Refinancing your vehicles is an effective way to manage your auto loan obligations. You can refinance to lower your monthly payments, pay less in interest, or pay off your cars sooner than expected. Whatever your goal, smart refinancing may help you get there with less time and money invested. Best of all, you can refinance all your cars if you're in the right financial situation.
While refinancing can offer many benefits, it's not as simple as it seems. You should take the time to thoroughly explore your options before refinancing your vehicle to ensure that you're making a smart decision. Evaluating your finances and vehicles carefully will help you choose the most suitable option in this complex situation.
Can you refinance two cars at the same time? Sure. But is this the best option? That's a more complicated story.
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What Is Auto Loan Refinancing?
Refinancing an auto loan is the process of replacing your existing car loan with a new one. You then use the new loan to pay off the existing debt for your vehicle. When you refinance a car loan, you can essentially start over with the loan process and enjoy new terms. If you're unhappy with your current auto loan, refinancing is likely the best option for fixing the situation.
If you purchased your vehicle in a hurry and used dealership financing without comparing your options, refinancing can help you remedy potential errors. However, you shouldn't take a loan carelessly because you can refinance later.
When Can I Refinance My Vehicles?
While auto loan refinancing may sound exciting, it's something that you should approach with great care. It's not always advisable or even possible to refinance your auto loan. You may not qualify for refinancing if:
Your vehicle has more than 100,000 miles.
Your vehicle is more than 10 years old.
Your current loan is less than six months old.
The car is worth less than what you owe on it.
Your credit score or income is lower than when you applied for the original loan.
You should also consider situations where you may technically qualify for refinancing, but it's not in your best interest. For example, some auto loans have a prepayment penalty. Your lender charges this fee if you attempt to pay off your loan earlier than scheduled. In most cases, you'll have to pay the prepayment penalty if you refinance. Consider whether the financial benefits of refinancing are greater than the expenses associated with this penalty.
When to Refinance a Vehicle
You may want to consider refinancing your vehicle if you can improve your financial situation by doing so. When your credit score or income has increased and you're eligible for better terms on a new loan than on your old one, it's a good time to refinance. Having a cosigner with a high income and credit score can also help improve your loan terms. However, your cosigner takes on the financial risk associated with the loan, so you should approach this arrangement carefully.
You may also want to refinance your vehicle if you have trouble making the monthly payments and can secure lower payments through a new loan. Both the interest rate on your loan and the total length of the loan help determine the amount of the monthly payment. There are many factors to consider when determining how much to pay each month. Lower payments free up more cash in the short term, but a longer loan means you'll pay more in interest.
For example, a $10,000 loan with a 3% interest rate costs $180 monthly over a 60-month term. Over that time, you'll pay $781 in interest. If you decrease the term for the same loan to 36 months, you'll pay $291 a month. However, your total interest decreases to $469. The shorter loan term saves you $312 over the life of the loan but increases your monthly payment by $39.
Consider your financial situation carefully before you refinance your auto loan so you can decide which terms are the most favorable. You don't want to sign on for more than you can pay each month, or you'll risk defaulting on the loan and losing your vehicle. However, if you can afford a higher monthly payment now, you'll free yourself from this loan entirely in a shorter period while spending less money overall.
Can You Refinance Two Cars at the Same Time?
Once you've explored the benefits of refinancing your vehicle, you may want to do this for every car you own. If you own more than one car, you're probably wondering if you can refinance two cars at the same time. The short answer is yes.
If you're in a good financial situation, there's nothing stopping you from refinancing two cars at once. The only drawback is that your credit score takes a small hit when you apply for a new loan. You may have already experienced this when you applied for your second car loan. If you purchased the second vehicle shortly after the first, your credit score was likely lower when your lender pulled it for the second loan.
Refinancing is similar, since you're essentially taking on a whole new auto loan. After you've refinanced the first car, your credit score may be slightly lower when you pursue new financing for the second one. You can sidestep this complication and streamline the entire process by consolidating your car loans instead. Consolidation eliminates the second car loan entirely.
What Is Car Loan Consolidation?
Car loan consolidation is the process of taking out a new loan to pay off the existing loans for both cars. Consolidating two car loans into one is essentially the same thing as refinancing both loans. The only difference is that you're taking on one new loan instead of two. You can consolidate both of your cars under a new auto loan, or you can pursue other loan options.
When consolidating vehicle loans, you may want to compare more than just traditional auto loans, which require that you carry full insurance coverage on your vehicles. If you use a different type of loan, you can decrease your auto coverage to as little as the state minimum, which may help you save money. Some alternative loan options include:
Personal loans: You can typically use a personal loan for any type of expense. You could use this to pay off both car loans and other debts, such as credit card debt. If the terms of the personal loan are better than those of the existing loans and lines of credit, this can help you improve your financial situation.
Home equity loans (HELOCs): A home equity loan uses your home as collateral for the loan. Since you have something of great value to back up your loan, you can usually get a lower interest rate for this type of financing. If your HELOC has sufficient value, you might use it to repay both of your car loans at once.
Credit cards: It's not usually advisable to pay off car loans with a credit card, as credit cards often have high interest rates. However, if you get a great introductory offer with no APR for a period, and you can pay off your loans before this period ends, you may find that this is a workable solution.
While these creative alternatives give you some interesting options to explore, in most cases, you'll probably find that it's best to take out a new car loan in place of your current one. The vehicle itself secures the car loan, which usually gives you a lower interest rate. This is usually better than an unsecured loan that will charge you more in interest, since there's nothing for the lender to repossess if you default on the loan.
No matter how you refinance, consider prepayment penalties. If your current loans charge penalties for paying them off early, you'll need to determine whether these fees will cost you more than what you save with your new loan terms.
The Benefits of Consolidating Car Loans
You can enjoy several benefits from consolidating your car loans wisely. If you want to simplify your financial burden, consolidating your auto loans will give you one monthly expense to track rather than two. This makes it less likely that you'll miss a payment. If you and your spouse consolidate your car loans, you may find it easier to work together toward one loan than to independently manage two of them.
If you're mindful of the type of loan consolidation you get, you may also be able to lower your overall monthly expense. You can achieve this by securing a lower interest rate. If interest rates are trending lower overall, you have a window of opportunity for consolidation. Getting a lower interest rate on one new loan than what you had on two previous loans can save you a lot of money. Extending the term of your loan may also help you lower your monthly payments.
Determining the Length of Your New Auto Loan
When you're securing a new car loan, it's important to think about the overall length of the loan. Car loans typically range from 24 to 84 months. The longer the term, the less you'll pay each month. This is why it's so appealing to opt for a longer term.
However, you must consider vehicle depreciation. After just two years of ownership, the average $20,000 vehicle drops in value to just $14,247. After seven years of ownership, that same vehicle is worth just $6,101. When you refinance your loan, it's important to make sure that you don't end up paying far more than what the vehicle is actually worth.
Refinancing can extend the length of your loan, giving you more time to pay it off and lowering your monthly payments. This may help your monthly budget, but it's only a smart move if you can trust the vehicle to last. If your vehicle fails before you've paid off the loan, you'll still owe money on your car, even as you're searching for a replacement.
If you consolidate your auto loans as you're refinancing them, consider the lifespan of both vehicles. You're committed to owning these two cars until you've paid off their joint loan. If you expect to replace one of the vehicles before that time, consolidation may not be a good option for you.
Refinancing your cars offers several opportunities to improve your financial situation. If you get lower payments, this may ease your financial burden each month and help you build emergency savings or funnel more funds toward high-interest lines of credit. If car loan refinancing helps you pay off your vehicles faster, you'll get to enjoy the financial freedom of owning your vehicle outright for a longer period before you choose to replace it.
Consider all your options carefully, whether you're refinancing one car or two. While it's possible to refinance all your cars at once, you may find that there's one method that will work better for you.
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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