If you got your original auto loan through a dealership, you may not have received the best interest rate. Refinancing your car loan allows you to take out a new loan with new terms to replace your current loan, which can help you get lower monthly payments and potentially lower costs over the life of the loan.
7 steps to refinance your car loan
To refinance your car loan, you will need to assess your current loan and apply. This step-by-step guide will show you how to do it.
1. Decide if refinancing is the right financial decision
Before diving into the refinancing process, you must first decide if refi is the best financial option for you. There are two main reasons to refinance: you can get a better rate or you have trouble making your vehicle payments.
The first scenario is common if you took out your auto loan when interest rates were high or when you had a low credit score. If your credit rating has improved since you got your loan, lenders will likely offer you better terms, which will help you save money over time.
On the other hand, if you feel like you’re stretching your monthly budget with your current payment, you can refinance your car loan for a longer term. By extending your repayment term, your monthly payments will decrease, but you’ll likely pay more interest over time.
The bottom line: The key to knowing if refinancing your vehicle is the right choice is whether you will save money. If you can’t get a lower interest rate through refinancing, it’s not a good idea; refinancing at a higher interest rate will make your loan more expensive.
2. Review your current loan
Understand exactly how much you paid in interest, what your monthly payment is, and what the total cost of the loan will be if you complete the full term. Refinancing at a lower rate could save you money, but you won’t know for sure if you don’t know your current rate.
The bottom line: Education is power when it comes to getting the best deal. Enjoy a car loan calculator to understand how much you are paying on your existing loan.
3. Check your credit score
Do you remember what your credit score was it when you got your original car loan? If you’ve made smart financial decisions since then, such as paying off credit card debt and making payments on time, your credit score may have improved. Lenders will see you as less risky and may offer you better rates.
The bottom line: The better your credit score, the lower the refinance rate you will receive from a lender.
4. Estimate the value of your car
The cost of your loan isn’t the only factor to consider when considering refinancing. You will also want to have an idea of the value of your car. To do this, you can use resources such as Kelley’s Blue Book.
If your car is newer with low mileage and a large balance that will still take years to pay off, you might be a good candidate for refinancing. If it’s worth less than you owe, you might be out of luck. And if your vehicle is nearly paid off, it makes less sense to refinance, since interest is currently only a small portion of your remaining payments.
The bottom line: Knowing the value of your car can help you determine if lenders will be willing to refinance.
5. Look for the best refinance rates
Not all interest rates are created equal. All lenders will assess your credit score, financial history, and eligibility differently. If you’ve decided to refinance, start with the bank you use for other services. Some financial institutions offer interest rate discounts to existing customers.
Compare the rate offered by your current bank with rates from other lenders to have a clearer view of what the best lenders offer. A good rule of thumb is to be prequalified with at least three lenders.
The bottom line: Interest rates vary widely, so compare offers with a few lenders.
6. Determine how much you would save by refinancing
After shopping around for rates and understanding what you might be eligible for, do the math to see how much you’d save by refinancing your car loan. A auto loan refinance calculator can help.
The bottom line: Doing the math up front will let you see how much money a new rate could save you in interest, monthly payments, or both.
7. Get your papers in order
Before submitting an application to refinance your car, gather all the documents that the lender will need to review. You will need to provide proof of income, proof of insurance and details of your existing loan.
Be prepared to show W-2 forms, pay stubs, utility bills, insurance cards and more. You will also need to prepare your vehicle’s make, model, mileage and VIN.
The bottom line: Organize your documents in advance to speed up the refinancing schedule.
Factors to consider before refinancing
Here are some factors to consider before deciding to refinance your vehicle:
- Refinancing conditions: Each bank or lender has different requirements that determine if you qualify for refinancing. Some specific things to look for before deciding to refinance are a clean car title, whether you are upside down on your loan and if you are up to date on payments.
- Prepayment penalties: A prepayment penalty is the fee you have to pay if you prepay your loan. Not all lenders charge this, but it could affect your overall savings.
- Time remaining on the loan: If you’re nearing the end of your current loan, it may make more sense to finish paying it off instead of spending time and money refinancing.
- Your financial situation: Your debt-to-income ratio (DTI) is one of many factors considered by lenders. most debt that you are able to repay before applying for a new loan, the best terms you will receive will be.
Refinancing your car loan can make a big difference to your personal finances. If you’re considering refinancing, investigate car loan rate and compare these terms with the terms of your current loan.