Millions of adults in the U.S. depend on their vehicles to commute to work, drive to school, and live a fulfilling life. This is why so many people view owning a car as an absolute necessity. However, cars are expensive, so people often need to take on debt in order to purchase one.
Over the years, the average amount borrowed and average monthly payment for an auto loan has steadily increased. Because of this, many borrowers may struggle to make on-time payments on their auto loans. If you can no longer afford to make your auto loan monthly payments, it’s important to consider refinancing.
What is refinancing? How can you pre-qualify for an auto refinance loan? Here’s everything you need to know about this option:
What is Auto Loan Refinancing?
Refinancing is the process of taking out a new auto loan to pay off the balance on your existing auto loan. Even though you are taking out a new loan, you will only need to make payments on one loan after refinancing. This is because the money you borrow from your new loan is used to completely clear your debt from your existing loan.
Your car is typically used as collateral on your new loan just like it was on your existing loan. Refinancing your auto loan will not impact your ability to drive your car. You can continue to drive your car while you make payments on your new loan.
What Are the Benefits of Refinancing An Auto Loan?
If you’re struggling to make auto loan payments, taking out a new loan might not sound like a smart financial decision. However, you shouldn’t think of it as taking out an additional loan. Instead, think of refinancing as replacing one loan with a more favorable loan.
There are many benefits to refinancing an auto loan, including:
- Lower interest rate. If you choose to refinance, your new auto loan may have a lower interest rate than your existing auto loan. Given that all loan terms are the same, the lower the interest rate, the lower the total cost of the loan.
- More affordable monthly payments. Lowering your interest rate can lower your monthly payment. Even a one percent drop in the interest rate could significantly reduce the amount you are expected to pay every month.
- Shorter term. Some borrowers choose to refinance so they can shorten their loan term. If your new loan has a lower interest rate, you may be able to shorten your loan term without raising your monthly payment. This way, you can pay off your car faster.
- Longer term. Other borrowers choose to refinance so they can extend their loan term. Extending the loan term will lower the monthly payment even if you aren’t able to lower your interest rate.
- Borrow additional cash. In some cases, you may qualify to borrow additional cash when you choose to refinance your auto loan.
What Are the Requirements to Pre-qualify for An Auto Refinance Loan?
The requirements to pre-qualify for an auto refinance loan will vary depending on the lender. In general, lenders consider a number of factors when determining whether you are eligible for auto loan refinancing, including:
- Your credit. You don’t need perfect credit to qualify, but your lender will check your credit as part of the application process.
- Your ability to repay the loan. You need a reliable source of income to qualify for refinancing. Your lender will need to see proof of income to determine if you are able to make consistent payments on your refinanced loan.
- Value of your vehicle. Because your car is used as collateral to support your auto loan, it’s important for your lender to know how much it is worth.
- Outstanding balance. The amount you still owe on your existing auto loan could also impact your eligibility for refinancing.
Auto Refinance Pre-Qualify: How Long Does the Process Take?
If you need to lower your monthly payments as quickly as possible, you may be eager to find out how long it will take to prequalify for an auto refinance loan. Fortunately, it won’t take long to get the answers you need.
The time it will take to complete the process will vary depending on the lender. But in general, you can find out if you pre-qualify for an auto refinance loan in a matter of minutes.
Will Applying for Auto Refinance Affect Your Credit?
You may be wondering how applying for pre-qualification or pre-approval for auto loan refinancing will impact your credit. The way in which your credit is impacted will depend on whether you are applying for pre-qualification or pre-approval.
Lenders usually conduct a soft inquiry when you apply for pre-qualification for auto loan refinancing. A soft inquiry will allow the lender to review your credit history, but it will not impact your credit score or appear on your credit report.
However, lenders generally conduct a hard inquiry when checking your credit during the pre-approval process. Unlike a soft inquiry, a hard inquiry may negatively impact your credit score and appear on your credit report.
What to Look for When Comparing Quotes From Different Auto Refinance Companies
If you are thinking about refinancing your auto loan, it’s important to shop around. Request quotes from different auto refinance companies so you can compare offers. Here’s what you should take into consideration when reviewing your options:
- Interest rate. The interest rate is the annual cost of borrowing money expressed as a percentage of the principal. Make sure the interest rate and APR on the loan you choose is lower than the interest rate and APR on your existing loan. Given that all loan terms are equal, the lower the interest rate, the less you will pay.
- Fees. Lenders may charge certain fees to borrowers who choose to refinance their auto loans. If a lender charges a lot of extra fees, this could drive up the cost of refinancing and will be seen in the APR calculation.
- Monthly payment. See how the proposed refinancing terms affect your monthly payment. Be sure to choose a loan with an affordable monthly payment.
- Term. If you are eager to pay off your auto loan, look for a refinancing offer with a short loan term. If you need to extend your loan term to lower your payments as much as possible, look for a refinancing offer with a longer term.
Keep all of these factors in mind when comparing quotes so you can choose the best refinancing option for your needs.
Should You Consider Auto Refinancing?
Refinancing is not right for everyone, so it’s important to know how to determine if it’s a good option for you. Here’s what you should consider when making this decision:
- Have interest rates recently dropped? Pay close attention to the Federal Reserve Bank’s actions. If the Federal Reserve Bank lowers interest rates, you may want to refinance to take advantage of the lower rate.
- Has your credit improved? If your credit has improved significantly since you took out your auto loan, refinancing might be a good idea. This is because a significant improvement in your credit score might help you obtain more favorable loan terms, including a lower interest rate.
- Are you experiencing financial hardship? If you’re going through a tough time financially, you may want to explore refinancing to see if it can help you save on your monthly auto loan payment.
- Will you have to pay a prepayment penalty? Some lenders charge prepayment penalties to borrowers who pay off their auto loan early. If your existing auto loan has a prepayment penalty, make sure you do the math to determine if refinancing is still worth it in the long run.
How Much Does It Cost to Refinance An Auto Loan?
Taking out a loan will cost you more than the amount you borrow. In addition to interest, lenders typically charge borrowers fees to borrow money. If you are unable to make your monthly auto loan payments, it’s important to understand how much refinancing will cost.
The fees associated with refinancing an auto loan will vary from lender-to-lender. If you refinance your auto loan through LoanCenter, you will only have to pay the fees associated with the title transfer and any fees charged by your state such as a lender fee. There are no hidden costs or application fees.
How to Refinance Your Auto Loan
Refinancing is a simple and straightforward process. Follow these steps to refinance your auto loan with LoanCenter:
- Fill out the form on our website to get started. You will just need to provide basic information to initiate the process.
- Review your options. We will present you with different refinancing offers you qualify for based on the information you provided.
- Customize your loan terms. You get to select your terms to ensure your loan fits your unique needs.
- Start enjoying your new loan. Once your refinancing agreement has been finalized, you can start to enjoy the benefits of more favorable loan terms.
Don’t wait any longer to refinance your auto loan. Contact LoanCenter today to learn more about how refinancing can help you save money.