Although it may not seem like it, replacing your current auto loan with a new one could help you save money. Let’s take a look at when and how to opt for a car loan refinance.
Have you been searching for ways to save money on your auto loan? Auto refinance could save you money by lowering your monthly payment or cutting the amount of interest you pay. You can then apply that money toward savings, home upgrades, or debt repayment. Read on to know how to refinance a car and when it’s appropriate to do so.
How does car loan refinancing work?
When you refinance your car, you are replacing your current auto loan with a new one. Your new lender will pay off the initial loan, and you begin making monthly payments on the new loan. Although the process for refinancing your car loan is quick, there are a few things to think about before making the leap.
Five steps to save money with car loan refinance
Refinancing an auto loan may sound like a tedious process. However, by preparing a few things ahead of time, you could get your car refinanced in a wink. The procedure may differ significantly depending on the lender, but understanding the fundamental processes can help you prepare for what comes next.
Determine whether refinancing makes sense for you.
Refinancing your auto loan should lower your monthly payment or the total amount of interest you pay. However, if any of the following factors apply to you, this may not be possible:
Falling behind on your payments: Late payments on your existing loan, as well as other credit issues, may rule you out for a loan with better conditions.
You owe more than the value of your car: Securing suitable loan terms may be difficult if the sum on your loan exceeds the value of your vehicle.
You have an old car: Some lenders will not refinance older or high-mileage vehicles, so upgrading your vehicle may be more cost-effective in the long run.
Check your credit report
Lenders rely on your credit report and credit score before approving a loan and determining your interest rate. Lower interest rates are usually associated with a higher credit score. Keep an eye out for your credit score, as it may have improved over time.
Collect relevant papers
Organizing your paperwork ahead of time can make the application process go more smoothly. To refinance your car, you’ll need the same documents you’d need to secure a loan, such as:
- A copy of your driver’s license
- Your social security number
- Proof of car insurance
- Proof of income
Finally, you’ll need a copy of your original loan contract. If you can’t find it, call the lender and ask them to send you a copy by email. Before granting auto refinance, your new lender may request details such as the remaining balance on your loan. You may also have to provide your current monthly payment plan, interest rate, and the amount of time left on your loan.
Ask the right questions
Before signing the new contract, make sure you’ve understood the terms of conditions of your new car loan. Hence, it is important to read the fine print and ask the right questions. Inquire about the annual percentage rate (APR), loan length, and whether there are any prepayment penalties.
Apply for car loan refinance
If you’ve found the deal that meets your needs, you are ready to dive right in and begin the application process. However, it may result in an inquiry into your credit report. If you’re unsure where you stand, prequalifying for the loan can help you figure it out without affecting your credit score.
If you can refinance for a cheaper interest rate or a shorter term, you could save hundreds of dollars per year.
When should you think about refinancing your car?
Refinancing a car is not for everyone, and determining when to refinance can be difficult. In other cases, the benefits of refinancing may be limited or non-existent. For example, if you have a bad payment history on your present loan or are close to paying it off, refinancing may not be advantageous.
There are situations, however, when refinancing your car can be advantageous. If any of the following scenarios apply to you, you might consider refinancing your car.
Your credit score has improved.
The credit score is one of the variables a lender evaluates when deciding on loan acceptance and credit terms. If you took a car loan when your credit score was low, refinancing it may result in a lower interest rate or possibly a lower monthly payment.
Interest rates have fallen.
If you acquired your car when interest rates were high, refinancing it can save you money, possibly more than you know. If you do not extend the duration of your loan, a 2% to 3% reduction in interest rates could help you save hundreds of dollars.
You did not shop around for rates the first time around.
You may have overpaid if you obtained your original loan from the car dealer. Car buyers do not always verify their credit score or check the current interest rates before going to the dealership. As a result, their loan terms may have suffered. You might not have received the greatest bargain if you accepted the loan offer from the dealership without knowing what other options were available.
Your monthly payment is very expensive.
If your monthly payment is too high, refinancing your car may be beneficial. The lower your interest rate, the lesser your monthly payment. However, but it may not be enough to make a significant impact. Extending the term of your loan can have a greater impact on lowering your monthly payment. On the other hand, a longer term raises the amount of interest you’ll pay over the life of the loan.
Once you’ve located the right lender, auto loan refinancing might be a terrific method to put some money back in your pocket.