How To Refinance Your Auto Loan

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Most of us know about mortgage refinancing. But do you know that auto loans can be refinanced? And it is possible to refinance an auto loan, but it is a much simpler procedure than a house loan refinance. Auto loan refinancing will rarely need an appraisal, and there are no origination fees either. If your credit has improved since you took out your original loan, refinancing can save you lots of money and make it possible for you to remove a cosigner. If you are considering an auto loan refinance, you can’t know where to begin or what to do, read below for more information.

How to Refinance an Auto Loan?

Estimate Your Car’s Loan-To-Value Ratio

Due to depreciation, some car owners will discover, they are underwater on their car loans. In other words, they owe more on their car than it is worth. If you are underwater on your auto loan, you can have a tough time qualifying for refinancing. To find out where you stand, begin by taking a look at your last auto loan bill to see how much you still owe. Then, use an online tool like Kelley Blue Book and Edmunds to estimate the fair market value of cars. If your car is worth more than you owe, refinancing can be a viable choice. Otherwise, you can want to wait unless you have built up some equity.

Look Out for Prepayment Penalties

A prepayment penalty is a fee that few lenders charge if you pay off your loan early than the agreed payment schedule. Check the loan documentation and call up your lender to find out if there’s a prepayment penalty on your loan. In most cases, there will not be. But you will need to ensure before moving forward. 

Evaluate Your Credit

If you have made all car loan payments on time for a year or more, your credit has likely improved and there is a chance you can benefit from a refinance. Obviously, that is true if you have kept all other financial commitments up to date. The proof is in the numbers, so you will have to find out where you stand, and you have 2 options to do so. You can pull your own credit report that is a history of credit activity and inspect your credit score for free to see if you have had any issues, like late payments. Because you’re checking your own credit, this type of research won’t low your score. However, because each of us has several credit scores, the score you get will not essentially tell you what interest rate to expect on your new loan. Your alternative is to apply for a new loan and find out how better your credit is as a result of the application. 

Consider the Time Remaining on Your Loan

If you have a year or 2 left, you can be better off sticking with your original loan. Extending your loan repayment period may low your monthly payments. But when you add in the money you will pay in interest charges; you can finish paying a lot more overall. On the other hand, refinancing into a very short repayment term may be a better idea. Very short terms tend to unlock low-interest rates. Your monthly payment will likely go up with a short term, but if you qualify for a much good interest rate than what you have now, it cannot increase as much as you did think. And you can save a lot of money overall.

Complete the Process

If you decide to refinance, complete the application with the lender you have chosen. You will be sent the loan paperwork, and you respond to the requests of the lender. Here is an overview of what you can expect: You will sign new loan documents and a new loan will be created for you, at a new interest rate, with the term length you select. Your new lender, the refinance company, will pay off your old loan and you will start making payments to the new lender at a low rate. While there are several details to take care of, the whole process may be completed in some hours.

Evaluate Loan Terms

If you decide to refinance that you may leave the length of the loan unchanged and consider these options: Pay off the loan more rapidly. If you are used to making loan payments of a specific amount, you can be capable of keeping the payment about the same but shorten the loan’s length. This saves you money because you will pay less interest over the loan’s life. Take longer to pay the loan. If your budget is stretched and you need a small financial breathing room, you can extend the loan term by some months and a year to lower your payments. This is not ideal because you will pay additional interest in the long run. However, it is better than missing payments and damaging the credit history.

When to Refinance Your Auto Loan

Every situation is different, and the 1st step to determine whether refinancing is right for you is to take a look at the current market and your financial position. Consider refinancing your auto loan if:

Interest Rates Have Dropped Since You Have Bought the Car

Your credit score has improved, which may mean you qualify for a good rate. You financed the car via a dealership. The rates are frequently high through dealer financing, so it is better to look at other sources when you can.

How to Prepare for Refinancing

Unlike a mortgage, auto refinancing should need some documents. Gather the following info before you start so you have all the facts when asked about them:

A Copy of Your Current Loan Papers

Info about your vehicles, like the VIN and current mileage. Next, before you begin shopping for a new loan, you should know where you stand with your current loan. Consider the following questions:

What Are You Paying in Interest?

How many months do you have left on the loan? What’s your current payoff amount? This’s the amount you will pay the lender if you paid the whole bill today. Is there a pre-payment penalty in place? Few lenders let borrowers pay off a specific amount of their loan every year without a penalty. It’s more common with a house mortgage, although can apply to some car loans.

Determine If Your Car Qualifies

While every bank has its own qualification requirements, most banks won’t refinance a vehicle if it, and the loan, meets specific conditions, such as the following:

  • Your present loan has less than $7,500.
  • Your car is over 7 years old.
  • Your car has 100,000 miles.
  • You use the car commercially.
  • Your car has a salvage title.
  • You will not have much luck refinancing a motorcycle and RV. Few banks can even rule out specific vehicle makes.

Get a Better Deal

Sometimes, you do not get a good deal when you finance the vehicle. Perhaps you were not prepared, bought on the spur of the moment, and did not succeed in getting a good rate during your negotiations. Whatever the case, if your original car loan interest rate is well above what you’re seeing advertised that you need to shop for an auto refinance deal. Trading a higher interest rate for a lower-interest-rate is the quick way to save money on a car refinance. When you get original financing at the car dealership, it is easy to get confused by all of the numbers and simply buy based solely on the monthly payment. You need to go back to your copies of the documents you signed to inspect the interest rate on your loan. If it’s higher than the market rate, look for another lender with good terms.

Apply for Your New Loan

Once you have found an auto loan refinancing deal that you like, you can move forward with filling out an official application. If you are approved that your lender will pay off your old loan and you will make payments to the new lender moving forward. Your car title will require to be transferred to your new lender. In several cases, the lender will take care of this themselves. You need to receive paperwork from your new lender that contain all the terms and conditions of your new loan. Be sure to store your loan paperwork in a safe, accessible place.

Why Refinance My Auto Loan?

There are many best reasons to refinance a car loan, with saving money at the top of the list. As per the credit reporting bureau TransUnion, customers lower their interest rate by an average of 2.4%, and their monthly loan payments by more than $50. Nearly 2-thirds of auto finance companies provide refinancing, but as per a recent Harris poll, less than half of customers are familiar they can utilize this option as part of their financing strategy. Even with interest rates slow climbing, there are still lots of ways to save with auto loan refinancing. Report of TransUnion showed that several customers refinanced their original vehicle loan within days of signing the papers.

To Take Advantage of An Incentive

Sometimes you have to use the financing of the manufacturer to get a cashback offer (sometimes known as a rebate). If the interest rate for that loan is higher than what you can find elsewhere, it is a great reason to refinance the loan. You should do your research, although, as many cashback offers to need you to keep the financing of the manufacturer for a specific time period. Those periods change from deal to deal, so check the paperwork to see how several months have to pass before you can seek a new finance deal. Few loan deals let you turn around almost instantly and get a new auto loan.  

Your Credit Score Has Improved

If you had bad credit when you took out the car loan, but are making on-time monthly payments for a while, your credit score has probably improved. You’ll have made a dent in the balance of your present auto loan, lowering its loan to value (LTV) ratio as long as your payments outpaced depreciation. The low the LTV ratio, the more attractive your loan is to a new lender. You have shown that you can be responsible for that. If you can go in and refinance and get a low rate, it will be a smart financial decision to do so. If you had bad credit when you took out the old loan, you likely did not qualify for lower rates. With good credit, however, you can qualify for lower rates when you apply for a new loan. The new rate can let you lower the monthly payment, shorten the length of your loan, or both.

To Move It to Your Financial Department

Having your auto loan at the bank and credit union where you do the most business is beneficial for many reasons. You do not just receive more benefits and discounts, but it makes it easier to work with the loan. Since many people now have their paychecks deposited straight from their employers to their checking accounts, it is greatly convenient to set up automatic payments from your checking account straight to your auto loan. If there are ever issues with a payment not being applied to your loan, it is easier working with one institution to get it straightened out.

To Change the Length of Your Loan

If you should lengthen and shorten the term of your loan, an auto refinance is the best way to do it. Say your original financing was for 4 years, but your loan payments are stretching your budget. With a refinance, you can be capable of stretch the payments out to 5 years to come up with an amount that is easier to make. By raising the length of your loan, however, you can finish paying more interest in the long run. You can use a refinance to shorten your car loan. Why not make oversize payments to decrease the time it takes to pay off your current loan? Because a short-term vehicle loan will probably come with a rate discount, and that’ll save you more money.

About Marcus The Car Guy

I've been in car sales and finance for over 20 years, working at the highest volume dealerships in the nation including Fletcher Jones, DCH and more. Want to pick my brain on finding cars, negotiating cars, and structuring car deals?

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