Several Factors That Affect Auto Refinancing
Your credit score is very important for many reasons. Refinancing your auto loan is no exception. Not only does your credit contribute to getting approved for a loan, but it also affects what interest rate you are offered. Most lenders have a threshold number that they won’t go below. Above that threshold, they may use credit score as a factor in setting the terms of the loans, such as the interest rate and the amount they will finance. Before you apply for a new loan, you need to decide what your goal out of refinancing is. If you are aiming to lower your interest rate or monthly payment, make sure you work on your credit score first.
Your Score and More
Your debt-to-income ratio is an indicator of your ability to pay your car loan. DTI is calculated using the information on the credit bureau about how much you pay monthly for your obligations versus your monthly gross income. The good news is that if your DTI doesn’t qualify now, as you pay down your debts, and carefully manage how many new debts you incur, your DTI can improve. With a lower DTI, the lender sees you as less risky to provide a loan to. This explains why your debt-to-income ratio is a large factor that affects refinancing approval odds. For guidance, take a look at another blog on paying off debt.
Lenders want to make sure the new loan payment is less than what you can afford each month. If your payment on the new loan is too high compared to your monthly gross income, there may be ways to adjust the payment amount. Some ways include getting a smaller loan and getting a longer-term, so you are spreading payments out over more time. This typically lowers the monthly payment. Although this is a factor that affects refinancing approval rates, it is a great way to know when is the right time to refinance. So, if you recently received a raise or took a higher paying job, you may be in a great spot to refinance.
What is your car worth? This is a question lenders are going to ask when determining if they will offer you a new loan. The make, model, trim, features, mileage, and age of your vehicle are all factors that affect refinancing approval rates. The value is important because the lender wants to make sure they aren’t lending too much compared to what the vehicle is worth. Lenders will typically lend more than the value of the vehicle, assuming other loan factors mitigate the risk. So, sadly, that 1990 Ford Mustang probably isn’t going to be approved to refinance.