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Whether you should refinance your vehicle loan often depends on whether you’ll save money — either month to month or overall. But before signing off on a new loan, you must confirm that you and your vehicle fit the requirements.
Though requirements vary among lenders, keep an eye out for the ones listed below.
Requirements about your current loan
Not every vehicle loan is eligible to be refinanced. Your car loan typically must meet certain requirements from the new lender to be refinanced.
Time left on loan
The amount of time left on your loan is a common eligibility requirement. Typically, lenders will want you to be current on your loan payments, have paid at least six months into the loan and have at least six months left. This allows the lender to see that you have an established history of payments — and still have enough payments left that they’ll profit off interest.
If you took out a 60-month auto loan and are only three months into paying it off, you likely won’t be able to refinance it for a few more months. Similarly, if you’ve made 54 payments already, you will likely have to finish paying it off rather than refinance it.
Minimum loan amounts vary by lender, but you can expect to need at least $3,000 to $7,500 left on your loan. Since refinancing is essentially taking out a new auto loan, lenders don’t want to offer small amounts because they won’t be able to make as much money from them.
And if you bought a particularly expensive car, you may be unable to refinance immediately. Finding auto refinance loans for over $75,000 can be a challenge.
Vehicle requirements to refinance your car
Lenders don’t just care about your existing loan — they have requirements around the vehicles they’re willing to finance, too.
Mileage and model year
If you bought a heavily used car and want to refinance the loan — or you’ve just racked up a lot of miles — you may not be able to. Lenders tend to have a cap of 100,000 to 150,000 miles.
While lenders don’t set a minimum age, you may not qualify if you have an older car. Typically, lenders set a hard limit at 10 years old. But some may require a car under eight years old to refinance the loan.
Car type and titles
Lenders won’t be willing to refinance all vehicle and title types. Personal vehicles with clean titles will be the easiest to refinance. Certain lenders may not refinance vehicles that are known to have a lot of issues or discontinued makes. Lenders may not refinance commercial vehicles, either. For example, Nationwide won’t allow auto loans for vehicles from discontinued makes like Daewoo, Saab, Oldsmobile, Suzuki or Isuzu or commercial vehicles.
Additionally, finding a refinance for a salvage title vehicle will be more difficult. Some lenders do not offer financing for vehicles with a salvage title at all. Others may require a note from the mechanic to consider financing a salvage title vehicle.
Loan-to-value ratio (LTV) measures what you owe compared to the value of your vehicle. It is calculated by looking at the total you owe on your loan divided by the actual cash value (ACV) of your vehicle. The final number is expressed as a percentage.
LTV = Total loan value / ACV of the vehicle x 100
Since the vehicle serves as collateral for the loan, the LTV shows how much of a risk the lender is taking on. With vehicles, the value continues to go down throughout the life of the vehicle. This means you can end up owing more on the loan than the car is worth. In this case, you would have an LTV higher than 100 percent.
Having an LTV over 100 percent doesn’t mean it’s impossible to get an auto loan refinance, but it can make it more difficult. Most lenders look for an LTV below 125 percent. However, the lower your LTV, the better interest rate you can get.
Credit requirements for auto loan refinancing
Lastly, lenders look at your personal finances.
As with any loan, your credit score will be a major factor. There are pros and cons to refinancing an auto loan, but there are more pros if your credit score has improved. Refinancing is usually a good idea if you have a poor interest rate on your auto loan and have since raised your credit score.
Exact lender requirements for your credit score may vary, but the higher your score, the better your interest rate will be. Most lenders require at least 600. You likely won’t get a better rate by refinancing with a score lower than this. It could even cost you more overall, especially if you increase your loan term to reduce monthly payments.
Debt-to-income ratio requirements
Your debt-to-income ratio measures your debt against your income and is often expressed as a percentage. The acceptable range varies from lender to lender, but anything below 36 percent is considered good, and adequate ratios range from 36 percent to 49 percent. If you have a DTI of 50 percent or higher, you may want to consider if refinancing is the best option for you.
Paying down your current debts is the simplest method to lower your DTI if a lender deems it too high. Lowering other installment loans or credit card bills may help prove you are financially responsible to a new lender.
Consider using a calculator to find your DTI. That way, you’ll know how much debt you need to pay down before applying.
Refinancing your car loan can be wise, but you must take a few steps to prepare for the process. Consider the requirements to refinance a car: your current credit score, your car’s age and mileage, the amount you owe on your car and your ability to pay for the new loan. Depending on your financial situation, think about instead asking about modifying your car loan to make your auto loan payments more affordable.