A person clicking on a refinancing button on a keyboard.

Key Factors that Influence the Cost to Refinance. Image credit: AdobeStock

Key Factors that Influence the Cost to Refinance

(Partner Content) Refinancing your auto loan simply means taking out a new loan to pay off your old one. Of course, the refinance terms have to work for your current financing needs.

A person clicking on a refinancing button on a keyboard.

Key Factors that Influence the Cost to Refinance. Image credit: AdobeStock

There are many reasons to consider refinancing an auto loan. Maybe your lender has new and better loan terms, or you finally got a raise at work. Or it could be you finally managed to clean up your credit score and want to apply for lower interest rates. It could also be you need to adjust your monthly auto loan fees to make way for other expenses.

In any case, here are some factors that could help you get better terms when you refinance auto loan.

1. Credit Score

Lenders look at your credit score to assess your creditworthiness. Your credit score affects the loan amount approved and the interest rate they offer. If your credit score has improved since taking out a car loan, refinancing could help you get better terms with lower interest rates.

2. Debt-to-Income (DTI) Ratio

Another factor lenders look at is your income. More specifically, they look at your DTI ratio. Your DTI ratio is an indicator of your capability to pay your loan. Like your credit score, you can work to improve your DTI score. Car owners with a lower DTI ratio often get good loan term approval since the lender considers them trustworthy to pay off their debt.

3. Length of Term

The usual loan term ranges from 36 to 72 months. On average, 36-month terms have a 5 percent interest rate, while a 60-month term has around 4.5 percent interest. If you can afford higher monthly installments, you can pay less for total interest and you can clear your debt faster. However, you can choose a longer-term if you need a lower monthly fee. The payoff is higher total interest, though.

4. Car Value

Lenders also look at your car’s current market value. They want to ensure they don’t let you borrow more than what your vehicle is worth.

The car’s make, model, features, mileage, and age are all factors that dictate its value. Remember that that value is quick to depreciate over time. If you want to slow your car’s value depreciation, bring it to the auto shop for its routine maintenance.

The higher your car’s value is, the better the loan amount and terms you can get. 

When Should You Refinance And When Should You Avoid It?

Depending on your timing of applying for refinancing, you can save up to thousands of dollars per year. So, when should you refinance, and when should you avoid it?

Refinance your car loan when your lender has new loans with lower rates. Car loan rates often fluctuate depending on the health of the economy. Sometimes, the loan company has better rates months after purchasing your car.

It is also good to refinance after you clean up your credit score. High credit scores usually result in loan terms with lower interest. If you started financing your car with bad credit and recently managed to get your credit up, it is a good time to consider refinancing.

You can also consider refinancing if you got the loan from the dealer and want to move your financing to a third-party lender that offers better terms. Dealers often charge higher loan rates than banks, credit unions, and other providers.

Refinancing is also an option if you need lower monthly rates to adjust your budget. While you can get your monthly bills reduced, this also means longer loan terms and higher total interest, so keep that in mind.

However, if you’re already far along in your current financing, that would be a bit impractical to apply for refinancing. It just extends your debt and increases the amount you pay for interest. Most people refinance around 30 days to six months after buying their car.

It is also not advisable to refinance a car with high mileage, or if your current loan is “underwater.” If your current loan has a prepayment penalty, it would also be better not to refinance, so make sure you check the contract of your current loan.

Some Final Tips

It is always a good thing to be conscious of your budget. Refinancing is a great way to keep on top of your finances, as long as you do your research.

Make sure to compare interest rates among different lenders, avoid loans with prepayment penalties, and look into multiple types of financing. The more knowledge you have going in, the better you can manage your budget.