When to Refinance Your Car Loan and How to Go About it.
Refinancing is something people tend to forget about once they are all happy and content, riding around in their new cars, trucks, SUVs, or recreational vehicles. Your car loan may seem like a done deal, but it doesn’t have to be. It’s worth your while to do a little investigating from time to time to see if you can find a more attractive auto loan that will lower your monthly payments, free up cash for other expenses and save you money in the long run.
What Is Refinancing?
Refinancing a car loan is the process of using a new loan to pay off the balance of your existing car loan. Like your current loan, this type of loan is secured by your car and will be paid off in fixed monthly payments over a predetermined period of time — usually a few years.
Before you start: Be sure you know what your current loan interest rate is, the number of payments you have left and if your current loan has a pre-payment penalty, which is the fee you will be charged for paying your loan off early. Not all lenders charge this, but if so, it will affect your overall savings.
When Does It Pay to Refinance?
If interest rates have dropped since you bought your car, or if your lender offers a special promotional rate that is below your current loan rate...both are good opportunities to consider refinancing your auto loan in order to lower your monthly payments and save you interest over time.
Another great reason to refinance is when your financial situation or credit rating has improved, and you have the means to make a larger down payment, secure a better loan rate and/or to shorten your loan term. Also, if you are finding your money is tight, you may wish to refinance in order to find a loan with a longer repayment period, which will lower your monthly payment, although it may increase your total interest cost over the life of your loan.
It is ideal to find a loan opportunity that will lower your monthly payment and save you interest over the long term. Here’s an example:
Use an Auto Loan calculator to see which refinance option best fits your budget. Estimate a new monthly payment and see how factors like loan term, down payment and interest rate can provide significant savings.
Situations When Refinancing Isn’t A Good Option…
Refinancing your vehicle loan isn’t always a viable or smart choice. In general, the longer you have your car…the less likely you will even be approved or benefit from refinancing. Examples include:
- If you have already paid off a large part of your loan, refinancing will not likely save you money. Car loans are paid off via amortization, which means you pay more interest at the beginning of the loan than at the end. In this situation, it’s best to just keep your original car loan unless you are in dire need of extending your loan term to reduce your monthly payment.
- Do you have an “upside-down” or “underwater” situation on the original car loan? When you owe more on a car than it is worth, it makes it difficult to refinance because lenders in general won’t approve you.
- If your car is older or has high mileage, lenders may choose not to refinance. A rule of thumb is a car that is 7 to 10 years+ old or has more than 100,000 miles. (This can vary per lender.)
Follow These Six Steps to Refinancing Your Auto Loan
When you find refinancing conditions are favorable, such as loan rates being low, your car is still relatively new and your credit history is good, it’s time to get those refinancing wheels turning. Following these steps will help make the process as easy and rewarding as possible.
Know What Criteria Lenders Look For
Every lender has different requirements for loan eligibility but in general, here is some key info your lender will want to know:
- Proof of steady income
- Low debt-to-income ratio
- Good credit rating (see next step)
- Proof of residence (lease agreement, mortgage statement, utility bill, etc.)
- Make, model, & year
- Mileage & condition
- Vehicle Identification Number (VIN)
Current Loan Information
- Loan balance
- Monthly payment
- Loan pay-off amount and date
Know Your Credit Score & History
It’s important to check your credit score before you start applying. Lenders consider your credit rating to be a major factor when you apply for refinancing. Knowing your credit score will help guide you to the lenders most likely to qualify you and it will give you a good idea of potential rates.
Lenders evaluate your credit report and credit score, as well as your debt-to-income ratio (DTI) — your monthly debt payments relative to your gross monthly income — your employment history, and other factors. Making payments on time and paying down credit card balances are ways to improve your credit so you can qualify for a better loan.
You can get a free copy of your credit report from any of the major reporting bureaus at annualcreditreport.com. Your report includes info about your payment and credit history — but not your actual credit score. Yourcredit score is a number ranging from 300 to 850 that looks at your borrowing history to tell lenders how likely you are to repay your vehicle loan.
Shop Around for the Best Refinancing Rates
A great place to start looking is at your current credit union or bank. Some financial institutions will offer existing customers discounts on interest rates. Always ask! This gives you a rate and other info to compare with other lenders so you can make the best decision for you. Lenders evaluate credit history based on their own criteria when determining your auto loan interest rate.
Be sure you understand your main goal for refinancing. Are you seeking a lower interest rate and want to save money in the long run? Or are you wanting to free up some monthly income by extending the loan term? Both scenarios could lower your monthly payment, but strategy is best for you is only something you can decide by taking the time to analyze each deal and by doing the math.
Get Pre-Approved by Several Lenders
Now that you have rates and terms from multiple lenders, your next step is to get pre-approved. A good rule of thumb is to get pre-qualified by a least three lenders and do so within a short period of time. It only counts as one inquiry on your credit report if you do so within two weeks. When lenders know that they are competing for your business, you are most likely to get their most favorable rates and terms. Plus, with multiple offers to choose from, you can pick the one that best serves your goals and needs.
Finalize Your Loan With Proper Documentation in Hand
Now it’s time to choose to finalize your refinancing with one of your pre-approved lending sources. Be prepared to show W-2’s , pay stubs, utility bills, insurance card, whatever your lender requires. You’ll need your driver's license, proof of income, proof of insurance, and proof of residency to finalize your loan…and also your checkbook, if you are making a down payment. Once you completed all the paperwork, and have finalized the loan, be sure to check back with both lenders…especially if the new lender is paying off the old loan. You’ll want to follow up to be sure that everything transfers as intended between both lenders, so that there are no missed payments.
Set Up Automatic Monthly Payments
Making on-time loan payments is extremely important to your credit history and your ability to secure future loans at better rates. Consider setting up automatic payments. The funds will be deducted directly from your bank account on a monthly date you choose. You won’t have to worry about meeting the due date or mailing in monthly payments! Some lenders offer a small interest rate discount when you sign up for an automatic payment. Be sure to ask yours if you haven’t received any info about rate discounts. Automated payments can easily be set up with your lender online or in the office.
Is Now A Good Time for You to Refinance?
That’s a decision only you can make. But you’ll never know if this is the right time for you to refinance your auto loan unless you make the effort to find out. Bottom line: if refinancing will save you money, or make your monthly payments more affordable, it is always the right time.
Go for it!