Main steps for refinancing a car loan
When you want to refinance an auto loan, there are a few different stages. But, as a rule, the process is the same as when applying for any other car loan. Assess your current finances and loan documents, and then find the right lender to suit your needs.
Decide if refinancing is the right financial solution
There are several main reasons to refinance: if you can get a better rate or if you are having trouble making payments.
The first option is standard if you took out a car loan when interest rates were high, or you had a bad credit score. If your credit score has increased since you got a loan, lenders will likely offer you better terms to help you save money over the life of the loan.
If you feel like you're increasing your monthly budget with your current payment, you can refinance your car loan for a longer term.
View your current loan
When refinancing, you will need to know the amount of the payment. Most lenders set a minimum amount that they will lend. If the payment amount is below the lender's minimum amount, you will not qualify.
But it is also essential to understand precisely how much interest you pay, the size of your monthly payment, and the total loan cost when you finish the term. Refinancing at a lower rate let you save some money, but you won't know for sure if you don't know your current rate.
Check your credit score
Your credit score and history are the key factors lenders consider when applying for refinancing. If you've made smart money decisions since then — like paying off your credit card debt and making payments on time — your credit score may have increased. Lenders will view you as less risk and may offer you low rates.
Estimate the value of your car
The cost of a loan is not the only factor to consider when considering refinancing. You'll also want to know how much your car is worth. Resources such as Kelley Blue Book and Edmunds can be used for this.
If your auto is newer, with low mileage and a significant balance that will take years to pay off, refinancing can save you money and prevent you from rolling over your loan. You might be out of luck if it costs less than you should.
And if your car is almost paid off, refinancing is no point since the interest currently makes up a little portion of your remaining payments.
Take a look at the optimal refinancing rates
All lenders evaluate your credit score, financial history, and eligibility differently. If you want to refinance, start with a bank or credit union that you use for other services. Some financial organizations offer interest rate discounts to existing clients. Then compare the rate offered by your current bank with those of other lenders to get a clear idea of what the top lenders offer. When you're ready, pre-qualify with at least three lenders.
Define your savings
Once you've looked at the rates and figured out what you can qualify for, calculate how much you'll save by refinancing your auto loan. Like when you look at your current loan, use the particular refinance calculator.
Check your current loan for fees. Lenders often charge a prepayment penalty, which makes refinancing more expensive.
Get your documents in order
Prior approval is essential, but it's not the end of the process. You will need to collect the documentation the lender requires, such as proof of income, insurance, and details of your existing loan.
Be prepared to demonstrate W-2s, pay stubs, utility bills, insurance cards, and more. You will also need to prepare your vehicle's make, model, mileage, and VIN. It often means a lot of paperwork, so be prepared to review everything and double-check for errors.
What to consider when refinancing
You must consider lender requirements, additional fees on loan, and your finances before you refinance your car:
Refinancing requirements: each bank or lender has its criteria for determining who is eligible for refinancing. Another eligibility requirement is the amount of time remaining until the loan is repaid. Lenders often want your loan payments to be made at least six months later, with at least six more months.
Early repayment penalties: many auto loans include clauses determining how and when you can pay off the loan. Often, these items have a prepayment penalty, a fee that must be paid if you repay the loan early. Not all lenders require this fee, but it can affect your savings.
Loan time remaining: If you're close to the end of your current loan, it might make sense to pay it off instead of wasting time and money on refinancing.
Your financial condition: Your debt-to-income ratio is one of the many factors lenders consider.
The more debt you may pay off before applying for a new loan, the better terms you will get. You can use an online calculator to conduct what your debt-to-income ratio is.