Rateworks auto loan refinance
October 30, 2024

Auto Refinancing: Key Terms to Know

Considering auto refinancing, but daunted by the process? To avoid being confused or frustrated, here are all of the key auto refinance terms to understand before you start.

Someone signing documents with a car key on top of them
Written by

Sarah T.

The chances are that you will refinance an auto loan at some point in your lifetime. You may be thinking about doing so now. Auto refinancing provides you with an excellent way to save money. You can achieve a lower monthly payment and even save on the amount of interest you pay.

But before you apply for any auto refinance loan, it's important to know what you are getting into. And one of the best ways to do that is to understand some auto refinancing terminology. In this article, the RateWorks team will let you know the terms that you should add to your vocabulary so you are familiar with them before you sign on the dotted line.

Key Auto Refinancing Terms to Know

Why Knowing Auto Refinancing Terms is So Important 

Being in the know on financial terms can make sure you understand the expectations that come with your new auto loan. The more up-to-date and educated that you are on these key financial terms can help make sure you aren’t unpleasantly surprised down the road.

Thankfully, loan terms aren’t overly complicated, especially now that loan agreements need to be clear and easy for borrowers to understand. While you should still read the fine print, lenders today need to be more up-front than ever before. That said, here’s what you need to know. 

Interest Rate

The interest rate is the percentage of the loan amount charged by the lender for borrowing money. It directly affects your monthly payments and the total cost of the loan. A lower interest rate means lower payments. You’ll also encounter fixed rates, which stay the same, and variable rates, which can change quite frequently.

Annual Percentage Rate (APR)

The APR includes both the interest rate and any fees associated with the loan, giving you a clearer picture of the total borrowing cost. When comparing loan offers, focusing on the APR helps you evaluate which one is more favorable. A lower APR can result in significant savings.

Consider this example. Let’s say you have a car loan for $10,000 with an interest rate of 9%. But, you refinance your loan, at the same amount, with an interest rate of 6.84%. Over the course of three years, you could save about $684. Explore our easy loan calculator to see how much you could save.

Loan Term

The loan term refers to the length of time you have to repay the loan, usually measured in months such as 36, 48, or 60 months. A shorter term means your monthly payments will be higher but you will pay less interest. A longer term offers lower monthly payments but increases the total amount paid in interest.

Principal

The principal is the original amount you borrowed when taking out the loan, excluding interest. Keeping track of your principal and how much interest you’ve paid helps you understand where you are in your repayment journey. Reducing your principal balance faster can lead to lower interest charges over the course of your loan.

Equity

Equity represents the difference between the value of your car and the remaining loan balance. Positive equity occurs if your car has a higher worth than the amount you owe. Negative equity happens when you owe more than the car’s value, which can complicate refinancing decisions. The more positive equity you have, the easier it will be to refinance your vehicle. 

Loan-to-Value (LTV) Ratio

The LTV ratio compares your current loan balance to the vehicle’s current market value. If the LTV ratio is high, meaning you owe more than the car’s worth, refinancing can be more challenging. Lenders often prefer lower LTV ratios because they indicate a lower risk for the loan.

Credit Score

The average credit score in the U.S. is about 715. This score sits nicely in the good range as defined by FICO, which means that if your score is good or better, you are more likely to get approved for your auto loan refinance and get a lower interest rate, leading to long-term savings. If your score has improved since your original loan, refinancing could help you access better terms.

However, a lower score can impact your chances of approval. And, if approved, you will likely pay a higher interest rate than you would with a higher score.

Prepayment Penalty

Some lenders charge a prepayment penalty if you pay off your loan early, which can reduce the savings you gain by refinancing. It’s important to check your original loan agreement for any prepayment penalties before committing to a refinance, so you aren’t surprised by additional costs.

Refinancing Fees

Auto refinancing often comes with fees, such as application charges or title transfer costs. It’s important to factor these fees into your calculations when considering refinancing to make sure that the overall savings outweigh the expenses involved in the process.

Cosigner

A cosigner is someone who agrees to share responsibility for the loan. Having a cosigner with a stronger credit history can help you secure better loan terms. When refinancing, you may have the opportunity to add or remove a cosigner, depending on your current financial situation.

A toy car n front of someone signing auto refinancing papers

Want to Save Money on Your Auto Loan with a Reliable Auto Refinancing Lender?

Not all auto refinance lenders are the same. You want one that offers transparency, with clear terms and competitive rates. That’s where RateWorks comes into play. We offer fast and easy auto loan refinancing so that you can save money and get on with your day.

Want to know more? Get a free quote today.