Refinancing a car loan can be confusing, particularly if you haven’t done it before. One question you might have is whether your car warranty (or warranties) will continue under your new loan.
If so, breathe easy — most manufacturer warranties do remain in effect. Don’t let that keep you from trying to refinance and get a better auto loan rate.
But what about non-manufacturer car add-ons like extended warranties and vehicle service contracts? Those are different. We’ll cover why that is below.
What Is a Car Warranty?
A car warranty is an agreement from your car’s manufacturer to repair mechanical defects for a period of time or mileage after you purchase your vehicle.
A bumper-to-bumper or “comprehensive” warranty is always provided by the manufacturer when you buy a new car. For example, your new car’s warranty may provide coverage for three years or 36,000 miles, whichever comes first.
Used cars may or may not include a warranty. Sometimes the manufacturer’s warranty is still in effect. There are also a handful of states with lemon laws for used cars which require varying types of coverage, much like a warranty. However, most states do not offer any sort of protection from defects or failures, even if the seller lied about its condition.
Vehicle Service Contracts and Other Car Loan Add-ons
When you purchased your car, you might have purchased other extras to cover additional repairs over an extended length of time. The cost of these extras (like GAP waivers or vehicle service contracts) is often rolled into your original car loan or your refinance loan, but you can also buy these products later.
A vehicle service contract covers specific mechanical failures and repairs for a specified timeframe or up until the mileage limit is reached. A VSC is not an extended warranty. Instead, it functions more like insurance – you file a claim and pay a deductible to cover the remaining costs – and is offered by an independent provider, not the car manufacturer.
The price of a vehicle service contract can range anywhere from a few hundred dollars to more than a thousand dollars, depending on your vehicle, coverage selection and where you buy it.
Maintaining Your Car Warranty During Refinancing
If you’ve decided that it’s time to refinance your car loan but are concerned about maintaining your warranty or add-ons during the process, don’t be. A new car warranty stays with the vehicle, regardless of the status of your car loan.
The issuer of your extras and add-ons may or may not honor your contract even after the contract has been paid off by the refinance loan. In most cases:
Refinancing your car loan will not cancel your vehicle service contract. However, it’s important to review your original agreement with each provider to make sure that your terms aren’t affected by refinancing your loan.
Refinancing your car loan will cancel your GAP protection plan. The original loan has been paid off, so there is no longer a financial “gap” to protect. You will need to purchase a new GAP waiver for the refinance loan.
Don’t Let Warranty Concerns Keep You From Refinancing
To recap, refinancing your car loan shouldn’t make you lose your warranty or vehicle service contract, but you should check the fine print of your plan’s details to confirm. So go ahead and find yourself a better auto loan. Your wallet will thank you later.
Chances are, if you’re a licensed driver, you probably have a car loan. Around 85% of all new car purchases and 53% of all used car purchases are financed in the U.S., according to a report by Experian. The average American household also has more vehicles than drivers, and many of those additional vehicles are financed too.
While you can have multiple car loans at the same time, lenders will want to know if you’ll be able to make payments on all of your financed vehicles. Qualifying for an auto loan may be a little harder this time around. Here’s why.
Yes, You Can Have More Than One Car Loan
The simple answer to this question is yes. If you have good credit and can afford another monthly payment, you should be able to finance another car.
Ultimately, a bank, credit union, or another financial institution is likely to provide auto loan financing to any individual they deem credit worthy, regardless of the types of loans they have on their credit history. In order to secure a second car loan and get the most competitive rates, you need to show the banks that you can afford the additional debt and will pay it back.
Lenders will look at the following factors when evaluating your car financing application:
Down payment:Do you have enough cash?
Credit score:Is it over or below 600?
Payment history: Have you been making all of your other payments on time?
Debt-to-income ratio: Is your DTI less than 50%?
If you have a relatively high monthly income, enough cash for a down payment, a good credit score, and a solid debt-to-income ratio, a lender may be more willing to give you an additional loan, and with a really great interest rate too.
If you have bad credit, it’s still possible to qualify for another car loan. There are many lenders who work specifically with borrowers with subprime, or poor, credit. Your interest rate may not be as competitive as someone with a higher credit score, but after a few months of on-time payments on your credit report, you may start to see your credit score go up.
A common strategy for borrowers with bad credit is to buy and finance the car, then wait a few months for the on-time payments to make a positive impact on their credit. Once their credit score goes up, they apply for auto loan refinancing to get a lower, more competitive interest rate.
Should You Take Out Another Car Loan?
There are many reasons why you might opt to use your credit to finance an additional vehicle, but you want to be sure you weigh all the pros and cons before taking advantage of all your financing options.
Perhaps you need another car for a spouse or child. Perhaps you currently drive a sedan and believe you could benefit from adding a truck or SUV to your fleet. All of these are totally valid reasons why you might seek an additional vehicle loan.
Pros of taking out another car loan:
Taking out an additional loan can help you achieve your goal without saving up a ton of money or waiting until your current loan term is up. But there are some downsides to consider as well.
Cons of taking out another car loan:
Having two or more loan payments can take a significant toll on your monthly budget, which may cause you to default on payments. What’s more, loan applications leave a hard inquiry on your credit report, which could cause your score to drop.
Do Multiple Hard Inquiries Ding Your Credit?
Depending on the circumstance, multiple hard inquiries may or may not hurt your credit.
Remember that each time you attempt to get approved for a new loan, you add a hard inquiry to your credit score. Hard inquiries can bring down your score five to 10 points, and too many can signal to a lender that you’re a high risk or irresponsible with credit.
However, multiple inquiries for the same type of loan during the rate shopping period will only count as one.
Consider Refinancing Your Loan(s)
If you have a high interest rate on your current auto loan, you may want to consider auto loan refinance. If approved, refinancing will help you get your annual percentage rate (APR) down, which will ultimately lower your monthly payment and free up cash for other monthly expenses, such as a second car loan.
Use our refinance car loan calculator to see how much refinancing could save you during the repayment process. If you have multiple car loans already, you may want to apply for refinancing to get lower auto loan rates and save money over the life of your vehicles.
Weigh Your Options
In theory, you can have as many car loans as a vehicle financing company will grant you, but you will need excellent credit and a high income to qualify for a second loan. There are no laws preventing an individual from taking out more than one car loan, so if it makes sense for your financial situation, it may be a smart option.
Weighing your options and evaluating your own unique financial situation is critical when deciding whether or not to take out an additional loan.
The time it takes to refinance a car loan depends on a few factors, including the completeness of your loan application and your lender’s policy. The process can happen quickly, often within a few days of your application. Preparing for refinancing, including checking your credit reports and making sure that you can document the information in your application, can help prevent delays.
Refinancing an Auto Loan
Refinancing an auto loan allows you to secure more favorable terms for your car loan. If you are approved for refinancing, your old loan is rolled into your new, refinanced loan. If you’ve applied for auto loan financing in the past, you’ll find many similarities between the two processes.
Why Refinance?
People refinance their vehicle loans because they want — or need — a change in their current loan agreement. Refinancing allows them to take out a new loan with terms that better meet their needs. Here are some common scenarios:
Interest Rate Change
If interest rates drop during your loan repayment period, you might be able to save some money by refinancing at a lower rate.
Improved Credit
If you financed your original car loan while you had no or damaged credit, check your current credit score. If it has improved since you purchased your car, you may qualify for a lower interest rate if you refinance.
Need to Lower Monthly Payments
Even if you don’t qualify for a lower interest rate, you might be able to reduce monthly payments by refinancing for a longer loan term. You’ll pay more money over time, but the smaller payments each month might be easier on your budget.
Preparing to Refinance
If you are considering a refi on your auto loan, there are several things that you can do before applying that can help ensure a speedy acceptance and, hopefully, approval:
Order your free credit reports from all three major credit bureaus, TransUnion, Experian and Equifax. Check your report for errors and, if you find them, get them corrected before applying to refinance.
Refrain from applying for new credit, making major purchases or closing credit card accounts. All of these actions can negatively impact your credit score, reducing your chances of approval or getting approved for favorable refinancing terms.
Gather the documents you may need to apply for your loan. Your lender will tell you what documents you need, but be prepared to provide proof of identity, income and assets. For example, you may need to include pay stubs, W-2s or bank statements with your loan application.
Waiting for a Decision
If your loan application is complete and there aren’t any red flags during the application process, you can expect a decision within a few days. If you are approved for refinancing, the lender may handle paying off your old loan for you, or you may receive the funds yourself so that you can pay off your old balance. Receiving the funds, or the forwarding of the funds, can take a few weeks, so be sure to continue to make payments on your old loan until you can confirm that it has been paid in full.
Once your old loan is paid, you’ll continue to make payments on your new, refinanced contract.
Refinancing can be an effective way to make owning a car more affordable, so it is definitely worth taking the time to research this option with AUTOPAY. Get in touch with us today and one of our knowledgeable team members will answer your questions and help you get the process started.
If you’re considering buying a car, there’s a good chance you’ll wind up taking out an auto loan. The majority of drivers rely on car loans to cover all or a portion of their automotive purchase. In fact, Americans have about $1.18 trillion in car loans in total.
The interest rate on your car loan has a big impact on how much you pay over the life of your loan. It’s a percentage of your total balance charged by the lender or financial institution in exchange for the loan. The higher the rate, the more money you’re paying in interest each month until your loan is paid off.
That’s why it’s so important to make sure you get a good rate on your loan when buying a car. It raises or lowers the price you pay for the vehicle in total.
Whether you’re buying a new car or hoping to lower how much you’re paying for your current one, here’s how to determine whether you have a good interest rate on your loan.
Why Interest Rate Matters
The interest rate on your car loan is the fee you pay to the auto loan company for loaning you the cash up front. Lenders calculate monthly interest based on the principal or the total amount owed.
Note that interest rate and annual percentage rate (APR) are not the same. While interest rate is the annual cost of borrowing money and is calculated based on the principal, APR reflects the total cost of the car loan and includes the principal, interest, fees, and other things you rolled into the loan.
As you pay down the principal and your total amount owed lowers, so the amount you pay in interest lowers as well.
One of the simplest ways to determine how much you will pay in interest is to use an auto loan calculator online. Simply plugging in a few of the basics — the price of the car, your down payment, the length of the loan, the APR, and sales tax — will tell you the total amount of interest you will pay over time.
How Credit Affects Interest Rate
To get the lowest rates possible, you need to make sure you have great credit and are in good financial standing with your current lenders. Credit is rated by tiers, with tier 1 being the highest and tier 3 being the lowest. The higher the tier, the less information you may have to provide when applying for a loan.
Your credit score is determined by payment history, current account balances, length of your credit history, types of credit accounts, and other factors.
Every lender has their own underwriting guidelines, so it’s important to find a lender who will work with your credit profile and offer the most competitive loan terms.
It also helps if you use a cosigner who has good credit, choose a shorter loan period, or pay a bigger down payment to lower the overall loan amount.
You also want to check with multiple lenders, including online lenders, to “shop around” for the best rate. You may also consider heading into the car shopping process with pre-approval and multiple loan offers so you don’t risk winding up with a higher rate financing at the dealership.
What Criteria Financial Institutions Use to Determine Interest Rate
Financial institutions — such as banks and credit unions — determine loan rates based on a borrower’s credit. Lenders give borrowers with better credit ratings a lower interest rate because they are considered lower risk and they’re much more likely to pay back the loan in full. Every financial institution uses different criteria to determine whether someone is creditworthy.
Although every lender is different, they typically evaluate a borrower’s creditworthiness based on their credit report, which takes into account things like total debt in loans, credit cards, mortgages, and more as well as payment history, credit usage, and other factors. The average loan rates vary widely depending on where a borrower’s credit score falls.
Every financial institution evaluates credit differently and may provide you with a rate that’s higher or lower depending on many unique factors.
The Real Cost of Interest
Here is a simple example to help you see exactly how much interest rate affects your monthly payments and total interest paid.
Let’s say you want to buy a used car that costs $20,000 and you put $5,000 down as a down payment. That means your total loan amount is $15,000 plus the cost of taxes and fees, taking it to around $16,000.
If you have excellent credit and are able to secure a low interest rate of 3%, you will pay $354 a month and $999 in interest over the life of the loan.
If you have bad credit or no credit history, you’ll have a higher interest rate on your used car loan. In this example, let’s say your interest rate is 9%. In this case, you will pay $398 per month and over $3,000 in interest over the life of the loan.
As you can see, having good credit and securing a lower auto loan interest rate can save you thousands of dollars over the life of your loan. This means more money in your pocket for savings, monthly bills, and more.
How to Get a Good Interest Rate for a Car
So how do you get the best interest rate on your car purchase or refinance? Before you submit a single loan application, you want to make sure you follow the tips below.
Work on Your Credit
Boosting your credit score goes a really long way in securing the best auto loan rates.
So, how do you do that, exactly?
Pay Your Bills on Time
Always pay at least the minimum balance on time on your current loans each month. You may also consider paying debts down more aggressively to lower your overall credit use, which could boost your score.
Keep Accounts Open
As tempting as it may be to close old credit cards you’re not using, especially if they have high annual fees, don’t. Keep them open to help lengthen your average credit age.
Avoid taking out new loans
It’s also a good idea to avoid taking out any new personal loans or credit cards during this time since these can put hard inquiries on your credit and cause it to drop. If approved, it will also shorten your average credit age, which doesn’t look good to the bank.
Build Your Credit History
If you don’t have much credit history, consider putting utility bills in your name, signing up for a secured credit card, or asking a loved one you trust — and who trusts you! — to add you as an authorized user on one of their accounts.
Try Credit Raising Services
Many companies offer services to help you raise your credit score fast. For example, Experian offers an option that claims to raise your FICO score instantly.
Put More Money Down
Increasing your down payment is another great way to get a lower interest rate and smaller monthly loan payments. Not only will a higher down payment help convince the bank of your creditworthiness, but it will also lower the amount of interest you pay in total and each month since your interest payment is based on the principal loan amount.
Consider a Cosigner or Co-Borrower
To get a better rate, you may want to consider partnering with a cosigner or co-borrower. Though similar, a cosigner and co-borrower are not the same.
A cosigner is a person who signs the car loan alongside you, agreeing to pay the loan if you fail to do so. A co-borrower is similar, but will share ownership of the car as well as responsibility for the payments. Co-borrowers should both have access to the money used to buy the car.
Note that lenders may not allow a cosigner, only a co-borrower. This is because, in general, lenders don’t like when someone else’s credit is used to secure a loan for someone else. They expect the person on the loan to be the one who will own the collateral.
Often a parent, friend, aunt, or uncle, the cosigner signals to the automotive finance company that you are worthy of a lower interest rate. This is a huge thing to ask because you’re effectively asking someone else to put their credit on the line for you, so make sure to only use this option if you’re sure you can pay it back.
This is a great route to take for anyone without a strong credit history or those with poor credit who have improved their financial standing and are now able to pay loans on time each month.
Take a Shorter Loan Term
Auto loans are generally offered in different term lengths ranging from 24 months (two years) to 84 months (seven years). When you stretch your loan across a longer time period, it lowers your monthly payment, which means more cash in your pocket.
But there is a downside — If you take too long to pay off your loan, you may end up with a loan that exceeds the value of your car. That puts you and the lender at risk should your car be totaled and you owe more on the loan than the car is worth. If you have a guaranteed asset protection (GAP) waiver, you’ll be protected if your car is totaled and you still owe money on it.
Opting for a shorter loan period may be a great way to get the best interest rate based on your credit. When looking at your loan options, play with different terms to help determine how the rates vary depending on the loan term length you choose.
Sign and Refinance Later
If you aren’t able to secure the lowest interest rate possible that doesn’t mean you shouldn’t take out a car loan at all.
One great strategy is to take your less-than-ideal loan rate and refinance later. Having an auto loan can help you build good credit and ensure that you get a better rate later. After a few months of timely payments, you may see your credit score improve, and you may qualify for better rates than when you first bought your car.
You can refinance your new car loan in two or three months from the time you sign on, but it may be more beneficial to wait until you’ve boosted your credit history and score so you secure a lower rate.
Plus, if the interest rate savings are large enough, you may even end up paying less for the car by the time you’ve paid off the loan, just by getting a lower rate Use an auto refinance calculator to see how much you can save with a better interest rate.
Find a Rate You’re Comfortable with
If you’re a new borrower or are working on your credit score, taking a higher rate isn’t always a bad thing since it can help you boost your credit standing and helps get you on the road faster. Ultimately, there’s no magic number when it comes to the ideal APR. A good interest rate is one you’re comfortable with and one that fits into your budget.
