How to Refinance Your Auto Loan?
Point of Interest
Refinancing your car loan can help free up space in your budget by cutting down your monthly payment or save you thousands altogether by slashing your interest rate.
What is auto loan refinancing?
Auto loan refinancing is the process of taking out a new car loan to replace your existing one. The point is to modify the loan terms to your advantage. This could mean seeking a lower interest rate or extending the life of the loan. It should be something that saves you money or provides financial relief.
If your goal is to pay off your debt as quickly as possible, refinancing your car loan can help you do that. However, if you refinance at the wrong time, it could cost you. We’ll help you figure out when is the best time to refinance your auto loan and walk you through the process step-by-step.
When should I refinance my auto loan?
- Your credit score is higher than it was when you opened your original loan: A lender will offer more favorable terms if your credit health is in good condition or if your income is high enough to mitigate your risk as a borrower.
- Your monthly payment is too high: Refinancing is a great way to lower your monthly auto loan payment, but be aware that depending on the new loan’s terms, you may be extending the life of your loan.
Questions to ask yourself before refinancing your auto loan
- Are interest rates low?
- What is my car worth?
- How much do I still owe?
- How is my credit?
- How many miles does the car have?
- Are there any fees?
- If you have a warranty, will it cross over?
If you think your credit history is holding you back from approval, consider working on your credit for a few months before applying. You may also want to look over your credit report to make sure it’s error free. An unchecked error can put a damper on your credit score and repel lenders if left unreported.
How to refinance a car loan
1. Shop rates
Don’t pull the trigger on the first lender to toss you an offer. You should compare auto refinancing rates between at least three different lenders before going forward with a decision. If you find a rate you like, see if another lender can match it. They’re all in competition for your business, so they’re often eager to negotiate for your service. Lenders will often shave a point or two off the interest rate if it means swiping you from a competitor.
2. Get your paperwork together
After you find the loan that suits your needs, take the time to get all the necessary information in order before you apply. Here’s a list of some things you may need:
- Driver’s license
- Proof of insurance
- VIN number
- Picture of the odometer
- Proof of income
Fill out an application with your preferred lender. Once your application is received, a hard credit check will be run, which can drop your credit score by a few points. Don’t stress over it too much though; your score should rebound after a few on-time payments. If you’re approved, read over the contract again to make sure you know exactly what you’re locking yourself into and keep a copy for records. If everything looks good, you can now proceed to sign the contract and congratulate yourself on a job well done!
Remember, if you have second thoughts after agreeing to a loan, under the Truth in Lending Act, the right of rescission gives borrowers three days to void a loan contract, for whatever reason, no questions asked.
4. Continue making payments
Keep making payments to your old lender until told otherwise. This way you avoid complications and potential fees. If you overpay your old lender, your new lender will compensate you for the amount that was overpaid, so don’t worry about your money getting lost in the transaction.
The final word
Refinancing your auto loan can help you work toward financial freedom, but make sure it’s the best option for you before you commit to a new loan.