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Refinance Your Car Loan and Lower Your Monthly Payments
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Choose a loan offer, and on final approval, enjoy the extra cash in your pocket. It’s that simple!
How Car Loan Refinancing Works
What Is Auto Loan Refinancing?
Essentially, auto loan refinancing is taking out a new loan to pay off your existing car loan. Depending on individual financial situations, applicants could qualify for a lower interest rate through refinancing—which could mean lower monthly payments and saving money in the long run.
How Does Auto Loan Refinancing Work?
When you apply to refinance a car loan, your goal is likely to secure a new loan with better rates or terms. Here's an example of what an auto refinance may look like:
Sam took out a car loan in late 2019. At the time, Sam had a low income and credit score, plus a fair amount of debt. This financial situation resulted in an interest rate of 16.88% for a subprime borrower on a used car—higher than the national average of 9.49% for used cars.
Since purchasing the car, Sam's income has risen, his debt has shrunk, and his credit score has improved. As a result, Sam thinks a lender would offer a lower interest rate today.
So Sam decides to investigate car loan refinancing by:
Setting goals for the new loan, such as an improved auto loan refinance rate.
Researching online and brick-and-mortar lenders, including his current lender (some lenders allow internal refinancing), and choosing a few possibilities.
Self-reporting information to preferred lenders to see what prequalifying auto refinance rates look like (if available).
Reading the fine print for preferred potential lenders to make sure all terms are clear.
Applying to refinance the auto loan.
Given Sam's income, debt-to-income ratio (DTI), and credit score improvements, a lender may offer him a loan with more favorable auto refinance rates and terms.
If Sam does find a significantly better option, that's when step 5 happens.
Remember: A prequalified offer for refinancing a car may not be identical to the final one because the prequalification doesn't include a hard credit check.
Once Sam signs the car loan refinancing paperwork, the new loan is used to pay off the original loan, and he now makes regular payments to the new lender.
When to Think About Refinancing an Auto Loan
You might consider refinancing your auto loan in several circumstances, including when:
Your income, credit, and/or debt-to-income ratio have greatly improved. In other words, you present less risk as a borrower compared to when you first took out the auto loan.
Interest rates have dropped in general.
You realize your current lender charged you a higher interest rate than you could have qualified for (e.g., if you originally financed through a dealership).
You want to remove a cosigner but can't or don't want to do so via a standard release.
You may also consider refinancing your car loan when you can't keep up with payments for your current loan, but you should first consider other options.
Lower monthly payments from a refinanced car loan are usually achieved as the result of a loan term, which can mean paying more over the life of the loan, even if the new interest rate is lower. Meanwhile, the car is depreciating in value.
Info You'll Need to Apply for an Auto Loan Refinance
When an individual applies to refinance a car loan with a new lender, they need to provide information showing creditworthiness and risk level. Some of these documents and details may include:
Proof of residence (e.g., a utility bill)
Income verification (e.g., a pay stub)
Your social security number
Your credit score (via a credit check)
10-day payoff amount from the current lender
Vehicle identification number (VIN)
Limited power of attorney allowing vehicle title modification
Proof your current lender reports to at least one major credit bureau, is insured by the FDIC or NCUA, and is registered by the state and Better Business Bureau
Evidence of consistent, up-to-date payments on your current loan
Note: This list is relatively extensive and lenders likely require all this information. Some auto refinance lenders may initially only ask for a few documents then request additional information to verify details.
Tips for When You're Shopping Rates
Pay close attention to auto loan refinance rates and terms, which vary greatly depending on the lender. A few tips for making the best decisions when refinancing your car loan are:
Compare several potential lenders.
Determine if you can prequalify.
- If you need to apply for several loans, do this in a short period because creditors may combine them into one hard check rather than counting each separately.
Look for hidden fees from the new lender.
See how much you still owe on your current loan:
- Owing too little can make auto refinancing more expensive than just finishing your current payments.
- Owing more than the car is worth can make auto refinance lenders not want to offer assistance.
Make sure your car is worth enough for lenders to want to help (e.g., low mileage is preferable).
Verify your current loan doesn't have a prepayment penalty.
Make sure your credit score can handle a hard credit check.
- Hard checks account for 10% of your score and stay on your report for two years.
- If you plan to apply for several loans or credit cards in the coming years, refinancing a car loan may not be the best idea right now.
Refinancing a Car Loan With Bad Credit
Refinancing an auto loan with bad credit may be difficult, but it may not be impossible. Lenders typically handle vehicle refinancing on a case-by-case basis.
You may be able to refinance an auto loan with bad credit if you have a positive track record of making payments on your current loan and/or have a cosigner. Shop around before deciding if refinancing is right for you, and don't let any lender run a hard credit check until you've determined that refinancing your car loan with the lender is right for you.
If you're considering refinancing and are coming up empty-handed, talk to your current lender. They may be open to discussing options.
Pros and Cons of Refinancing a Car Loan
There are benefits and drawbacks to refinancing an auto loan, no matter your situation. You should weigh these carefully when deciding whether refinancing is right for you.
Remember, none of the pros or cons of refinancing car loans are guarantees. Every situation and every lender is different.
Pros of Refinancing an Auto Loan
Potential benefits of refinancing an auto loan include:
Lower interest rates: If your financial and credit situations have significantly improved since you took out the original loan, you could qualify for a lower interest rate.
Budget-friendly monthly payments: Refinancing your loan may result in lower payments each month if you decide to extend your loan term.
Cash for other expenses: If you have positive equity (i.e., your car is worth more than your current loan amount), you may be able to refinance your auto loan using your car as collateral. This means you can take out more than what you currently owe on your car and use that additional money for other expenses.
Cons of Refinancing an Auto Loan
Potential downsides of refinancing an auto loan include:
Lowering your credit score: A lender will pull a hard credit check before making an official auto loan refinancing offer. The hard credit check affects your credit score whether or not you choose to refinance.
Paying more in the long run: While monthly payments may be more budget-friendly in the short term, refinancing a car may entail a longer loan term. As a result, lower monthly payments can result in paying more in interest over the life of the loan.
Risking your vehicle: If you used your car as collateral for a personal loan, as described above, falling behind or stopping payments could result in the lender repossessing your vehicle.
Reasons Refinancing Your Car Loan Could Be a Good Idea
If your financial situation has improved since taking out your auto loan, you could qualify for a better rate. Improving a credit score, landing a better job, or paying off some other debts may cause a lender to consider an applicant as less of a risk than when they financed a car originally. Qualifying for a more favorable rate now could mean saving money over the life of the loan.
Ready to refinance your auto loan? Check your rate for free, today.
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