Refinancing a car loan will save you money by lowering your rate of interest. The procedure involves replacing your present car loan with a new one, typically with a different lender. Your car will act as collateral in your new loan, just like it did around the original loan. Here's how the auto loan refinance process works and what to think about before you apply.
Benefits of Refinancing an automobile Loan
There are several reasons to consider refinancing your vehicle loan with a different lender. Here are some advantages to bear in mind:
- Lower interest rate: If your credit has improved because you first bought your vehicle or market rates of interest have decreased, you may be able to get a lesser interest rate than you have at this time.
- Lower payment per month: If you keep your same repayment term, a lesser rate of interest will typically translate into lower monthly obligations. If you want to decrease your monthly payment even more, though, you might be capable of getting a new loan with a longer repayment term. This may mean higher interest fees over the lifetime of the loan, however it could be worth it in case your monthly budget is tight.
- Choose to pay off debt sooner: On the flip side, you could also choose a shorter repayment term. Shorter terms typically correspond with lower interest rates, which means you'll save more income and get rid of 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 cover other expenses. This option is usually limited to people who have lots of equity in their vehicle.
As you consider these benefits, think about whether refinancing is right for you and take steps to refinance your auto loan.
1. Determine that Refinancing Makes Sense for You
Before you start the applying process, you need to determine if refinancing may be the right move for you right now. Here are a few things to consider:
- Credit requirements: To qualify for the best terms on the new loan, your credit history typically must be in great shape. If you're not quite ready, consider waiting and reversing your credit damage first.
- Prepayment penalty: Some lenders charges you a fee if you repay your auto loan sooner than agreed. Check your loan terms to see if you've got a prepayment penalty and just how much it'll cost you compared with the potential savings you expect to obtain in the new loan.
- Origination fee: Some lenders may charge an upfront fee when you refinance. This fee can differ from lender to lender, but it's important to compare it with the potential savings to see if it's well worth the hassle.
- Length of payment term: In case your new repayment term is more than your present one and you don't necessarily require the lower payments, it may not be worth it simply because you may end up paying more in interest within the lifetime of the loan.
2. Look at your Credit
Ideally, your credit rating will be better now than it was when you received the first auto loan on the car. Look at your credit score to determine where you stand and when it could seem sensible to wait and continue making improvements before you decide to apply.
If your credit does need some work, go over your credit reports to get ideas of where you can focus your efforts. You can get your credit score all three bureaus free of charge through AnnualCreditReport.com. Your Experian credit report can also be readily available for free directly through Experian.
3. Gather the required Documents for a financial 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 will help it go more smoothly.
Documents that you may be asked to share include:
- Copy of your driver's license
- Vehicle registration
- Proof of insurance
- Proof of income
- Proof of residence
- 10-day payoff statement
You'll also typically have to provide the vehicle identification number (VIN), so the lender can determine the car's value.
4. Compare Offers
The the easy way maximize your savings would be to shop around and compare offers from multiple lenders. Some lenders will help you to get prequalified before you decide to submit an application, while others may need a complete credit check before offering any kind of interest rate information.
The good news is that if you do submit multiple auto loan applications inside a short period—attempt to submit all applications within 14 days—FICO will normally combine these into one for purpose of calculating your credit rating.
As you compare offers, consider the rate of interest, repayment terms, fees and other features which are vital that you you.
5. Obtain a New Auto Loan
Once you've reduced your listing of offers to one, submit an application with that lender. Depending on the lender, you may be able to perform it on the internet, over the telephone or even in person.
You'll generally need to provide the same information you shared when you requested your overall car loan.
6. Review the Terms and Sign the Contract
Once you've submitted your application, the lender goes with the underwriting process to see whether you qualify and just what the loan terms will be.
Carefully browse the small print to make sure you know very well what you're getting yourself into. Should you agree, sign the contract, and also the lender will pay off your existing loan. Anything will show you when you'll need to begin to make payments on the new loan.
Be sure to manage this transition towards the new loan carefully to avoid missing payments. Pay attention to all communication from both your old lender as well as your new one to ensure things are buttoned up.
How Refinancing an auto loan Affects Your Credit
When you first obtain a new loan, hard credit inquiry made by the lender can cause your credit rating to temporarily dip by a number of points. But over time, your score will rebound, particularly if you make all of your payments on time.
Refinancing can also lower the average 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 is going to do probably the most good to protect your credit score.
Continue to watch Your Credit
After you've been approved to refinance your auto loan, it's still important to keep an eye on your credit and make adjustments as needed. This way, you'll be ready next time you have to take a loan.
Experian's credit monitoring tool makes it easy to remain on course. You'll get free use of your FICO® Score run by Experian as well as your Experian credit history. You will also get real-time alerts once your credit report updates with new inquiries, accounts and personal information.
With your pulse on your credit rating, you'll be inside a stronger position to deal with issues as they arise to maintain a good credit score.