Myth #1 - Refinancing Doesn’t Help You Save Money
A lot of borrowers think that refinancing won’t help them save money.
Well, this depends on certain situations, both financial and personal.
For instance, if the market interest rates have dropped or there has been an increase in your credit score since you took the first auto loan, accepting newer rates and terms can save you money.
However, it is extremely important to keep in mind that a lower rate doesn’t always mean that you’ll be saving money.
If you increase the term of the loan just to lower your monthly payments, you might end up paying more than the value of the vehicle.
Most lenders claim that refinancing an auto loan helps borrowers save anything between 2% to 5%.
A good idea is to compare multiple quotes, amounts offered, repayment term, and the interest rates from different lenders.
Myth #2 -
You Won’t Be Eligible If You Have Negative Equity
A lot of car owners are currently experiencing negative equity, otherwise known as being upside down or underwater, on the car they drive.
This is mainly because the depreciation value of a vehicle is way faster than you’re able to clear the principal amount.
During the first few years of the loan, the depreciation rate of the vehicle ranges between 10% to 25%.
The average value of a car can drop up to 80% or more of the actual price by the time you clear one-fourth of the principal.
This trouble gets bigger if you fall for advertisements where dealerships accept a very small down payment or no down payment when purchasing a car.
Most refinancing lenders are already aware of this.
Accordingly, they usually offer loans up to 130% LTV (loan to value) of the vehicle’s value.
If you are currently upside down on the car’s value, refinancing can actually help you save money while substantially lowering your monthly payments as long as you stick to shorter repayment terms.
Myth #3 -
You Can’t Refinance Because You Have a Low Credit Score
Credit scores matter, but lenders also look at other things.
You might have a lower score because of a problem in the past. Yet, if you have a recent record of making timely payments, the lender will overlook the credit score to an extent.
If you have a steady income, a stable job and reliable residence history, income proofs, low debt-to-income ratio, and are currently in good terms with all debtors, you’ll have higher chances of approval.
A high credit score, on the other hand, helps you negotiate and secure lower rates.
Generally, if you have a low score, you’ll receive the least preferable rates and strictest terms.
You might even be asked to make a higher down payment.
Still, there are workarounds for those with bad or no credit — for example, having a cosigner or pre-qualifying with a credit union will increase the chances of getting a better rate even without a stellar FICO score.
Myth #4 -
A Good FICO Score Gets Your Application Approved
A strong credit score is beneficial, but it is not the only aspect that ensures approval.
Besides your credit score, lenders take other considerations into account.
For example, if your car is more than seven years old, some lenders won’t accept your application.
There are different requirements for approval, and it varies by lenders and your location.
Lenders also don’t approve applications for refinancing certain older cars or cars with poor mileage, even specific makes and models.
Hence, make sure that you check with the lender about the eligibility requirements.
Myth #5 -
Shopping For Refinancing Is A Waste Of Time
A lot of people think that refinancing lenders offer the same rates and terms.
Thus, they feel shopping around comparing rates is a complete waste of time.
Another added problem is the wrong notion that asking for quotes impacts a borrower’s credit score.
The fact is, all of your inquiries for a specific loan niche for 30 days are calculated as a single entry, thus there isn’t a huge impact on your credit score.
Another thing is that each lender has different algorithms for calculating rates. So, if you shop around, the chances of you receiving a lower rate increases greatly.
Refinancing an auto loan is the ideal choice if you’re able to access lower rates than what you currently pay.
If you decide to go for refinancing, make sure to check all available options and discuss your situation directly with the lender to achieve the best possible outcome.