Understanding auto refinancing: A guide to car loans and ways to save

To understand auto refinancing we must first take a look at auto financing. Financing your new car is a great way to get a new set of wheels without spending all of your hard earned money at the time of purchase. Financing a vehicle involves obtaining an auto loan to buy the car. You repay the loan by making monthly car payments over the term, which is normally expressed as a number of months. Your monthly payment includes principal and interest on the loan.

Banks and car dealerships provide financing options based on your credit score, income, and other factors. If you are financing your car through a bank directly, you can be pre-approved for a specific dollar amount, which can help you budget ahead of time. If you are financing your loan through a car dealership, the dealer makes the loan to the customer and sells the loan to a lender. The dealer obtains rates from lenders and chooses the rate to offer the customer. The dealer is often able to increase the APR and the dealer keeps the amount of the increase.

Dealer incentives and dealership financing promotions

Car buyers who finance through dealerships typically work with a finance manager. Dealers sometimes offer additional perks to the car buyer like promotional interest rates or cashback deals. Interest rates of 0% Annual Percentage Rate (APR) for a set number of months on specific vehicle models are commonly viewed as incentives. Also, cashback offers are often an alternative promotion offered to a 0% APR. It is important to remember that interest rates and APR are different.

Promotional incentives are offered by specific manufacturers on that manufacturer's new and certified pre-owned vehicles. For example, you may come across a deal on a Ford Mustang. In order to benefit from that deal, you would have to purchase the Mustang directly from the Ford dealer.

Rebates are another promotional incentive when you finance through a manufacturer's financial services branch like GM Financial, Ford Motor Credit, and Toyota Financial Services. These are captive lenders under the parent automaker group. The rebate terms usually require that you make a predetermined number of payments on your car loan in order to qualify for the offer, like 3-6 payments.

These offers give you the option to either put money back into your pocket, or you can put the extra cash toward your vehicle's down payment. Depending on the financing deal you received when you purchased your car and when the promotions (if any) ended, refinancing your vehicle is a good option to consider next.

The downside of dealership financing

All of the promotions and incentives might seem like rainbows and sunshine until you take a hard look at the finance details. You get a new car, the dealership gets paid, and you can pay it off later right? Financing through a dealership is often a sweet deal that can quickly add up to be a lot with the initial terms. This is because of how dealerships make their money.

In most cases, dealerships make very little profit off of selling the vehicles on the car lot. The real money comes from selling other products, services, and your loan contract. You can actually end up paying more in the long term because of higher interest rates, unused warranties, and other services you may never use.

Automotive refinancing is the process of negotiating a new auto loan on your car, truck, SUV, or other vehicle. Your refinanced car loan amount is almost always lower than your original car loan. This original loan often comes from the dealership where you first bought your car. You might feel like you've gotten a great deal when you finance with a dealership. However, the reality and financial impact to your wallet can be just the opposite.

You might end up paying more than expected when the dealership’s initial promotions or offers tied to your loan expire. Not to mention, as your financial situation changes, your original loan may not be as good as it once was. Reviewing the benefits and challenges of refinancing can help you decide what is best for you.

Refinance benefits

Several ways you can benefit from auto refinancing include decreasing your loan interest rate, decreasing your monthly payment, managing the loan’s term, paying down your loan, and adding additional products to your loan.

Have you ever asked yourself if you are happy with your car loan? Check to see if refinancing your loan could help you. While everyone's situation is unique, refinancing helps tens of thousands of people every year. Start by asking yourself the following questions:

• Were you satisfied with your loan or financing when you first bought your vehicle?

• Did you intend to refinance your vehicle after you bought it?

Check your answers

Our Caribou customers answered these same questions. Check out the results below and see how your answers compare.

Were you satisfied with your loan or financing when you first bought your vehicle?

The majority were satisfied with their financing.

Tip: Don't settle for an old loan thinking you have the best deal. Check for yourself and read your old financial agreement terms.

Did you intend to refinance 
your vehicle after you bought a vehicle?

The majority planned to refinance their cars.

Tip: Check current rates. If your financial situation, credit score, or other factors have changed you may have the opportunity to save money.

When you are thinking about refinancing your auto loan, the following terms are good to know about and understand. These terms often come up in the refinance process and are used in the monthly payment calculations, define different parties in the financial contract, measure values related to the loan like your credit score, and other similar things. These are some of the main terms to focus on, and you can find a comprehensive list further down in the glossary.

Common Refinance Terms:

• Annual Percentage Rate (APR): APR is the rate of how much it costs to borrow money over the course of a year plus other fees like loan origination fees and the cost of GAP. This means your APR will be higher than your interest rate in most cases.

• Auto Loan Lender: The auto loan lender is the institution that loans you the money to buy your car. This can be a third-party bank, credit union, finance company, or other Federal Deposit Insurance Corporation (FDIC) member. Also, some car dealerships offer in-house lending while other dealerships will resell your loan contract to a third party lending institution.

• Car Loan Amount: The car loan amount is the amount of money you borrowed to buy your car. This is the money that is loaned from the lender and which you pay back over the life of the loan.

• Car Loan Interest Rate: The car loan interest rate is the amount of interest you are charged by the lender for using their money to buy your car. It is a percentage of the principal amount you borrowed. For example, if you borrowed $30,000 for an auto loan at 5.3%, the interest would be $1,590.

• Car Loan Payment: The car loan payment is the amount you pay every month. Your payment goes toward paying off the auto loan amount as well as the interest on the loan. Payments are made for each month of the loan's term and pay down the principal value of the loan. The amount of each car payment decreases as payments are made over the term.

• Car Loan Term: The car loan term is the length of the loan and is measured in a number of months. Common loan terms are 36, 48, 60, and 72 months. You need to complete a payment on your auto loan for every month in the term's length.

• Car Loan Refinance: A car loan refinance enables you to replace your old auto loan with a new loan. You can refinance to find a more favorable term and/or rate. Refinancing is completed when a new lender pays off your loan from the old lender, takes over the debt, and accepts your monthly car payments. The refinanced amount is almost always lower than your original car loan. One of the best ways to check refinance savings is by applying through Caribou.

• Credit Score: Your credit score is a number that measures the likelihood of being able to pay off financial obligations. This is an important number in the auto finance process since lenders usually require a specific credit score. It is measured by a combination of factors including your available credit limits, the number of bank accounts you have, outstanding debts owed, payment histories, length of history, and other credit related things.

• Loan Co-borrower: A co-borrower is someone who enters into the loan contract with you. This is usually a family member, spouse, partner, or close friend. Your co-borrower shares responsibility with you for paying back the loan and can help you qualify for a better interest rate.

See the full auto refinance term glossary

Many people have questions about which cars and vehicles qualify for refinancing. Requirements are different depending on the vehicle and can vary depending on the lender, there is no globally applicable vehicle rule.

Typically, in order for your vehicle to qualify for refinancing, the vehicle needs to meet certain criteria including it needs to be a car, truck, SUV, or similar passenger vehicle, it needs to have a positive equity, and it needs to have lower mileage e.g. under 120,000 miles.

When refinancing your car

Check the following things as the car’s owner. First, make sure your vehicle is in good order. Second, make sure you are up-to-date on your car payments. And third, make sure you have a good loan-to-value ratio with the value of the vehicle worth more than the loan. On the contrary, having negative equity or an upside-down loan (owing more than the vehicle is worth) makes it significantly harder to refinance.

Newer vehicles

Vehicles previously purchased brand new are often easy to refinance. Newer model cars, trucks, and SUVs tend to have great loan-to-value ratios and low miles making it easy to qualify for refinancing. Compare buying new versus used cars.

Used cars

When refinancing used cars and pre-owned vehicles, you will need to check several things including vehicle mileage and condition. Make sure the vehicle's mileage is under the lender's refinance guidelines, and it is in good shape.

The vehicle's title status also matters during refinancing. Double check the used car's title status before purchasing it. Most lenders will not refinance a vehicle with any sort of brand (like rebuilt or salvaged) on the title. This is because branded vehicles were totaled and written-off as insurance losses. Full-coverage insurance is usually not available for these vehicles which adds more risk to the lender, so branded vehicles cannot typically be refinanced.

If you are buying a used car from a dealership, they will typically list the title's status such as clean, salvage, or rebuilt in the sales listing. Ask your car salesman or representative if you have any questions related to the condition of the title.

Older cars

Older cars can be harder to refinance depending on the lender requirements. For example, cars older than 5 to 10 years old begin losing value faster and usually have higher mileage based on average miles driven per year. It is possible to refinance collectible and classic cars with suitable lender programs.

Other vehicle mileage factors

Vehicle mileage is a factor in the auto refinancing process. Lenders usually require the refinanced vehicle to be under a specific mileage like 120,000 miles. If you have a high-mileage vehicle, look for a lender who offers refinancing with higher mileage limits.

Other vehicle location factors

The location, meaning the state where your vehicle is registered, matters when it comes to refinancing. Lenders typically operate within certain states and geographic areas. Therefore, look for a lender who services your area.

When you refinance your car loan, you replace your old loan with your new one entirely. Meaning your interest rate and loan term will change. Once you choose the new loan you want to accept, you can personalize that loan to meet your financial goals.

Common goals include:

• Lowering loan APR: Lowering the auto loan's annual percentage rate (APR) can be accomplished through a number of ways. Since lenders often offer better rates than the rates available through dealers, applying for car loan refinancing can give you a lower APR. Choosing a shorter loan term when refinancing can also help lower rates. Additionally, adding a co-borrower may help achieve a lower your rate.

• Shortening loan terms: Shortening the term can be a good idea if you want to pay off your car sooner. While your monthly car payment may increase since there are fewer payments to make, the shorter-term can also lead to lower interest rates since less risk is associated with the loan.

• Lowering monthly payments: Refinancing your car loan with a lower interest rate over a more manageable term may lower your monthly car payment. Maintaining a lower payment can add money back into the your pocket each month allowing you to save and budget for other expenses.

• Refunding warranties and insurance products: You may be entitled to a refund when you refinance your old car loan if you cancel previously purchased products bought through the dealer or lender. This may be the case if you have specific products associated with your old loan like GAP insurance, other optional coverage, or extended warranties. If you think you qualify, check with a Caribou loan officer to find out about your refund eligibility.

Before you start the refinance process, you should have a general understanding of exactly who qualifies for car loan refinancing. Recognizing application details like “how your situation aligns with lender credit score brackets” will give you a better idea about how likely you are to be approved as a borrower.

Lenders take into account your credit score, financial situation, debt-to-income ratio, location, and other factors when determining refinancer qualifications. Knowing the basic requirements can help you avoid problems later on like being unable to complete the refinance process or qualify for optimal rates.

Soft credit pulls VS hard credit pulls

A soft credit pull is necessary in order to check your credit report and ensure you qualify for a rate. Soft credit pulls do not affect your credit score. With these pulls, your credit history for initial eligibility (not for credit approval) is checked and questions like how many times you have borrowed money are answered.

Hard credit pulls happen later in the refinancing process prior to when a lender can offer you a specific refinancing rate. These pulls also occur during pre-approval processes. Hard pulls can affect your credit score since it means you are actively applying for the new line of credit. Learn more about where these pulls take place in the the refinancing application process.

Credit score

Credit scores are used to determine your borrowing eligibility. As we noted earlier, your credit score is a number that measures your likelihood of being able to pay back borrowed money and meet your financial obligations. Lenders use these scores measured within brackets for determining if you qualify for auto loan refinancing.

The credit scores are based on values using a point system and include FICO scores. These brackets cover different credit ranges from excellent (750 to 850), good (680 to 749), fair (580 to 679), and low (less than 579). Many lenders require a minimum credit score in order to refinance your vehicle. These main credit score brackets are defined as the following:

• Credit scores of under 580: These credit scores are toward the lower end of the range and are usually classified as poor credit scores. For auto refinancing, having a lower score means you need to find a lender which services low credit score customers.

• Credit scores of 580 to 669: These credit scores are found in the middle ranges and are classified as fair credit scores. If you fall into this range, refinancing your vehicle depends on a combination of factors like other outstanding debts and liabilities. You will want to check with lenders to see if you can qualify for a competitive rate.

• Credit scores of 670 to 739: These credit scores are near the mid-upper ranges and are generally considered to be good credit scores. You can often pre-qualify to refinance your car if your score is within this range since lenders consider your credit risk to be lower.

• Credit scores of 740 to 799: These credit scores are near the upper ranges and are generally considered to be very good credit scores. You can usually pre-qualify to refinance your car if your score is within this range.

• Credit scores of over 800: These credit scores are at the highest range and are exceptional credit scores. This means you have the lowest credit risk to lenders and almost always repay borrowed funds. This is the easiest bracket for pre-qualification and refinancing your vehicle.

These poor, fair, good, very good, and exceptional credit categories and ranges come from the FICO® credit score ranges. FICO® does not approve of or endorse this content.

The refinancing process from starting the application to approval usually takes about two weeks to complete. However, the entire refinancing process from application to full funding does vary but typically takes about 30 days.

The refinancing timeline can vary depending on your unique situation and how quickly certain steps are completed. Make sure you have all of the required documents and details on hand before you start. You can usually submit your preliminary details within minutes and see estimated quotes immediately. Learn about pre-approval in the auto refinance process.

The steps that usually take the longest include moving your application status from pre-qualified to submitted along with any title work. To efficiently move this step along, it is necessary to communicate in a timely manner with representatives and loan officers.

Other automotive products

Refinancing a vehicle also gives you the opportunity to add additional products to your refinancing contract that help take care of your vehicle and help protect your equity. These include products like guaranteed asset protection (GAP), cosmetic care packages, and replacement key programs which come at an extra cost.

Adding on these additional automotive products can increase or affect your monthly payment. They can make all the difference in being a happy car owner ready to take on the challenges of the road or stuck in a rut if you lose a key or sustain damage to your vehicle.

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