If you’re like most car, truck, or SUV owners, your monthly car payment takes up a significant chunk of your household budget. The good news is you can lower your car payment by refinancing your auto loan. Here’s why you should consider refinancing your loan and how you can prequalify.
What Is Auto Refinance Prequalification?
Refinancing an automotive loan means you’re paying off your current loan and replacing it with a new one. Typically, drivers who refinance their loans get their new loan from a different lender than the one holding their current loan. Prequalification is the first step to refinancing your automotive loan. Your new lender will ask for your credit score, income, and other essential information, then use that information to craft an introductory offer.
The prequalification process is classified as a soft credit check, meaning it shows up on your credit report but doesn’t affect your score. Remember that your lender bases its introductory offer on information they haven’t verified. After your lender performs a hard credit check and verifies your information, the offer might change. Make sure you provide your lender with accurate information so that they can give you as accurate a prequalifying offer as possible.
When to Refinance Your Auto Loan
There are several situations where it makes sense to refinance your automotive loan. These include:
- An improved credit score – When you pay your bills consistently and on time, including your automotive loan, you should see an improvement in your credit score. A higher credit score means you qualify for lower interest rates and more favorable loan terms.
- Higher dealer rates – Like most drivers, you probably financed your original loan through the dealership that sold your vehicle. If so, shop around and see if other lenders are charging lower rates for automotive loans. Having the option of refinancing means that it’s never too late to qualify for better rates.
- Overwhelming monthly payments – When refinancing your automotive loan, you have the option of extending the loan and lowering your monthly payments. Remember that lower monthly payments mean higher interest rates, increasing the total cost of the loan. However, it might be worth it if your other option is missing payments and having your car repossessed.
- A drop in interest rates – When interest rates fall lower than when you initially financed your car, it makes sense to refinance to take advantage of lower interest rates.
The Benefits of Refinancing Your Auto Loan
Depending on your situation, there are several ways to benefit from refinancing your auto loan, including:
- A lower interest rate – When you refinance your loan, your new lender will likely offer you a lower interest rate than your current lender. This is typically the case if you have an excellent credit rating and you’ve kept up on your car payments. If the other terms of the loan remain the same, a lower interest rate will decrease the total cost of the loan.
- Lower monthly payments – If you qualify for lower interest rates, your monthly payments will decrease.
- Shorter loan terms – If your goal is to pay off your loan quickly, you can ask your new lender to shorten your loan term. Keep in mind that this might increase your monthly payment unless your new loan has lower interest rates.
- Longer loan terms – If you don’t qualify for lower interest rates, you can still lower your monthly payments by asking your lender to extend your loan.
- Additional cash – Some lenders offer “cash-out” refinancing, which means you can borrow extra cash when you refinance your loan. Remember, if you qualify for “cash-out” refinancing, your lender might increase your monthly payments.
Are There Drawbacks to Refinancing Your Auto Loan?
While an auto refinance provides several benefits, it isn’t for everyone. Before initiating the refinancing process, consider the possible drawbacks, including:
- Having to pay more interest – If you extend your loan terms when you refinance, you’ll pay higher interest rates, increasing the total cost of the loan. Even if you qualify for a reduced interest rate, it might not always offset the cost because you’ll end up paying interest for an extra year or two.
- Additional fees – When you refinance your auto loan, you have to pay off your current loan, and your lender may charge a penalty fee for paying off your loan early. Depending on your state’s laws, you might have to re-register your vehicle, which comes with a fee, or you might have to pay for a title transfer. Sometimes, lenders will charge application fees, although most lenders don’t.
- An upside-down loan – If you’re refinancing your auto loan to extend the terms or applying for “cash-out” refinancing, you could end up owing more than your vehicle’s actual value. If you decide to sell your car or trade it in to a dealership, you’ll have to pay your lender the difference.
How to Auto Refinance Prequalify
After comparing the pros and cons of refinancing your auto loan, many drivers determine that the benefits outweigh the risks. If you’ve decided that’s the case, here’s how to prequalify for refinancing:
- Have a clear goal in mind. Are you refinancing to pay your car off more quickly or to lower your monthly payments? Knowing how you want to benefit from refinancing your loan can help you decide if a preliminary offer is the right one for you.
- Apply with several lenders. Prequalification opens up a dialogue between you and potential lenders without requiring you to commit to anything. That’s why you should prequalify with several lenders and see which one gives you the best preliminary offer.
- Compare your preliminary offers. You should compare your offers with each other and with your current auto loan. By running the numbers, you can see whether each offer costs or saves you money.
- Accept the best offer. After you decide which offer works best, you can continue with the refinancing process. Remember, your loan terms are subject to change after final approval, but they shouldn’t change much if you’ve given your lender accurate information.
Once your new lender approves your refinancing package, they’ll provide you with the necessary finances to pay off your current loan or pay it off themselves. Then you’ll have to transfer the title to your new lender and, depending on state laws, re-register your vehicle.
Now that you know the benefits of refinancing your auto loan and how to prequalify, you can do so with confidence. Hopefully, you’ll save some money and enjoy your car for years to come.
At FIXD, our mission is to make car ownership as simple, easy, and affordable as possible. Our research team utilizes the latest automotive data and insights to create tools and resources that help drivers get peace of mind and save money over the life of their car.