How to refinance your auto loan: 6 steps
You’ve signed the loan documents for your vehicle, but that doesn’t necessarily mean you’re stuck in the deal with no other payment options. Much like a mortgage, you can refinance your car loan for lower monthly payments and potentially lower costs over the life of the loan.
How to refinance a car loan: 6 steps
If you got your original car loan from the dealership, you may not have received the best interest rate. And falling rates can make your current rate seem like even more of a bad deal.
Here is a step-by-step guide to assessing your current loan and submitting an application for refinancing your car.
1. Review your current loan
One-third of Americans don’t know their auto loan APR, says 2019 survey conducted by Harris Poll conducted for Lending Club. Don’t make the mistake of not knowing yours.
Instead, learn about your existing loan to understand exactly how much you paid in interest, what your monthly payment is, and what the total cost of the loan will be if you end the entire term.
Refinancing at a lower rate could save you money, but you won’t be sure if you don’t know your current rate.
2. Check your credit score
Do you remember your credit score when you got your original car loan? If you’ve made smart money decisions since then – paying off your credit card debt and making payments on time, for example – your credit score may have improved.
If your credit has improved, lenders will likely view you as a better borrower with a lower risk of loan default. As a result, the lender may offer you a lower rate on a refinance.
Follow these steps to improve your credit score.
3. Estimate the value of your car
The cost of your loan is not the only factor to consider when considering refinancing. You will also want to get an idea of the value of your car.
If your car is newer with low mileage and a large balance that will take years to pay off, you may be a good candidate for refinancing. If it’s worth less than you owe, you might be out of luck. If your vehicle is almost paid off, it is less wise to refinance, as the interest will be a small portion of your remaining payments.
You can use a resource like Kelley Blue Book to get an idea of what your car is worth.
4. Find the best refinance rates
Interest rates vary widely, so compare offers from a number of banks and credit unions.
Start with the bank that you use for other services, such as your checking account and your savings account. Some financial institutions offer discounts on interest rates to existing customers.
Additionally, compare auto credit rates online to get a clearer view of what the best lenders are offering.
5. Determine how much you would save by refinancing
After you’ve looked around the rates and figured out what you might qualify for, do the math to see how much you would save by refinancing your car loan.
Use Bankrate Auto Loan Refinance Calculator to see how much money a new rate could save you on interest, monthly payments, and maybe even both.
6. Put your papers in order
Before you submit an application for refinancing your car, make sure you have all the appropriate documents that the lender will need to review.
Here is what you will need to provide:
- Proof of income.
- Proof of insurance.
- Details about your existing loan, such as your current interest rate, remaining balance, and the repayment amount.
When to refinance your car loan?
There are two main reasons why auto loan refinancing can be a smart financial decision:
- If your credit score has improved, you can take advantage of your improved financial situation with a loan refinanced at a lower interest rate.
- If you feel like you’re stretching your monthly budget with your current payment, you can refinance your car loan for the longer term. By dividing your payments over an extended period, you will have a lower monthly bill which can reduce your financial stress. But keep in mind that you could incur additional interest charges by extending your existing four-year remaining loan to, say, a five or six-year loan.
At the end of the line
Refinancing your car loan can make a big difference in your personal finances. The current interest rate environment is a great time to compare auto loan rates and consider your refinancing options.