How to Refinance a Car Loan? Sometimes you have to purchase a car even if your credit rating isn’t the best. You might end up with a high-interest car loan if that happens to you.
Although the auto loan you took out is not the best, there are still options. You can refinance to receive more favourable loan terms if your financial situation changes.
Refinance your auto loan to get lower monthly payments and lower interest rates.
Refinance your existing loan to reduce your monthly payments, lower your interest rate or speed up the repayment process. You’ll save money over the long term and be able to reach other financial goals faster if you play your cards well.
These steps will help you secure the best deal before you contact a lender.
1. Find out if refinancing makes sense for you
Refinancing may not be right for you. You should ensure that you will benefit financially from the process before you rush to do it.
Before you make a decision to move forward, ask yourself some questions.
- What interest rates are available? While interest rates have been at an all-time low for quite some time, they are now starting to rise. You should confirm that the rates available are lower than the current rate before you begin the refinance process.
- Prepayment penalties are a common feature of car loans. This means that you will have to pay an additional fee to repay your loan prior to the end. Refinances can be more costly depending on how high the penalty is.
- What is your car worth? Some vehicles lose value quickly after they are brought home. A lender may not allow you to take out a loan if your vehicle is too old or has a poor reputation.
- What is the remaining term of your original loan? Refinancing a loan that you have only just received may be the best option if you still have some years to pay it off. It might not be a good idea to refinance if the loan is almost paid off.
- Are you planning on making large purchases? It is a good idea to delay refinancing if there are other major purchases. Refinancing your car loan could be a problem if you are looking to obtain a mortgage to buy a new house.
- What is the cost of refinancing? Car loans come with loan origination fees. These are a kind of processing fee. Refinancing can cost you more than it saves depending on how large the fee is.
2. Verify Your Credit
Although you might not have the best credit history when you obtained your loan, if you’ve been paying on time for at least a year, it’s likely that you are in better financial standing now than you were before you took out the loan.
You might be able to access your credit score and credit report free of charge through your bank, credit union or credit card. Many financial institutions offer free credit monitoring via their website or mobile app.
There are options if you don’t like the credit report you receive. If you find any errors in your credit report, first contact the credit reporting agency. You might make the following mistakes:
- Closed accounts are reported as open accounts
- Incorrect spelling of your name.
- Accounts belonging to another person, often a person with the same name.
- Multiple listings for the same debt.
A score of 780 or more will get you the best rates. A score between 661-780 and 780 will give you a decent rate. You can still qualify for a car loan if your score is below 660 but the interest rate will not be as high.
You can move on to the next step if you are satisfied with your credit score.
3. Collect the relevant documents
When applying for car loans, you will need to provide the lender with several documents. Before you contact any lenders, organize your paperwork to make loan applications as smooth as possible.
- Personal Details. Most likely, the lender will need your Social Security number, driver’s license, current address, as well as details about any other loans or financial obligations.
- Vehicle Identification Number. (VIN). The VIN of your car is similar to its fingerprint. It is a 17-character number that uniquely identifies your vehicle. It is usually located on the driver’s right, where the dashboard meets with the windshield. It is on a metal plate that should be easily visible from the outside. It is helpful to have additional details about your vehicle, such as the model year and mileage.
- Proof Of Insurance. To legally own a car, you will most likely need auto insurance. You will need to show proof of insurance to your lender.
- Proof Of Income. You will need to provide proof of income such as pay stubs and W-2s or income tax returns. The rate and approval you receive for a refinance will depend on your income.
- Information About Your Current Loan. Refinances allow you to pay off your existing loan and get a new loan. The lender will need to see details about your current loan, including the amount and lender name.
Learn more about: What is Auto Insurance? Costs, Covers, Claims, Types
4. Get Prequalified
When refinancing a car loan, it pays to shop around. You can get a prequalification to determine the interest rate, term and maximum amount that you are eligible for.
Prequalification is not the same thing as applying for a loan. The lender will only look at your credit history, current loan amount, and car type. They can then give you an estimate of how much loan you could get based on that information.
Prequalification is not a hard credit inquiry. It won’t affect your credit score. Prequalification is not a guarantee of anything. Although you may be prequalified for a rate, the lender might offer a different rate after they have done a hard credit review and looked at your financial records.
Before you move forward, make sure to check with multiple lenders to see if they can prequalify you.
You shouldn’t refinance if you are unable to get prequalified by a lender. You could have bad credit or your car’s age or value, both of which you can fix.
5. Compare offers
In the ideal scenario, you will be prequalified by several lenders. You will be able to compare car loans if you have multiple prequalifications. How expensive a new car loan will cost depends on the loan term, interest rate and monthly payment.
- Loan Term. The term of the loan is how long it takes to repay the balance. A longer-term will usually result in a lower monthly instalment, but you’ll be paying more interest over the course of time. The loan term can be chosen in increments of 12 months, but you’ll pay more interest over time.
- Interest rate. Refinance your car loan to get a lower rate of interest than you have now. Rates can vary between lenders.
- Monthly payment. A monthly payment is an amount you pay each month. This includes principal and interest. Although a low monthly payment may seem appealing, it can lead to a longer loan term and higher interest rates. Higher monthly payments will pay off your loan sooner, but it could strain your budget.
- Fees. There might be several fees associated with your new auto loan, including a lender fee and an origination fee. You can compare the costs of each fee to determine the cost of interest. You might save money by taking out a loan with higher upfront costs. However, you may end up paying a lower interest rate over the long term.
The big question you need to ask when reviewing offers is whether you prefer lower monthly payments at a higher rate over time so that it fits in your monthly budget, or larger payments at lower costs so that you can pay off your debt faster (and cheaper).
6. Submit Your Application
The rest of the process is easy once you have chosen a lender. Complete the application.
You will continue to make payments on your car loan while you go through the refinancing process. You are still responsible for your current car loan payments until you have been approved by the lender.
If everything goes according to plan, your lender will approve you. The contract for the loan can be read and signed by you. Be clear when your first payment is due, and when the refinancing company will pay off your current debt. To avoid late payments appearing on your credit report, make sure you pay any outstanding payments before refinancing is completed.
The Final Word
How to Refinance a Car Loan: 6 Steps For Car Finance
Refinancing is a good option if your car loan is too expensive, has high monthly payments, or doesn’t work out for you.
Refinancing your car loan is much easier than refinancing a mortgage. Refinancing a car loan doesn’t require you to have it appraised or go through another complex closing process. After you submit your application, the refinance process will be completed in just a few hours.