Refinancing

Refinancing……

 …..an auto loan means replacing your current car loan with a new one. Your new auto loan pays off the old one, meaning you’ll have an all-new loan agreement — including a new APR, which is your interest rate, and a new loan term, which is the amount of time you have to pay off the loan.

There are a number of reasons why a driver might want to refinance a car loan, but it’s usually a cost-cutting measure. Refinancing from a loan with a high interest rate to one with a lower rate can be a good way to save money. If your monthly loan payments are too expensive, refinancing to an auto loan with a longer loan term can get you lower monthly payments, but may cost you more over the life of the loan.

Refinancing a loan can mean additional fees, too, and may damage your credit score, so if you’re wondering whether or not you should refinance your auto loan, it’s important to weigh the pros and cons — refinancing is definitely not an automatic money-saver.

In this article:

What is a car loan?

Pros of refinancing an auto loan

Cons of refinancing an auto loan

How do you refinance an auto loan?

What is a car loan?

A car loan is a type of secured loan meant to help you buy a vehicle. Car loans work much the same way as other types of loans: An institution agrees to lend you money to buy a car, and you agree to pay back that amount over time, plus interest. You can get a car loan directly from a bank or a credit union, or you can go through a car dealership.

Wherever you get your loan from becomes your lienholder. Your lienholder is the party that owns your debt, and if your original lender sells your loan to another party, they become your new lienholder.

When you take out a car loan, your car itself is the collateral. That means that if you don’t make your loan payments, your lien holder can take possession of the vehicle.

Damaging a car won’t free you from having to repay your car loan.

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Pros of refinancing an auto loan

For some drivers, refinancing an auto loan makes financial sense. Some of the benefits to refinancing your car loan include:

Getting a lower interest rate

This might be the most obvious reason to refinance. If interest rates have dropped since you initially took out your car loan, it makes sense to refinance. A loan with a lower interest rate, even if it seems like a small difference, can save you a lot of money over time.

You may also be able to get a lower interest rate if your credit score has improved significantly since you first took out your loan.

The better your credit, the better loan offers you’ll get, so if you’re in a better financial situation than when you first took out your car loan, consider shopping around to see if you qualify for lower rates.

Getting a longer term

Even if you can’t refinance for a lower interest rate, if your monthly payments are too high, you can look into refinancing with a new loan that has a longer term.

Going from a 36-month loan term to a 72-month loan term won’t save you money overall — longer term lengths usually mean you wind up paying more over the life of the loan — but it will lower your monthly payments. If you’re struggling to keep your head above water each month, lower monthly payments might be helpful.

Possible discounts

Some banks or credit union lenders may offer special discounts for existing customers who choose to refinance a car loan with them. Check with your current bank to see if they can offer special rates on refinancing auto loans.

Cons of refinancing an auto loan

As we mentioned above, while refinancing an auto loan can be a good way to save money, it’s not an instant win for every driver. There are some cons to refinancing an auto loan, including:

It doesn’t make sense for everyone

Refinancing your auto loan makes sense if you can save money, but it’s not right for everyone. If you’re almost done paying off your current auto loan, refinancing to a loan with a lower rate won’t save you much money since you’ve already paid most of the interest.

Lenders may also place some restrictions on refinancing. For example, some banks and other lending institutions won’t refinance your loan if your vehicle is above a certain number of miles or is more than ten years old.

Refinancing can ding your credit score

If you need your credit score in tiptop shape for any reason, you may want to consider holding off on refinancing your auto loan. When you apply for a new loan, lenders will conduct a credit inquiry, which can take some points off your credit report.

If you’re just straddling the line between “good credit” and “great credit,” the process of refinancing your loan might keep you from that better score. However, as with all loans, making your payments in full and on time is good for your credit score, so taking a small hit to your credit score may be worth it in the long run, if it helps you avoid missing any payments or defaulting on a loan.

It’s also worth noting that if you shop around with a few lenders, it won’t necessarily harm your credit score anymore than if you just applied with one. If multiple auto lenders conduct hard inquiries within a certain time frame, it will only count as a single inquiry, and the damage to your credit score will be minimal.

How do you refinance an auto loan?

Refinancing an auto loan is a much faster process than, say, refinancing a mortgage. You should have all the necessary info on hand, including info about your current loan, like your monthly payment, your interest rate, and your loan term. You’ll also want to check with your current lender to see if you’ll have to pay a prepayment penalty.

Just like any time you apply for a loan, you should apply with multiple lenders and then compare loan offers to see which is the best one (most banks and online lenders make it quick and simple to apply online). If you’re looking to save money, make sure you’re considering loan term as well as interest rate.

Once you’ve crunched the numbers and decided on the loan that’s right for you and your bank account, you’ll sign a new loan agreement. Your loan will pay off your own loan and then you’ll start making your new monthly payments.

Refinancing your car is a good idea if you want to lower your monthly overhead. Sometimes you may get a higher interest rate if your credit score is lower when you buy the car. Afterwards if your credit score gets higher you can save some money on the interest. This is ideal for people that are paying 5% or higher on their vehicle loan and has improved their credit score since they purchased the vehicle. The refinancing process is easier than the initiation of the loan for the vehicle when you purchase it. There is less paperwork to do and the process is a lot simpler. The payoff of the vehicle is purchased by another lender and they offer you a lower interest rate ideally. Then you get to choose a term, sometimes you will add a year or two to the payments but that should only be done if you are looking to lower your monthly overhead. 

How a lease buyout works.

You can buy your lease out at any time. It does not have to be the end of the lease if you know you want to keep the vehicle then why not look into some options now. The lease buyout is pretty much the same as the refinance process except you will have to pay taxes and re-register the car with the new lienholder so there are a few more steps involved. The buyout option at the end of an auto lease can be an attractive opportunity or a tool for damage control.

The buyout price is set by the leasing company at the beginning of your contract. If you’re anticipating extra fees and penalties, buying the car can cut your losses. Or, if market conditions have changed since you signed the lease and you’ve lightly driven the car, you could turn the hidden value in your vehicle into real savings.

Now that you know the numbers, here are the times when you might want to stay with old faithful.

1. You’re way over — or under — the allowed mileage

Most lease contracts are for three years and 36,000 miles. If you’re over, you’ll owe money; if you’re under, you could leave money on the table.

“Why pay two or three grand in mileage penalties and have nothing to show for it?” says Matt Jones, a senior consumer advice editor at Edmunds.com. “Not only that, but buying the car will save you the disposition fee,” the charge to prepare the car for resale, which is usually $350-$500.

But also check your contract for purchase option fees (typically about $350), charged by some leasing companies, and factor that into your decision.

Conversely, returning a car you drove only 10,000 miles, when you paid for 36,000 miles is like handing the dealer a big check. Instead, buy the car and use the value you’ve paid for, Jones says. Or you can get a no-haggle appraisal at CarMax (or at a dealer, although this could involve some haggling). If the numbers break in your favor, since the under-mileage car is worth more than the buyout price, the agency will buy your lease and give you a check for the difference.

2. Your car has excess wear and tear

If your car has a collection of indiscretions — scrapes, dings or tears in the upholstery — you could be looking at penalties for excess wear and tear. But if you buy the car, you won’t be charged for the damage or the disposition fee, and you can fix the bumps and bruises when, and if, you want, says Paul Maloney, owner of Car Leasing Concierge.

3. You negotiate a lower buyout price

Buying your leased car saves the leasing company shipping and auction fees. That’s why, in some cases, they’ll call and offer you a lower buyout price than what’s in the contract. But Maloney says it often isn’t a good deal since they’ll likely offer the retail price, when you should aim to buy it for wholesale.

To negotiate a reduced buyout price, you’ll need to talk to a lease-end manager at the leasing company who has the power to approve lower prices. Banks writing leases may be more likely to negotiate than automakers’ finance companies.

“It’s really just a case-by-case basis,” Jones says. He says leased electric vehicles often have reduced buyout prices because of low resale values.

4. Your friend wants to buy your leased car

If you buy the car then sell it to a friend, you’ll have to pay sales tax. Instead, see if the finance manager at a local dealership will do a “lease pass-through,” says Scot Hall, executive vice president of operations for Swapalease, which matches leaseholders with car shoppers looking to take over a lease.

Basically, the dealer buys the car from you and immediately sells it to your friend. You aren’t charged sales tax and the dealer makes a few hundred dollars for moving paper. But be aware: Your warm body without a car in a car dealership means that you’re probably in for a sales pitch.

5. You like the car and don’t want the hassle of car shopping

Maybe, you think, it’s time to stop being a serial leaser, jumping from one leased car to another, always having a monthly payment. If you like your car, compare the buyout price to the retail price on Edmunds.com and Kelley Blue Book. If it’s a fair deal, skip the dealership and send the lease company a check.

Keep in mind, however, that you won’t be protected by the bumper-to-bumper warranty which is typically for three years and 36,000 miles. But the powertrain warranty, covering major parts like the engine, transmission and suspension, might still be in effect. 

It’s easy to become attached to the car you’re leasing, and when that happens, you may find yourself dreading the day you return the keys. An auto lease buyout loan can help.

For many drivers, the end of an auto lease can mean saying goodbye to a car you love and signing a new lease agreement. But there’s another option: an auto lease buyout. A lease buyout loan lets you buy the car you’re already driving from the leasing company for a predetermined price.

Sound interesting? Here’s what you need to know about lease buyouts.

Take a fresh look at your lease contract

Start by reviewing your original leasing agreement to determine how much it’ll cost to purchase your car. Your leasing agreement should outline the residual value, or the purchase option price. If you choose to keep the car, you’ll need to pay the residual value amount, plus any applicable taxes and Department of Motor Vehicles (DMV) fees. You may also pay an administrative fee that’s predetermined by the leasing company, to cover transaction costs.

Keep in mind that depending on the make, model and specifics of your leasing deal, your car may be worth more or less than the residual price on the open market. The residual price:

  • Is based on previous sale prices for that specific make and model.
  • Reflects the car’s demand. A popular make or model usually commands a higher residual price.
  • Is typically nonnegotiable.

Run a simple search of used-car sites, such as Edmunds.com, Cars.com or Kelley Blue Book (kbb.com), to see how your vehicle’s lease buyout price compares to the open market.

Three key lease buyout considerations

If you’re happy with your car’s residual price, ask yourself if these other aspects of the deal work for you:

  • Have I exceeded the mileage agreement terms? If you’ve gone over your lease’s mileage limits, you’ll be subject to per-mile penalties that can add up when your lease comes to an end. For example, if you’re 10,000 miles over your lease’s mileage limit, you could pay a penalty as high as $2,500. That’s money that could be put toward buying out your lease.
  • Is the car in good condition? When you return your car, it’ll be inspected. While most leasing companies allow for imperfections due to everyday use, above-average wear and tear can cost you. These fees can range from hundreds to thousands of dollars.
  • How much will it cost to maintain? Check out independent research, like Edmunds’ True Cost to Own® reports, for your make and model. Factor these expected ongoing costs into your decision to purchase your leased vehicle.

Explore your payment options

Unless you have enough cash on hand, you’ll need financing. You may be able to finance the purchase by getting a loan from a bank or other finance company, as an alternative to the dealership’s financing services. As with any type of loan, it’s a good idea to shop around for the best interest rate and terms. Take into consideration that the annual percentage rate (APR) on a lease buyout loan is typically higher than on a new-car purchase. Also, give some thought to your desired loan term: A shorter-term loan comes with higher monthly payments, but the upside of that is lower interest charges over the life of the loan. Terms typically range from 36 to 72 months.

Seal the deal

If you decide to obtain a lease buyout loan from a bank or other finance source, you may first need to contact the leasing company to confirm the process for ending your lease. From then on, your lender’s loan officers can help you determine the loan amount based on your leasing agreement and work with your leasing company directly to facilitate the buyout. When you finance this way, you’ll likely be responsible for settling any fees with the DMV.

Now that you know what’s involved in an auto lease buyout, it’s much easier to make a smart decision that works for your budget and lifestyle–and perhaps buy that great car you’re already driving.

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