If you are thinking about refinancing your auto loan, then it's important to understand that there are a lot of misconceptions floating around. People will have their own beliefs about refinancing auto loans, however sometimes they are far from the truth.
Before you start refinancing, make sure you understand these five auto loan refinance myths.
You Can't Refinance an Auto Loan that's Underwater
It's not a secret that in most cases a new car is a depreciating asset. Carfax says that a new car will lose 10 percent of its value as soon as you drive it off the lot. By the end of the first year, another 10 percent is wiped away. To make things even worse, a car without brand recognition and features can actually decrease as much as 50 percent from its starting price. Because of this, a car can quickly be worth less than the amount still owed on the auto loan.
But being underwater on your car loan isn't the end of the world. If you are able to make a few extra payments to get it back to even, then there is a good chance that a lender will still refinance your auto loan.
You Won't Be Approved with a Low Credit Score
When you are attempting to refinance an auto loan, one of the biggest factors for the lender is your credit score. However, it's not the only thing they look at during the underwriting process. Can you bring additional money to the table? More importantly, how has your payment history been since you've had this car? If you made all your payments on time then that weighs pretty heavy in the minds of the lender.
Some lenders are also willing to look at extenuating circumstances. If you went through a traumatic time, such as a job loss or had health problems, then that might be considered. The lender will look at the type of borrower you were before the specific incident.
You Won't Save Much Money by Refinancing
This is very dependent on what interest rate you currently have. If refinancing will lower your rate by 0.25 percent, then the change in your monthly payments will be very minimal. However, if you have the chance to lower your rate by 2 percent on a $25,000 car loan, then you could actually save over $1,300 over the life of a five year loan.
You Are Guaranteed Approval Because of Your Credit Score
Having a good credit score certainly gives you a big advantage, however, it might not mean much if the lender won't refinance your specific car. There are a lot of banks that have strict policies on what cars they will finance. Some won't lend to you if the car is greater than a certain number of years. They also might not approve your loan if the outstanding balance is too little or too much.
Shopping Around Before Refinancing an Auto Loan Is a Waste of Time
Most of us will shop around when we look for a mortgage. The same should be true if attempting to refinance an auto loan. The rates that one lender might quote you could be considerably higher than what another might be offering. If you are worried about having too many hard inquiries, then you can rest easy. If it's within a 45 day period, FICO reports multiple inquiries for the same loan to be just a single hard inquiry on someone's credit report.
The Bottom Line
It's very possible that refinancing your auto loan could save you hundreds if not thousands of dollars over the life of your loan. Just keep in mind that there are several auto loan refinance myths out there. It's important to always shop around for the lowest rate and approval is never guaranteed, even if you have a strong credit score.