Tips to consider while taking Auto Refinance
In many ways, an refinance auto loan is very similar to a mortgage refinance. When looking at mortgage refinance, at a high level, one lender will review your existing loan with another lender, and decide to assume the loan – presumably at a lower interest rate.
One of the factors that a mortgage lender will need to perform its analysis is to appraise the worth of your house. To do this, a professional appraisal will need to be performed, which will cost you money.
Typically these appraisals will cost between $150 to $300. A quick and dirty way to get a comparable on your home is to checkout what other similar houses in your area have sold for within the past 6 months or so by using Zillow.
Putting a value on your car
Just like with mortgage refinance, an auto refinance lender will also need to appraise the worth of your car. If you’ve read our other articles, then you’ll know that determining loan-to-value (LTV) is very important for the bank to assess.
This is a relative gauge for the risk associated with providing a loan against a piece of collateral. Bank’s want to make sure that they keep the loan size within 100%-130% of the car’s value. In simplest terms, the collateral needs to be worth approximately the same amount (or less) when compared to the loan in order to mitigate asset risk.
No onsite appraiser required
Unlike mortgage refinance, you do not need to hire a professional to appraise the worth of your car. Banks will usually use Kelly Blue Book value (or similar agency) to determine the value of your car.
The bank will pull this report on your behalf as they evaluate your loan. There are auto refinance fees and no obligation for you to do anything beyond filling out the auto refinance application.
Cars are a depreciating asset
Think about it – you’ve probably heard that a new car depreciates 10% just by driving it off the lot. Because it is no longer “new”, it can’t be sold at the premium it fetched while sitting in the showroom.
In this example, the car lost 10% of its value, but the loan amount stayed the same. This is in stark contrast to a home mortgage, where (in most cases) the house will appreciate. Because houses tend to appreciate (historically speaking) banks tend to make loans that are less than 100% LTV. Currently many banks only do 75% LTV mortgage loans.
What if your car has a higher LTV than the maximum allowed by the lender. In this case, if the bank deems that you are creditworthy, but the vehicle LTV is out of bounds, then it is possible to apply additional money down to cover the LTV disparity.
While this option is not usually very appealing for cash-strapped consumers, it can be a wise play for those consumers who are looking to lower their rate and reduce the total amount of interest paid on their loan. Generally speaking, we recommend that you try to do this in order to accelerate payment of the loan in total, thus reduce the amount of interest paid.