People borrow money for many essential things, as seen with car loans or using credit cards to pay for groceries. Since lenders must earn profits on their financial transactions, they charge interest. Unfortunately, not all borrowers receive reasonable rates, leaving them with costly payoff balances. Refinancing presents a way to get better interest rates, among other benefits.
What Refinancing Means
In the simplest terms, refinancing refers to taking out a new loan to pay off an old one. The borrower must make payments on the new loan, although some refinancing deals may provide a grace period to skip the first months of payments. Different lenders present different rules, but the consistent element here is one loan replaces another. Borrowers interested in refinancing are not trying to eliminate a loan. They want to procure a less expensive one. However, they must qualify for the new loan. Even refinancing lenders want to reduce their risk exposure.
Time Durations to Consider
Refinancing a loan three weeks after executing the initial lending agreement is not likely possible. The title must transfer and other steps take place before the landscape becomes more agreeable to apply for a new auto loan. Waiting anywhere from two to six months could be unavoidable. Of course, the would-be borrower must be a good lending prospect for refinancing.
Credit Scores Count
People often pay high-interest rates because their credit score is poor. When someone has a low credit score, the person appears to be a risky prospect. Therefore, anyone who approves a loan may charge more than the average car loan interest rate. Getting away from subprime rates may involve taking steps to improve a credit rating. Ironically, making timely payments on a costly auto loan could favor someone hoping to improve a credit score.
Debt-to-Income Ratio Matters
The debt-to-income ratio refers to how much credit someone currently uses. A $4,500 balance on a $5,000 credit card limit reveals someone is maxing out their debt. Such figures drive down credit scores, making someone appear like a troubled borrower. As Lantern Credit reveals, “Nonprime borrowers with credit scores between 601 and 660 had the highest average new car loan repayment term across the five risk categories in Q4 2021.” Falling into that range might be costly. Putting effort into reducing borrowing and lowering balances may open more doors for refinancing.
Overall Earnings and Income
Even with a good credit score, the lender will examine whether the person can pay the loan. Someone who earns too little for a particular model may receive a negative response. Those with consistent income and fewer monthly expenses may find loans for affordable cars within their grasp.
The Car’s Value
Expect lenders to look at the car’s current resale value. Make, model, mileage, and condition all factor into value. Lenders want to know what a car is worth to avoid loans that exceed the vehicle’s value.
Refinancing a loan provides a way to escape high interest rates and receive fairer terms. Expect lenders to review different factors before making any approvals on a refinancing deal.
