When financing the purchase of a vehicle, you may assume that you’re stuck with your auto loan until it’s completely paid off. However, that’s not necessarily true. If you’re unhappy with the terms of your auto loan, you may want to consider refinancing.
Refinancing involves taking out a new car loan in order to pay off your existing car loan. In other words, it involves replacing your current car loan with a new loan that has more favorable terms.
Refinancing at the right time can help you secure a better interest rate, lower your monthly payments, and make your car loan more affordable overall. If you want to experience these benefits, it’s important to learn how to refinance a car loan. Here’s what to do:
Determine if Refinancing is Right for You
You may be eager to apply for refinancing, but first, it’s important to figure out if refinancing is a good option for you. Refinancing is not right for everyone. To determine if you could benefit from refinancing your car loan, ask yourself the following questions:
Will I be charged a prepayment penalty?
Read through your car loan agreement to see if it mentions a prepayment penalty. A prepayment penalty is a fee that lenders charge borrowers who pay off their loan earlier than expected. If you refinance, you will be paying off your current loan, which means you will incur this charge if it’s part of your loan agreement.
Find out the amount of the prepayment penalty you will incur. Then, factor this into your calculations when determining if you will save money by refinancing. If you will incur a large prepayment penalty, refinancing may not be worth it.
Do I owe more on the vehicle than it is worth?
Borrowers who are “upside down” on a car loan, which means they owe more than the vehicle is worth, may have trouble refinancing their loan. Find out how much your car is worth by using a free online estimation tool such as Kelley Blue Book.
If your outstanding loan balance is greater than your vehicle’s value, you may find it difficult to get approved for refinancing. Even if you are approved for refinancing, you may not be able to secure a loan with better terms, which means you wouldn’t benefit from going through the process.
Have interest rates gone down?
Interest rates change frequently. If you’re thinking about refinancing, research the current interest rates to see if they have changed since you took out your current car loan. If interest rates have gone down, you may be able to refinance and secure a new loan with a lower interest rate. The lower the interest rate, the less you will pay over the course of the loan. In this case, refinancing might be the right option for you.
Has my credit score improved?
Next, check your credit score to see how it has changed since you took out your current auto loan. If your credit score has improved, you may now qualify for a lower interest rate, so you may want to consider refinancing. However, if your credit score has gone down, refinancing may not help you secure more favorable loan terms.
Can I afford my current car loan payment?
Finally, ask yourself if you can afford to continue making payments on your current car loan. If you’re struggling to make payments, you may want to consider refinancing.
Even if you don’t qualify for a lower interest rate, there are other ways to make your loan more affordable through refinancing. For example, extending the loan term will lower your monthly payments, which may make your loan more affordable.
Talk to your lender to explore your options. If you’re in this situation, refinancing may help you avoid defaulting on your existing loan.
Choose A Lender
If you’ve determined that refinancing is right for you, the next step is choosing a lender. There are many lenders that offer refinancing, but you shouldn’t choose the first one you come across. Look for a lender with these important qualities:
- Excellent customer service: The lender you work with should value you as a customer. Make sure you will be able to speak to someone directly if you have questions or concerns at any point in the refinancing process.
- Easy application process: Find a lender that makes the process of applying for refinancing as easy as possible.
- Fast approvals: The sooner you get approved, the sooner you can start enjoying the benefits of refinancing.
- Established: Look for an established lender that has been in the business for a long time. This indicates that the lender has a strong customer base. It will also make it easier for you to research what other customers are saying about the company online.
Gather Your Documentation
Once you choose a lender, start preparing for the application process. The documents and information you will need to provide may vary depending on your lender. But in general, be prepared to provide:
- Driver’s license
- Proof of income such as recent tax returns, pay stubs, bank statements, etc.
- Proof of auto insurance.
- Details about your current loan, including the balance and lender’s contact information.
- Details about your car, including the make, model, year, mileage, and condition.
- Financial information, including your current mortgage/rent payment and monthly gross income.
- Employment information, including your employer’s contact information and how long you have been employed with the company.
Preparing all of this information in advance will make it easier to submit your refinancing application when you’re ready.
Review Your Refinancing Offers
After submitting all of the information requested by your lender, you will be able to review the refinancing offers available to you. It’s important to review these offers carefully to determine which one is best for you. Pay attention to these factors when comparing your offers:
- APR: The APR or “annual percentage rate” is the annual cost of borrowing money from your lender. Keep in mind that APR includes both interest and other fees.
- Interest rate: This is the annual cost of borrowing money expressed as a percentage of the principal. The lower the interest rate, the better.
- Monthly payment: This is the amount you will pay every month. If you’re struggling to make payments on your existing loan, look for a refinancing offer with a lower monthly payment.
- Term: This is the amount of time you have to repay the loan. If you want the lowest monthly payment possible, look for a longer loan term. However, if you want to pay off your loan quickly to save money on interest, look for a loan with a shorter term.
Some people simply choose the loan with the lowest monthly payment when refinancing. However, it’s important to consider all of these factors when determining which refinancing offer is right for you. Select the loan terms that best meet your needs.
Enjoy the Benefits of Refinancing
That’s all it takes to refinance your car loan. Now, it’s time to enjoy the many benefits of refinancing your car loan.
At this point, your new loan has replaced your old car loan. This means your old loan has been completely paid off and you will now need to start making payments on your new car loan.
If you’re interested in refinancing your car loan with LoanCenter1, contact the loan officers at LoanCenter to learn more. Call 1-877-624-7594 or submit your information using the form on our website.
1 Loan approval is subject to meeting the lender’s credit criteria, which include demonstration of ability to repay the loan. Not all applications will be approved.