Refinancing a car loan can help you save money by lowering your interest rate. The process involves replacing your present car loan with a brand new one, typically having a different lender. Your car will behave as collateral on your new loan, just as it did on the original loan. Here's how the car loan refinance process works and what to consider before you apply.
Benefits of Refinancing an automobile Loan
There are a few good reasons to consider refinancing your vehicle loan having a different lender. Here are a few advantages to bear in mind:
- Lower interest rate: If your credit has improved because you first bought your automobile or market rates of interest have decreased, you may be able to get a lower rate of interest than you've at this time.
- Lower payment per month: If you keep the same repayment term, a lower rate of interest will typically translate into lower monthly payments. If you wish to lower your monthly payment even more, though, you may be capable of getting a new loan with a longer repayment term. This may mean higher interest fees over the lifetime of the loan, but it could be worthwhile if your monthly finances are tight.
- Choose to pay off debt sooner: On the other hand, you might choose a shorter repayment term. Shorter terms typically correspond with lower interest rates, which means you'll save more income and eliminate the debt sooner—although your monthly payments could be more expensive.
- Get cash from your equity: Some auto lenders offer cash-out refinance loans where you can refinance the original loan and get some money to pay for other outlays. This method is typically restricted to people who have a lot of equity within their vehicle.
As you think about these benefits, think about whether refinancing is right for you and take steps to refinance your auto loan.
1. Consider if Refinancing Makes Sense for You
Before you start the application process, you need to determine whether refinancing may be the right move for you personally at this time. Here are a few things to consider:
- Credit requirements: To entitled to the best terms on the new loan, your credit history typically needs to be in great shape. If you aren't quite ready, consider waiting and improving your credit score first.
- Prepayment penalty: Some lenders will charge you a fee should you pay off your auto loan earlier than agreed. Check your loan terms to ascertain if you have a prepayment penalty and how much it'll cost you in contrast to the potential savings you expect to obtain from the new loan.
- Origination fee: Some lenders may charge an upfront fee when you refinance. This fee can vary from lender to lender, but it's vital that you compare it with the potential savings to see if it's worth the hassle.
- Length of payment term: In case your new repayment term is longer than your current one and also you don't necessarily need the lower payments, it may not be worthwhile due to the fact you might wind up paying more in interest within the life of the borrowed funds.
2. Check Your Credit
Ideally, your credit rating will be better now of computer was whenever you received your first car loan on the car. Look at your credit rating to determine where you stand and when it might make sense to hold back and continue making improvements before you decide to apply.
If your credit needs some work, review your credit history to obtain ideas of where one can focus your time and efforts. You will get your credit score all three bureaus for free through AnnualCreditReport.com. Your Experian credit report can also be available for free directly through Experian.
3. Gather the Necessary Documents for a Loan Application
After you submit the application, you'll typically be required to provide some documents to your new lender. Having this information even before you start the borrowed funds process can help it go more smoothly.
Documents that you might be asked to share include:
- Copy of the driver's license
- Vehicle registration
- Proof of insurance
- Proof of income
- Proof of residence
- 10-day payoff statement
You'll also typically need to supply the vehicle identification number (VIN), so the lender can determine the car's value.
4. Compare Offers
The the easy way maximize your savings is to shop around and compare offers from multiple lenders. Some lenders will allow you to get prequalified before you sign up, while some may require a full credit check before offering any kind of interest rate information.
The great news is when you do submit multiple auto loan applications in a short period—try to submit all applications within 14 days—FICO will generally combine these into one for purposes of calculating your credit rating.
As you compare offers, consider the interest rate, repayment terms, fees along with other features that are important to you.
5. Apply for a New Auto Loan
Once you've narrowed down your list of offers to one, sign up with this lender. Depending on the financial institution, you might be able to perform it on the internet, over the phone or perhaps person.
You'll generally need to provide the same information you shared whenever you applied for your existing auto loan.
6. Evaluate the Terms and Sign the Contract
Once you've submitted your application, the lender goes through the underwriting tactic to see whether you qualify and just what your loan terms is going to be.
Carefully browse the fine print to make sure you understand what you're setting yourself up for. Should you agree, sign the contract, and the lender will pay off your existing loan. Anything will show you when you'll need to start making payments on the new loan.
Be sure to manage this transition to the new loan carefully to prevent missing payments. Pay attention to all communication from both your old lender as well as your brand new one to ensure everything is buttoned up.
How Refinancing an auto loan Affects Your Credit
When you first apply for a new loan, hard credit inquiry produced by the lending company may cause your credit score to temporarily dip by a few points. But with time, your score will rebound, particularly if you make all of your payments on time.
Refinancing may also lower the typical chronilogical age of your accounts, that could impact your score negatively. But again, payment history is an essential element in your FICO® Score☉ , so making your instalments promptly will do probably the most good to protect your credit score.
Continue to Monitor Your Credit
After you've been approved to refinance your auto loan, it's still vital that you keep track of your credit and make adjustments as needed. This way, you'll be ready the next time you need to take a loan.
Experian's credit monitoring tool makes it simple to stay on the right track. You will get free access to your FICO® Score run by Experian and your Experian credit history. You'll also get real-time alerts whenever your credit history updates with new inquiries, accounts and private information.
With your pulse in your credit rating, you will be in a stronger position to deal with issues as they arise to keep a good credit score.