Are you thinking about refinancing your auto loan to get a lower monthly payment? It could be a sound idea, but you’ll want to ensure it’s a smart financial move.
In this guide, you’ll discover when it makes sense to refinance your car loan, how to pull it off with ease and an online platform you can use to simplify the process.
Benefits of Refinancing Your Auto Loan
Wondering why people get auto loans refinanced? There are several benefits that entice borrowers to refinance their auto loans.
1. Access Lower Interest Rates
If your credit score was low when you applied for your current auto loan, chances are you received a steep interest rate. Most borrowers with low credit accept the higher interest rate because it’s their only path to a loan. However, each monthly payment on your current loan helped your credit score. Building a history of on-time payments allows borrowers to qualify for better interest rates and loan terms. If your credit score has since improved, you could access a lower interest rate on your new loan. Changing your original loan under these circumstances can save you hundreds or thousands over the life of the loan and possibly reduce your monthly payment.
2. Decrease Your Car Payments
A lower interest rate isn’t the only way to lower your car payment, though. You can also refinance your auto loan to stretch out the repayment period, which means the monthly payment will be lower. Of course, the downside is you’ll pay more in interest over the loan as the lender will have more time to collect from you. Still, you have the option to refinance your car loan and repay the loan early to curb interest costs if the lender doesn’t charge an early prepayment penalty.
3. Get a Shorter Term on Your Loan
You could also opt for a shorter term on your auto loan when you refinance. The monthly payment will likely be higher, but you could avoid spending a fortune on interest. Some borrowers apply for long-term loans when getting started because they aren’t sure about their ability to make higher monthly payments. Since getting the first auto loan, a borrower may get a raise or develop multiple income streams that make it easier to cover monthly payments. Car owners in this situation may prefer to make higher monthly payments and get out of debt sooner so they have more financial flexibility for future obligations.
When Should You Refinance Your Auto Loan?
It could be sensible to refinance your auto loan in these situations:
Interest Rates on Auto Loans Are Lower
What are the current market conditions? Suppose they were fiercely competitive when you applied for an auto loan but have since cooled off. In that case, the average interest rates across the industry could be lower. A lower interest rate can save you a lot of money over the life of your loan.
You’re Paying Too Much Monthly
Does your monthly auto loan payment seem unaffordable? Although you can get a fixed-rate loan and make consistent monthly payments, other expenses in your life can increase. Higher costs in other areas can suddenly make fixed monthly payments more challenging. You may have a reasonable rate, considering your credit score and overall financial health. However, refinancing to get an extended loan term could help reduce your monthly car payment and free up funds in your budget. Some people forgo good terms on a current loan to secure lower monthly payments on a new auto loan.
You Want to Get Out of Debt
Refinancing a car loan isn’t just about securing a lower monthly payment. Some car owners want to escape debt as quickly as possible and avoid paying more interest over the life of the loan. Refinancing your loan to trim off a few years will increase monthly payments, but you will save money in the long run. Not everyone can initially qualify for a shorter-term loan since that requires a more favorable debt-to-income ratio. However, people’s financial situations change, and you may qualify for a refinance that gets you out of debt sooner. Getting rid of your auto loan sooner will also help your debt-to-income ratio if you decide to apply for a mortgage or another financial product in the future.
You Have a Better Credit Score
The best interest rates are usually reserved for borrowers with good or excellent credit. Even if you don’t have perfect credit, you could get a lower interest rate if it’s far better than it was when you initially applied for your current auto loan. You can check your credit report before applying to see your score, look for errors that you can then report, and look at which financial activity has a more substantial impact on your credit. The three major credit bureaus — Experian, Equifax, and TransUnion — can each provide you with a free copy of your credit report every year. Asking one of the major credit bureaus for a copy of your credit report will not impact your credit score.
How to Refinance an Auto Loan in 7 Steps
When you’re ready to move forward, below is a step-by-step guide to refinancing your auto loan with ease:
1. Review Your Current Loan
Review your current auto loan contract to determine the payoff amount, which is the total you still owe, including any fees for paying off your loan early. Also, take note of your loan’s annual percentage rate (APR), as this will be essential when comparing it with potential refinance offers to see if you can secure a lower rate.
2. Check Your Credit Score
Your credit score is a vital factor in the refinancing process and determines the interest rate lenders will offer you. If your credit score has improved since you took out your existing loan, you’re more likely to qualify for a lower APR, which can lead to considerable cost savings.
3. Determine if Auto Refinance Is Right for You
First, run the numbers to gauge if refinancing your auto loan makes sense. Does it make sense for you to lower your monthly payment in exchange for having to deal with more of them? Can you secure a lower interest rate if you get your auto loan refinanced? Then, consider the fees associated with refinance transactions. Also, ask the lender if there are any origination fees or prepayment penalties. These expenses can cancel out the profits from securing a lower interest rate. If you have a low loan amount on your remaining balance, it may make more sense to stick it out.
4. Find Lenders Offering Auto Refinance Loans
Traditional banks, credit unions and online lenders offer refinance loans. There’s no shortage of lenders to choose from in these categories. So consider using a platform that presents you with the best offers for your financial situation. That way, you won’t get stuck with lenders who expect higher credit scores and will find competitive interest rates and terms relative to your financials. More on that shortly.
5. Review Lenders’ Requirements
Ask the lenders you’re considering about their loan requirements. Many have a minimum credit score you’ll need to qualify. Some also have restrictions on the age and mileage of vehicles they’ll consider for refinancing. Generally, your car should be less than eight years old and have fewer than 100,000 miles. Eclipsing any of these marks can make it more challenging to get a refinance, and you may also have to contend with a higher interest rate.
Visit each lender’s website and use the pre-qualification tool (if available) to gauge your approval odds and view potential loan terms. This will help you determine which lender to apply with, and it does not impact your credit score. You only get a hard credit inquiry if you apply for a loan offer that you receive during the preapproval process.
6. Prepare Documentation for the Application
Not all lenders require the same documentation. However, these documents are usually required across the board:
- Copy of your driver’s license and vehicle registration
- Proof of auto insurance
- Your last two pay stubs (or other proof of income)
- A 10-day payoff statement from your auto lender
- Current mileage on your vehicle
- The vehicle identification number (VIN)
You should also expect to provide your name, address, phone number and Social Security number. Some lenders will also request your previous address, whether you currently rent or own, and the amount of your current monthly housing payment.
7. Apply with a Lender to Get Approved
Once you’ve gathered the necessary documents, submit a formal application with your top choice. Be sure to review the forms before submitting them. You should reach out to the lender if questions arise to avoid an accidental rejection and speed up the loan application process.
Tips For Successfully Refinancing Auto Loans
Refinancing your auto loan can be a smart move to lower your monthly payments and save money over the life of your loan. Here are some tips to ensure you fully leverage this strategy to meet your financial goals.
Maintain a Good Credit Score
It’s essential to check your credit report and dispute any discrepancies before applying. A good credit score could mean the difference between an offer with favorable terms and a higher interest rate that offers far less cost savings over time.
Understand the Terms of the Loan
Before you commit, familiarize yourself with the terms of the new loan. Be on the lookout for potential prepayment penalties, the possibility of a longer-term extension beyond the life of the vehicle and any changes in insurance requirements.
A longer term might reduce your monthly payments but could result in paying a mini-fortune in additional interest over time.
Shop Around for the Best Rates
Don’t settle for the first offer you receive. Take the time to shop around for the best rates and get prequalified for at least three lenders to get a feel for your refinance options.
Also, use resources like the Kelley Blue Book to determine your car’s value and compare it to the loan amount you’re considering. Knowing your car’s worth can give you the knowledge and confidence needed to negotiate better terms.
Consider Auto Loan Refinancing Platforms
Make use of online auto loan refinancing platforms that allow you to compare offers from multiple lenders quickly. These platforms can quickly give you a snapshot of different lenders’ APRs, helping you make an informed decision without the need to visit financial institutions in person.
Conclusion: Is It a Good Idea to Refinance a Car Loan?
Refinancing a car loan could be beneficial if the strategy aligns with your financial goals. Be sure to consider the interest rates, monthly payments and terms of loan offers and compare them with your current arrangement to determine if an auto loan refinance makes sense for your financial situation.
Frequently Asked Questions (FAQs)
Refinancing your auto loan can temporarily lower your credit score, as the lender performs a hard inquiry on your credit report. However, the effect is often minimal and short-lived, and your credit score will typically bounce back in just a few months.
Furthermore, when you refinance, the old loan is paid off and closed, and a new loan is opened, which can also affect your credit rating because it changes the average age of your credit accounts. But if you manage the new loan well and make timely payments, you can potentially minimize the impact.
Over time, consistent payments can improve your credit history and potentially boost your credit score. The key is to ensure that the benefits of refinancing, like a lower interest rate or reduced monthly payments, outweigh the temporary negative effect on your credit score.
In most instances, a down payment isn’t needed to refinance an auto loan. But you’ll need to have equity in your vehicle and meet the mileage requirements to qualify for a new loan. But if your car has depreciated and is worth less than what you owe, you might not be eligible for refinancing, or you might need to pay the difference between the loan balance and the car’s value to move forward with a refinance.
