One of life's constants in the modern age is that financial circumstances change frequently. The cost of living increases, consumer prices rise, and interest rates fluctuate. Adjusting for these changes is different for everyone. One approach is to refinance car loan agreements. Is a borrower eligible to do that? Let's look at the lending criteria. There are two parts to this. The first is the structure of the original loan. The second is the condition of the vehicle.

The Structure and Timing of the Original Auto Loan

Most lenders charge a simple interest rate on auto loans, meaning that the payments made early in the loan agreement go primarily to cover the interest. The borrower can see this in the original loan agreement by viewing the amortization schedule. This is a chart that shows what percentage of each payment goes to interest and how much is applied to the principal.

Banks and online lenders typically won't consider applications to refinance until at least six months have passed since the borrower took out the original loan. This is due to the amortization structure and the fact that a new auto depreciates at a rate of roughly 20% in the first year. Most car owners are essentially "upside down" in the first year of a new car loan, meaning the borrower owes more than the vehicle is worth.

Vehicle Condition and Loan-to-Value Ratio

The condition of the vehicle is important because it helps determine its value. Keep in mind that the value of the car has already depreciated. It will be worth significantly less if it's damaged or needs extensive maintenance. Most lenders will require an official appraisal before discussing terms for refinancing an auto loan. They'll also want to know what the mileage is.

Value is a primary variable in determining eligibility for auto loan refinancing. Lenders use the loan-to-value ratio formula to determine what they can and cannot offer. They divide the total amount of the loan by the vehicle's cash value, as determined by the factors listed above. The LTV can be over 100% but should be less than 150%.

Refinancing vs. Buying a New Vehicle

Depending on how many months' payments have been made on the original loan and the current value of the car, it might be more cost-effective to simply buy a new vehicle, even if monthly payments will be higher. It's important to spend extra time shopping for new car loan rates when investigating refinancing. Borrowers may be surprised at what's available.

Used vehicles require more maintenance and repairs, especially if their warranty has expired. It's important to look at those potential costs when choosing to refinance. You might lower your monthly payments for a while, but what is the extra cost of doing that? Refinancing a loan may create some extra money in your monthly budget, but if the term of the new loan extends past when the old loan would have been paid off, the benefit of refinancing no longer exists. In addition, remember that buying a new vehicle means more of a long-term investment.

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