3 Loans That Are Tough to Refinance

PHOTO: Refinancing an auto loan may be difficult, according to Edmunds.com.Getty Images
Refinancing an auto loan may be difficult, according to Edmunds.com.

Advertised rates for car loans, mortgages and even some credit cards are tantalizingly low, promising big savings for borrowers who can refinance. But just because you see that rate advertised doesn't mean you'll qualify.

Here are three loans that can be difficult to refinance, as well as strategies for lowering your rate if you are stuck with one of them.

Used Auto Loan

If you bought a new vehicle with little or no money down, or if you're driving a clunker, refinancing it may be tough. That's because you may be upside down on your loan -- you owe more than the vehicle is worth; or the value of your vehicle is so low that the lender may not want to be saddled with it if you default.

Lenders who finance car loans are typically looking at the borrower's credit and income, as well as the value of the car as collateral for the loan. "If you have strong credit then you may be able to refinance," says Phillip Reed, Edmunds.com Senior Consumer Advice Editor. "But if your credit is weak then the collateral may not be a factor in helping (you) get a loan."

However, that doesn't mean you are completely out of luck. You may be able to refinance a three-year loan to a five-year one, for example, thereby lowering your monthly payment, says Reed. Another option: "You may be able to roll your negative equity into a new auto loan," he says. "It's a terrible thing, but people do it all the time. They keep getting in deeper and deeper (debt)." He adds that in some cases the dealer may be offering a rebate on the new car that can help offset some of the negative equity.

How to refinance: Check with three lenders -- such as a local bank or credit union, or online lenders -- to find out what's available. Restrict your loan shopping to a two-week period. If you stretch out the process you may wind up with multiple inquiries on your credit reports, which can hurt your scores.

The alternative: Sell the vehicle yourself and find a way to come up with the cash -- or line up a personal loan -- to pay off any remaining balance. Then buy an economical used car that won't lose as much value.

Despite some recovery in the housing market, an estimated 10 million - 14 million or so homeowners are in negative equity -- meaning their home is worth less than they owe. And an estimated 2.3 million have less than 5% equity in their homes. That lack of equity makes it very hard to refinance, and makes the news about historically low rates a painful tease for millions who would like to be able to take advantage of them.

There aren't a lot of truly great options for the majority of homeowners in this situation. The Home Affordable Refinance Program (HARP) was expected to make it much easier for these homeowners whose loans are owned by Fannie Mae or Freddie Mac to refinance into a lower rate and smaller payment, but the program has been hampered by a lack of interest from the lending community. And if you are successful in refinancing under HARP or another program, you may wind up in another trap: paying for mortgage insurance for many more years to come. Finally, if your loan is not owned by Freddie or Fannie, or if you have a large second mortgage that's also underwater, you may be stuck.

[Related article: Another Good Mortgage Refinance Program Gets Its Wings Clipped]

How to refinance: First, check whether your loan is owned by Fannie or Freddie and eligible under HARP 2 guidelines. If it is, contact the lender that services your loan to apply for the program. Be prepared to provide a lot of documentation, and don't expect an answer immediately. VA or FHA loans are easier to refinance, and you can contact any mortgage professional that offers those kinds of loans.

The alternative? Consider selling your home with a short sale, trying to get a loan modification, or even finding out whether bankruptcy can help make your mortgage affordable.

[Related article: Underwater On Your Home? Your Six Options]

Student Loans

Student loans aren't impossible to refinance, but it can be tricky, depending on the type of loans you have. If you have federal student loans, you may consolidate those loans once. The benefits are that you can consolidate multiple loans into a single loan, and loans with variable rates may be consolidated into a fixed rate with a repayment period of up to 30 years. However, you may also wind up paying more over the loan run, or you may lose important benefits such as certain interest rate discounts or loan cancellation benefits available for some types of loans.

If you have private student loans, you'll typically need a strong credit score and steady income to refinance those loans. Most private lenders will charge a 1 percent origination fee in addition to the interest rate that is charged.

How to refinance: Read the consolidation checklist provided by the Department of Education first. If you decide to proceed with consolidating your federal student loans, you can do so online through the government's Direct Consolidation Loan website. To refinance a private loan, you'll need to shop around. Finaid.org publishes a list of private student loan lenders who offer consolidation.

The alternative: If your federal student loan payments are too high, check out the Income-Based Repayment Program, including its new iteration Pay As You Earn. Both of these programs offer loan forgiveness after 10 - 25 years, depending on the program for which you qualify. And don't forget to research loan cancellation programs as well.

What You Need to Know Before Refinancing a Difficult Loan

To get the best deal, it's a good idea to be prepared before you start the process. Remember, you could be saving hundreds -- or thousands -- of dollars over the life of your loan. The time you spend preparing and comparing offers can be well worth it.

Know Your Scores: Lenders will check your credit score, so you should too. Check your credit reports and scores at least a month in advance, if possible, to give you time to fix any mistakes you find. Note, you probably won't see the exact score that your lender will use, but you can at least get an idea of where you stand.

Know Your Value: In the case of a car loan, you'll want to know the trade-in or wholesale value of your car before you start negotiating with a lender. In the case of your home, ask two or three real estate professionals for their opinion of the value.

Know What You Owe: Ask your lender for a payoff figure on the loan, which may be different from the balance shown on your most recent statement.

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