Refinancing your auto loan is a good strategy if you didn’t qualify for competitive rates when you originally applied. It involves replacing your existing car loan with a new one, usually with a different finance company. Your car acts as collateral on your new loan. As a result, you may receive lower monthly payments and costs over the life of the loan. Read on to learn how to refinance an auto loan.
Factors To Consider Before Refinancing
While many people benefit from refinancing their car loans, it doesn’t suit everyone. Consider the following factors before making a decision:
Are You Upside-Down on Your Current Loan?
If you owe more than your car is worth, it’s best not to refinance. Check out a car value estimator for finding used-car values. Lenders charge more when your loan-to-value ratio is over 100%. Your debt-to-income ratio is another important element that lenders look at. The less debt you have before you apply for refinancing, the better terms you’ll receive.
Is There a Prepayment Penalty?
A prepayment penalty is a fee that some lenders charge for paying your loan off early. Check the documentation on your current loan for such a penalty. If there is one, you’ll need to pay it as well as the existing loan when you refinance.
Do You Have Declining Credit?
Despite previously having good credit, if you’ve missed any payments, your credit rating has likely decreased, and refinancing your auto loan might not make financial sense.
Do You Have a Low Interest Rate?
If your current loan has little to zero interest rate, there’s no reason to look at refinancing unless you’re ready to buy a new vehicle.
Is Your Car Almost Paid Off?
If you’re almost finished paying off your car, you may be better off completing your current loan. Unless your interest rate is exorbitantly high, payments made toward the end of your loan go mostly to the principal, not the interest. Any savings that you’re trying to achieve from refinancing to a lower rate would be minimal.
Are You About to Apply for a Mortgage?
Credit bureaus look at how many credit inquiries you have, as it may indicate that you’re in financial difficulty. Multiple inquiries may affect your potential loans. Separate the two loan applications over a few months to prevent interference in your credit history.
Benefits of Refinancing a Car Loan
Here are some reasons to refinance your auto loan:
Lower Interest Rate
By refinancing at the same repayment term, a lower interest rate will result in lower monthly payments. If you want even lower payments, a new loan with a longer repayment term will help, though it may come with higher interest rates.
Pay Off Debt Sooner
Alternatively, you could choose a shorter term to pay off the loan. This will result in lower interest rates, saving you money and allowing you to pay off your debt quicker, although the monthly payments will be higher.
Get Cash From Your Vehicle Equity
Some auto lenders offer cash-out refinance loans. This allows you to refinance your loan and receive cash for other payments. Of course, you would need plenty of equity in your vehicle.
Get a Better Deal
If you couldn’t find a good deal when you originally financed your car, it may be time to shop for an auto refinance deal. Exchanging for a better rate is a great way to save money.
Take Advantage of an Incentive
In some cases, you need to use a manufacturer’s financing to get a cash-back offer or rebate. If the interest rate is too high, it’s worth looking at refinancing the loan. Check your paperwork to see how long you must wait before you can refinance.
Move the Loan to Your Primary Financial Institution
There are advantages to having all your loans in your main bank or credit union. They may reward you for using them with extra benefits or discounts. Most employers deposit paychecks into your checking account, so it’s simple to arrange automatic payments from your checking account to your loan. If there is a problem with your loan payment, it’s less of a fuss to work within one institution to sort it out.
How To Refinance Your Auto Loan
If you’ve decided that refinancing is the right financial decision for you, then you can follow these steps to refinance your loan:
1. Review Your Current Loan
Find out your payoff amount when you refinance. You won’t qualify for the refinancing if your payoff amount is below the lender’s minimum. You need a thorough understanding of the following to find the best deal:
- How much interest have you been paying?
- What are your monthly payments?
- What is the total cost of the loan if you complete it to full term?
2. Evaluate Your Credit Score
Complete your own credit score check before you apply. By checking your own credit, you won’t lower your score. It will show you which lenders are suitable for you. Even with a poor credit score, you may find a better rate with the right company.
3. Collect Your Documents
You can find the following information from your current loan payment stub or online payment system:
- Current monthly payment
- Balance of payment
- How many months left to repay your loan
- Current interest rate
- The lender’s customer service number
You’ll need the following documentation for your applications:
- Driver’s license
- Vehicle identification number of your vehicle
- Pay stubs or proof of employment
- Social Security number
- Proof of auto insurance
- Details of existing loan
- Utility bills
- Vehicle’s make, model, mileage, and VIN
4. Compare the Different Offers
Shop around and compare offers from various lenders. If you apply to multiple companies within 14 days, these applications will only count as one for calculating your credit score. While multiple inquiries often hurt your credit score, they will not in this case, since they understand you’re just shopping around for the best offer.
5. Apply for the Loan of Your Choice
Once you’ve made your decision, complete the application with your chosen lender and wait for them to tell you if you’re approved.
6. Review the Terms and Sign the Contract
Once you’ve applied, the lender performs the underwriting process to work out your loan terms if you qualify. Read the fine print carefully. Once you’re satisfied, sign the contract. The contract informs you of when to start payments on the new loan. Be aware of all mail and messages from your previous lender and the new company to ensure that everything is concluded properly.
Though refinancing an auto loan might not be right for everyone, it can be a great way to save money in the long run. Always monitor your credit and make any changes as necessary so that you’re ready in case you need to borrow money again in the future.
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.