How to Refinance Your Car Loan
By lowering your interest rate, refinancing a car loan can help you save money. The procedure entails replacing your existing auto loan with a new one from a different lender. Your car will serve as security for the new loan, just as it did for the old one. Here’s how auto loan refinancing works and what you should consider before applying. Here’s How to Refinance Your Car Loan.
Benefits of Refinancing a Car Loan
There are several reasons to refinance your car loan with a different lender. Here are some advantages to consider:
Lower Interest Rate
A reduced financing rate may be available if your credit has improved or if market interest rates have decreased since you purchased your vehicle.
Lower Monthly Payment
In most cases, reduced interest rates translate into cheaper monthly payments. A longer repayment term may be able to cut your monthly payment even further. This may result in higher overall interest rates, but it may be worth it if your monthly budget is tight.
Choose to pay off debt sooner
You can also choose a shorter repayment term. Shorter terms usually equal lower interest rates, so you save more money and pay off debt faster, albeit your monthly payments are higher.
Get cash from your equity
Cash-out refinance loans allow you to refinance your initial loan and get cash for additional expenses. Most folks with a lot of equity in their car can afford this choice.
1. Consider if Refinancing Makes Sense for You
Before you begin the application process, consider whether refinancing is good for you right now. Consider these points:
Credit Requirements
Your credit history must be excellent to qualify for the best loan conditions. If you’re not ready yet, consider boosting your credit first.
Prepayment penalty
Some lenders demand a fee if you pay off your car loan early. Prepayment penalties can be costly, especially when compared to the possible savings from a new loan.
Origination Fee
Some lenders impose a refinance fee upfront. This cost varies every lender, so compare it to the possible savings to decide if it’s worth the hassle.
Length of repayment period
Even if your new repayment period is longer than your present one, you may end up paying more in interest throughout the life of the loan if you don’t require the lower installments.
2. Check Your Credit
Your credit score should ideally be higher now than it was when you took out your first vehicle loan. Check your credit score to understand where you stand and whether it’s better to wait and keep improving before applying. Learn more about How to Refinance Your Car Loan, continue reading.
If your credit is in need of repair, review your credit reports to see where you can concentrate your efforts. AnnualCreditReport.com provides free credit reports from all three credit bureaus. You may also get a free copy of your Experian credit report by contacting Experian directly.
3. Gather the Necessary Documents for a Loan Application
Following the submission of your application, you will most likely be asked to produce some documentation to your new lender. It will be easier to complete the loan process if you have these information before you begin.
You may be required to provide the following documents:
- Copy of your driver’s license
- Vehicle registration
- Proof of insurance
- Income amount and proof of it
- Proof of residence
- 10-day payoff statement
In most cases, you’ll also need to supply the vehicle identification number (VIN) so the lender can figure out how much the car is worth.
4. Compare Auto Loan Offers
Shopping around and comparing deals from other lenders is the greatest approach to optimize your savings. Some lenders will prequalify you before you submit an application, while others may demand a full credit check before providing any interest rate information.
The good news is that if you submit many auto loan applications in a short period of time—try to complete all of them within 14 days—FICO will usually aggregate them all into one credit score calculation.
Examine the interest rate, payback terms, fees, and other aspects that are essential to you when you evaluate offers.
5. Apply for a New Auto Loan
Submit an application with that lender once you’ve limited down your list of offers to one. You may be able to do it online, over the phone, or in person, depending on the financial institution.
In most cases, you’ll be asked to give the same information you provided when you applied for your last auto loan.
6. Review the Terms and Sign the Contract
The lender will go through the underwriting procedure after you’ve submitted your application to see if you qualify and what your loan terms will be.
Make sure you read the fine print to make sure you know what you’re signing up for. Sign the contract if you accept, and the lender will pay off your existing loan. When you sign the contract, it will state when you must begin making payments on the new loan. Learn more about How to Refinance Your Car Loan, continue reading.
To avoid missing payments, properly manage the transfer to the new loan. Pay close attention to every communication from both your old and new lenders to ensure that everything is in order.
How Refinancing a Car Loan Affects Your Credit
When you first apply for a new loan, the lender’s hard credit investigation can temporarily lower your credit score by a few points. However, your credit score will improve over time, especially if you make all of your payments on time.
Refinancing can also reduce the average age of your accounts, which might have a negative impact on your credit score. However, because payment history is the most essential element in your FICO® Score, making on-time payments will help you safeguard your credit score the most.
Monitor Your Credit
After you’ve been allowed to refinance your car loan, it’s still crucial to monitor your credit and make any necessary improvements. That way, the next time you need to borrow money, you’ll be prepared.
Experian’s credit monitoring service makes it simple to stay on track. You’ll get free access to your Experian credit report and your FICO® Score generated by Experian. You’ll also receive real-time notifications when your credit report is updated with new inquiries, accounts, or personal data.
You will be in a better position to solve concerns when they develop if you keep a close eye on your credit score.