Most people take out their car loan from a financial institution, which imposes set parameters for the length of the loan and the interest rate. As a borrower, you may ask "Can you refinance a car loan with a different bank?" or whether you need to stay with the same institution that issued the original loan. Either choice can give you the flexibility to take advantage of a loan with better terms and save money each month and over the life of the loan. This guide covers car loan basics and weighs the pros and cons of refinancing with a different bank.
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What Is a Car Loan?
A car loan is a financing agreement between a financial institution — the lender — and the car purchaser — the borrower. The borrower makes monthly payments to pay off the loan amount for the duration of the loan term. In the meantime, the lender uses the car as collateral to secure the loan until the eventual payoff.
Borrowers apply for auto loans to cover the out-the-door cost of their vehicle, which is the purchase price plus taxes and fees. They agree to make monthly payments of principal and interest in exchange for driving the vehicle. You can finance a car loan for a certain number of months, often between 24 and 84, giving you a consistent monthly payment amount to add to your monthly budget.
When you apply for a car loan, a financial institution will review your credit application and issue the terms of the loan if it approves it. The terms will include the principal amount borrowed, the interest rate, the repayment term length, and a monthly payment amount. If you have a higher credit score, the interest rate will be lower, meaning your monthly payment will be lower.
However, if you have a low credit score or limited credit history, the financial institution is likely to impose a higher interest rate, meaning you'll have a higher monthly payment for the length of the loan.
Once you have entered into a contractual agreement with a financial institution for an auto loan, you will need to make monthly payments to pay off the debt. Missing payments or defaulting on the auto loan can lead to serious credit issues and the repossession of the vehicle. Making car loan payments on time can help to build a strong credit profile that will make borrowing in the future an easy process.
Should your financial situation change, either positively or negatively, there are ways to create flexibility by refinancing an auto loan.
Refinancing in a Nutshell
At its core, refinancing is taking out a new loan on your existing vehicle to pay the existing loan off. This is ideal for taking advantage of lower interest rates, a longer term for payments, or a shorter term to pay off the car faster. Most of the time, a positive change in your credit score can help you secure a lower interest rate on a new car loan, leading to lower monthly payments and less interest paid over time. This can free up money each month for you to put toward other debts, or you can pay off your vehicle faster by paying additional money each month toward the loan's principal.
When refinancing, you are closing an account and opening a new one. This affects your credit but can also improve your financial situation. Moving from one lender to another can give you access to additional benefits, such as new credit opportunities or membership benefits, making refinancing even more rewarding.
When Should You Refinance a Car Loan?
Refinancing can help you take advantage of your improved credit, get out of a bad loan with terms that are not advantageous, and reduce the monthly payment for your car loan. The right time to refinance a loan will vary depending on several factors, including the following:
Is the loan current? If you have not missed any payments on your auto loan, a lender will consider your account to be in good standing. Missed payments can negatively impact your credit score and your ability to qualify for a refinancing loan.
Has your credit improved? You should only consider refinancing if there have been positive changes to your credit score, meaning you now qualify for better car loan terms and a lower interest rate.
Can you get better terms? If you are strapped into a loan with an inflated interest rate or one with a co-signer with poor credit, refinancing can help save you money on your monthly payment and get a better interest rate. Adding a co-signer if there was not one on the original loan can also help you get better terms, particularly if the co-signer has a strong credit history.
Do you have equity in your current loan? If a car is worth more than you have left on your loan, a cash-out refinance can give you access to that equity and all the benefits of a refinance. This can help you access cash for unexpected expenses or travel.
Is there another incentive to refinance with your current lender? If you have a pre-existing relationship with a financial institution, it may offer an incentive program that makes refinancing with it an attractive proposition. Sometimes, a financial institution will offer better terms for longstanding customers or allow you to extend the life of your loan.
There's no perfect time to refinance a car loan, but any borrower who can take advantage of their current situation to save money by paying less per month and less over the life of the loan may consider refinancing their car loan to improve their financial situation.
Refinancing with a Different Bank
When starting the process to refinance your car loan, the first step is to look at your current loan and financial status, including your credit report. Generally, if your credit has improved from when you first financed your car, a refinance can start saving you money in the short term and continue to build your credit in the long term.
Applying to refinance a car loan usually opens a 14- to 45-day window for you to apply for as many car refinancing loans as you want and have them count as a single hard inquiry on your credit, similar to shopping for a mortgage. During this timeframe, you should apply for auto loans through several financial institutions so that you can find the best terms to fit your financial needs.
Here are the advantages of refinancing with a different bank:
Comparison shopping: As you begin applying for refinancing, you will have the ability to pick the very best loan for your financial goals, pitting financial institutions against each other in the process. Shopping around could land you a better interest rate than your current lender would offer.
A potential payment reprieve: The time between when your new bank pays off your existing loan and when your first payment is due could be a couple of months, giving you a period of time that you don't have to make an auto loan payment.
Selecting the best experience for you: When choosing a new loan, you can take into account if the bank has a good reputation for customer service, whether their app or online portal is easy to use, and if the bank has a location near you for quick transactions.
These are the cons of refinancing with a different bank:
Creating a new account: If you choose to refinance with a different bank, you'll have to go through the process of setting up a new account, learning how and when to make your payments, and picking up the ins and outs of a new online portal or phone app.
You may lose perks: Your existing financial institution may have a rewards program or loyalty discounts that a new financial institution doesn't offer.
You don't know the customer service: When you switch to a new bank, you also get a new customer service experience, which could mean a change in service.
Refinancing with the Same Bank
As you're shopping for a new auto loan, considering your current bank is a good option for continuity. Your current lender may offer certain perks to keep you as a customer or increased loyalty rewards. While those perks may be a nice bonus, it is important to consider your financial goals in the short and long term and determine if your current bank is helping you meet those goals.
Here are the pros of refinancing with the same lender:
Familiarity with the bank and its processes: By keeping your auto loan with the same financial institution, you already know how everything works. From the online account portal to the grace period for late payments, nothing will come as a shock.
Potentially lower fees: If your current financial institution is working to keep your business, they may offer a break on fees associated with your account or eliminate setup fees that can come with a refinance.
Getting to the savings quicker: By working with a known entity, you'll be able to get into your new loan faster, giving you savings on monthly payments quicker than if you were switching financial institutions.
There are a few cons of refinancing with the same lender:
You may not get all of the perks: By sticking with the same lender in your refinance, you may not get the perks of a payment reprieve or the incentives that the bank may offer a new customer.
Your lender knows your current terms: Your current lender knows exactly what your payment and interest rate are on your loan, giving you less negotiating power.
The customer experience may not be as great: When you have an existing relationship with a financial institution, they may not roll out the red carpet for you in the same way as they would for a new customer.
As you consider your options for refinancing an auto loan, there is no set rulebook for how to proceed. Whether you choose to refinance with a new bank or stick with your original loan servicer, ensuring that the refinance process helps you meet your goals should be at the top of your list.
Hearst Autos Research, produced independently of the Car and Driver editorial staff, provides articles about cars and the automotive industry to help readers make informed purchasing choices.
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