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How does auto refinancing work

how does auto refinancing work

Categorized | Loans

How Does Auto Refinancing Work?

Posted on 04 May 2015.

Auto refinancing is simply when you replace an existing loan with a new one on your automobile. With refinancing, you will be offered an attractive option. This can be discovered if you want to minimize the amount spent on interest. Even if you are planning to cut your monthly payments, auto refinancing can also help. There are several reasons why people carry out auto refinancing. When there is divorce or marriage issue, auto refinance can be executed. Even during car ownership changes, auto refinance can as well be done. However, auto refinancing process remains the same irrespective of your motive. Is your quest for auto refinance? Reading through the enumerated points below will help you understand the basic concept of auto refinancing easily.

Loan Application:

The auto refinancing process usually commences with a credit application. You will have to make an application for refinance loans from financial institutions, finance companies, and credit unions. For convenience, most companies can allow you to apply in person or via online. With the application, you will be able to provide the company with detailed information about your vehicle. This can be found in the likes of mileage, car identification number, and general condition. You will also be requested to provide personal information such as date of birth, Social Security number, sources of income and just to mention a few. An individual will not be able to refinance a loan unless with a car insurance and valid driver’s license.

Credit Score:

In providing you with a loan, lenders often make use of your credit report to determine the level of risk involved. When you have a high score, it simply means that the risk involve is minimal. Low scores often signify a high default rate. From research and feasibility study, it is important to know that credit scores often change on a monthly basis. This is always executed with respect to the balance of your credit cards and payment history. A lower interest rate can be potentially provided with an auto refinance. This is usually when the credit score has risen since you purchased your

vehicle. Your rate may rise if the credit score has fallen as well. There is every possibility for a lender to decline or disapprove an application due to a low credit score.

Your Vehicle:

On an auto refinance with a purchase loan, your vehicle will be the collateral for the debt. If you don’t pay the loan, the lender has the right to take the vehicle and sell it. It is important for your vehicle’s worth to exceed the amount of loan borrowed. This is because the lender may lose money in the process of a loan default. You can be in an upside down position when your existing loan balance exceeds the present worth of the vehicle. However, it will be with a negative equity. You may be allowed to refinance. This can only be done when you pay down the balance prior to taking a new loan. There are certain factors that can have a negative or positive effect on the value of your car. Accident history, wear, tear, and even the condition of the paintwork can affect the worth of your vehicle effectively.

Debt To Income:

Irrespective of the value of the car and credit score, refinancing cannot be done. Refinancing will only be possible when you have the capacity to repay the loan borrowed. In most cases, you will find lenders using the equation called debt-to-income. Lenders often make use of this equation to calculate your monthly expenses. This will also reflect as a percentage of your income. Studies have perfectly shown that acceptable DTI ratios often vary from one lender to another. If the new loan will take your DTI over the required level, you cannot refinance. However, it may be counter-intuitive to your level of acceptance especially if the refinance will lead to reduced monthly payment.


Some of the few problems preventing the operation of an auto refinance are insurmountable. For instance, DTI issues can be easily resolved by adding a cosigner. With good credit, you can add a co-borrower. Nevertheless, collateral is one thing that cannot be controlled. Vehicles usually get obsolete and at this time, you will have to forget about an auto refinance.

Category: Credit

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