How To Refinance Your Car Loan?
Auto Refinancing debt can help your budget. By replacing your previous loan with a new one with lower payments or a lower interest rate, you can save money over time.
Car loans offer smaller upfront payments and fewer years than mortgages, for example. We'll explain car refinancing, including how to decide if it's the correct choice.
Why Refinance Your Car?
Most borrowers refinance to pay less monthly interest. Refinancing an auto loan can save you thousands in interest.
Smaller payments may free up money for other debts. A smaller payment reduces your debt-to-income ratio, and monthly debt payments are divided by monthly gross income. A low DTI can lower your mortgage rate.
Some borrowers refinance to shorten the loan term. Longer-term auto loans may provide financial flexibility. Refinancing could remove a co-signer.
Should You Refinance?
If your car loan interest rate is high and market rates have dropped, consider refinancing. You may qualify for a better interest rate because rates are near-historic lows.
Borrowers whose credit has improved since taking out the loan may get a better rate. If bankruptcy or default fell off your credit report, your score may be higher now.
When To Avoid Auto Refinancing?
Don't refinance your auto loan if you need a personal loan, mortgage, or another loan. Loan applications might hurt credit and raise interest rates.
Depending on your auto loan, refinancing may entail a prepayment penalty. The penalty and interest rate may not be worth refinancing. If you're unsure about a prepayment penalty, consult your loan contract or lender. Check by phone or in writing to see if prepayment penalties apply.
How To Refinance A Car?
To refinance your auto loan, follow these steps:
1. Gather Documents
You must input information about your current auto loan and vehicle to refinance. You must also supply your legal name, address, SSN, employment, and insurance verification.
2. Refi Lenders
Refinance with your present bank, online lenders, local and national banks, and credit unions. You can use one bank's offer at another.
Refinancing a car loan affects your credit score. Each auto refinance might lower your credit score by 5 points.
Multiple inquiries within 14 to 45 days count as one. Too much delay could mean missing out. Each application will be a hard inquiry, hurting your credit score.
3. Apply
Know that the lender will appraise the car. They will check your credit, income, and car insurance. You and your co-borrowers may need recent pay stubs or tax returns.
The auto loan refinance process takes about two weeks from start to finish.
4. If Approved
Once approved by multiple lenders, compare offers. APR and total interest paid over the loan's life are the most important. The APR comprises interest rates and lender and title fees. A lower APR lowers fees and interest.
Different interest rates and loan terms may be granted. Loans with longer terms have higher interest rates and lower monthly payments. A shorter loan period equals larger monthly payments and a lower rate.
Consider your monthly budget to determine how much you can spend. You can make extra payments if you choose a lender with no prepayment penalty.
You must finalize the car loan after choosing a lender. The new lender should pay off the old lender's loan sum, but double-check to be sure. Also, don't fall behind on car payments during the transfer. When the new lender pays off the original, they should repay any excess payments you made.
