Consider reputable online car loan companies such as Auto Credit Express and CarsDirect who provide auto loans to all kinds of people, even those with serious credit problems such as bankruptcies and repossessions.
Again, refinancing is no different than getting any other used-car loan. You can apply and if it doesn’t lower your payments, then turn it down and go try the next lender.