Can you refinance a car loan? Luckily, if you’re unhappy with the terms of your current car loan, refinancing it is a viable option. Many people, especially first-time car buyers, don’t qualify for competitive interest rates, especially if their credit score is low.
In this case, you may get stuck with the dealer’s marked-up rates because there aren’t other financing options. While those terms allowed you to purchase the vehicle at the time, you may find yourself wishing now that there was something you could do to save money on your car payments.
If you find yourself in a similar situation, consider refinancing your car loan. Doing so can be an effective way to lower your payments, get a better interest rate and change the repayment terms of your loan. Learn more about how to refinance an auto loan and why doing so can be a worthwhile financial move.
How Does Refinancing a Car Work?
What is refinancing a car and what does the process consist of? While you may have heard the term “refinance” before, you may not know what it means to refinance a car. Put simply, auto refinancing involves replacing your car loan with a new one. Your new auto loan pays off the old one, so you’re left to make payments on the new loan. There are a few reasons to refinance a car, and doing so can result in various outcomes.
The goal of refinancing your car may range from removing a co-signer from your loan to saving money. When done wisely, refinancing your car may lower your monthly payments, improve your interest rate or change your car loan length terms to help save you money. Refinancing is a great option for many people, though it can sometimes. not be as advantageous. Because refinancing your car can also be more expensive, knowing how to refinance an auto loan and when will help you make smart financial goals.
How to Refinance an Auto Loan
You need to know how to refinance your car to ensure it’s done properly, as this is a significant financial decision. There are many considerations to make, and you should have everything in order before beginning the process. Here are a few tips to help you refinance a vehicle.
1. Decide if Refinancing Is a Smart Financial Move
Refinancing your car can be a beneficial financial move, though there are some instances when refinancing may be the wrong move. Most people need to know how to refinance a car loan for one of two reasons — to get a better interest rate or because they’re struggling to make the monthly payments. These are the best situations in which you should refinance car loans, as they’ll be most beneficial to you.
When you bought the car, interest rates may have been high due to inflation, or your credit score prevented you from getting a better rate. Refinancing may allow you to get a better rate if rates are lower in general or you’ve improved your credit score. You’ll likely get better terms on your new loan with a better credit score. Lower interest rates and better loan terms will help you save money in the long run.
If you want to refinance auto loans because you’re unable to make the monthly payments, doing so would allow you to lengthen the loan terms to decrease the monthly payments. Although extending the terms will likely result in you paying more in interest over the life of the loan, you’ll have a lower monthly payment. Being able to afford the monthly payments is important to avoid late fees or complete inability to make payments.
Overall, auto refinance is a smart move if you’ll save money. Even if your monthly payments decrease, pay attention to the interest rates. If you’re signing on for a higher interest rate, your loan will be more expensive. Only refinance if doing so saves you money.
2. Review Your Current Loan
Once you decide that refinancing is a smart financial move, you’ll want to review the terms of your current loan. You need to know your current terms and interest rate to know if you’re getting a good deal. One of the biggest aspects of your current loan is your payoff amount, which is the money you have left to pay off. Many lenders have loan minimums, and if your payoff amount is below their minimum, you won’t qualify for their loan.
The more you know about your current loan’s terms, the more educated you’ll be to determine if you’re getting a good deal on your new loan. For example, make sure you know your interest rate, monthly payment and what the loan would cost if you finished the term. This information will help you compare your current loan to potential new ones. Again, if refinancing will end up costing more money, it’s not the best choice.
3. Check Your Credit Score
When applying for any loan, you need to check your credit score. Your credit score and history are major deciding factors for refinancing and loan eligibility. If you’ve made on-time payments and worked to pay off other forms of debt, your credit score may have improved since you originally bought the car. If this is the case, lenders will see you as less of a risk and offer better rates on your refinanced loan.
Be aware of your credit score before applying for refinancing, so you can estimate potential interest rates and find loans you qualify for. In most cases, the better your credit score, the better interest rates you’ll secure. You may still find decent rates with a lower credit score — you just have to find the right lender.
4. Estimate Your Car’s Value
Your car’s value can also help you determine if refinancing is worth it. If your car is still relatively new, has low mileage and you still have a significant balance to pay off, the car likely has value and is worth refinancing. Doing so could prevent you from owing more money on the car than it’s worth, which is referred to as going upside-down or having negative equity.
If your car is worth less than its remaining balance, you may be unable to refinance. Also, you may not want to refinance if your car is nearly paid off. Once your car is almost paid off, the remaining payments likely contain interest, which won’t be beneficial to refinance. In these situations, refinancing may cost you more than you’d save and some lenders may even be unwilling to help you refinance.
To estimate your car’s value, use resources like Kelley Blue Book. By entering your VIN or license plate and details about your car’s condition, Kelley Blue Book will give you an accurate estimate of your car’s value so you can determine whether it’s worth refinancing.
5. Shop Around for the Best Refinancing Rates
Every lender will consider your eligibility, credit score and financial history differently, which means loan terms and interest rates can vary significantly between lenders. Therefore, it’s best to shop around to find the best refinancing rates. A good starting place is a bank you use for other services like checking or savings accounts. You could get discounts for being an existing customer. Use the rate they give you to compare rates with other top lenders.
You may stop in other local banks to sit down and talk with a representative or you may get refinancing quotes from online lenders. You should look at lenders’ rates and loan terms first. Be sure to also look for lenders that will work with your specific situation and offer you personalized service to help you reach your financial goals. Your experience with a lender should be positive, especially if you’ll work with them for the rest of your loan term.
Find a few lenders with good offers to be your top picks. Once you find your best options, get preapproved with them so you know what your rates will be. Doing so allows you to make the best financial decision and fully understand what your new loan will look like.
6. Determine Your Savings
Something else to consider when shopping for refinancing rates is your savings. When you’ve determined the rates you qualify for, you should calculate how much you’ll save when you refinance with a specific lender. For example, if you’re financing to get a lower rate, ensure you’re saving interest money. If you want a lower monthly payment, make sure the loan won’t cost much more with longer repayment terms.
Before refinancing, ensure your current loan doesn’t have fees like a prepayment penalty. Penalties and fees can make refinancing more expensive. If you have fees, you’ll want to weigh the cost of them with the potential savings to ensure you’re making the right decision.
7. Organize Your Paperwork
Refinancing can involve a lot of paperwork. To help speed up the refinancing process, having your paperwork organized ahead of time can be helpful. Be prepared to provide your vehicle’s information, including the mileage, make, model and VIN. You’ll also need documentation like your current loan details, insurance cards, pay stubs, W-2 forms and other documents that show proof of insurance and income.
After submitting your paperwork and getting approved for an auto loan refinance, follow up with your new and old lenders. This step helps ensure the old loan is paid off and you’ve taken care of everything. This way, you can prevent errors and get them corrected as soon as possible when they occur.
Benefits of Refinancing Your Auto Loan
As mentioned above, financing your car loan can be helpful for saving money. Keep in mind that these advantages depend on finding the right loan and having a decent credit score. While you can benefit from refinancing with a lower credit score, you’ll see more perks if you’ve increased your credit score since purchasing the car.
Here are a few ways you can benefit from refinancing your car.
1. Lower Your Monthly Payment
While you’ll likely be paying your car off over a longer term, refinancing can help you gain better control over your finances in the present. This option helps you afford necessities, pay bills, pay off high-rate debt and save money to get in a better place financially. Lowering your monthly payment can be especially helpful if you’ve experienced recent financial difficulty.
2. Lower Your APR
Reducing your annual percentage rate (APR), or interest rate, is arguably one of the greatest benefits of refinancing your car. As mentioned above, there are many reasons you may have a high interest rate on your current loan — a low credit score, generally high rates or accepting a high rate to get a better deal on the car. Regardless of the reason, refinancing can lower your APR to reduce the amount of interest you pay on the loan over the course of its life.
With a high APR, you’ll end up paying significantly more on the loan over time, increasing the loan’s total amount. To truly save money on your loan, you need to get a lower interest rate. The most promising way to do so is to improve your credit score. If you’ve made consistent, on-time payments for at least six months, you may see an increase in your score, which will help you secure a lower rate.
3. Pay Off Your Car Faster
In some cases, refinancing can even help you pay off your car faster. Often, shorter repayment terms are accompanied by lower interest rates, which would allow you to pay off the loan quickly. When discussing lower interest rates, be sure to find out if your terms will be shortened.
Refinancing can be especially beneficial to pay your car off faster if you’ve increased your income since purchasing the vehicle. Increased income would allow you to make larger payments on a car loan, thus reaching the payoff sooner. For example, rather than make extra payments on your current loan, you could refinance to a shorter term with a lower interest rate to direct more of your money towards the principal amount.
Refinance Your Auto Loan and Save With RefiJet
When shopping around for refinancing loans, you may have to fill out several applications to find the best deal. At RefiJet, we understand this process can be time-consuming, so we’ve simplified it for you.
After meeting a few basic qualifications, we take your application information and run it through multiple lending programs to find the best options you qualify for. After choosing a lender and program, we’ll securely transfer your data to the loan documents to save you time and money.
If you’re interested in saving money on your car loan, find out if you’re eligible to refinance with RefiJet and how to get started.