Refinancing your car means taking a new loan to pay off your current loan. It’s an excellent way to save money, especially if your credit score has improved or interest rates have dropped. In short, it’s like replacing the existing loan with a new one with better terms.
The best time to consider refinancing a car is after your financial situation has improved or if you want to remove a co-signer included in the original loan. You have a chance to find better rates and terms that suit your current and long-term financial plans.
Besides that, if interest rates drop, you should take the opportunity to refinance your car and save a lot of money. For example, a decrease from 2% to 3% can save you a good amount of money by the time you finish paying the second loan.
Another reason to refinance your vehicle is the lower monthly payments. If you can find a lower interest rate, your monthly loan installment will reduce and ease the financial burden. But if you choose a longer period, your installment may increase or remain the same. Continue reading to find out how to refinance a car and key considerations.
Steps on How to Refinance a Car
Follow the seven steps below to ensure success when you refinance a car.
1. Determine If It’s the Right Decision
Before refinancing your vehicle, consider why you want to refinance. A refinance is sometimes due to high interest or to ease monthly payments. If you took your auto loan with bad credit or interest rates, your lender will give you better rates when you seek to refinance. When you extend your repayment period, your monthly installments will reduce, but you may have to pay more interest with time.
2. Review the Current Loan
Most lenders will let you know the minimum amount they can lend you. Your payoff loan should match your lender’s minimum for you to qualify. Also, understand the amount you must pay monthly for the new loan. Besides, consider the total amount of loan you will pay and see if you will save anything. The best thing is that most car loan lenders have a loan calculator to know the amount you will pay on the current loan and compare it with available refinancing options.
3. Consider Your Credit Rate
Your lender will factor in your credit score when applying for refinancing. If your credit score has improved since you took the original loan, you are less risky to lenders. Avoid applying for a refinance to get a better deal unless your credit score has improved.
The lower the credit rate, the lower the interest rate you’ll get from various lenders. Ultimately, the payment history and credit score determine how favorable your auto refinancing interest rate is.
4. Estimate Your Vehicle’s Value
The loan cost is not the only consideration to take in when refinancing your car. Estimate the value of your vehicle – if it has low mileage and looks newer with a small balance, avoid refinancing that takes years to pay off. Getting a new loan with new interest costs doesn’t make much sense. Besides, the value of your vehicle determines what lenders are willing to loan you.
5. Look For the Best Available Refinancing Rates
Every lender will check your financial history and credit score to determine your eligibility for a car refinance. The best place to start is with the credit union or bank you use for various financial services. Some institutions offer affordable loans to their existing customers. Compare rates from several lenders and choose the best.
Check with three or more lenders and compare the pre-approval offers to see who can help you achieve your financial goals. Interest rates differ from one institution to another, but your current financial service provider is always the best place to start.
6. Consider Your Savings
After looking around for the best rates and knowing how much you qualify for, consider if you need to save more to get a car refinancing loan. Also, look for penalties for loan prepayment, which can make refinancing costly.
However, make your decision based on intended goals. For example, if you’re looking for a cheaper monthly installment, make sure refinancing gives it to you. If it’s about a lower interest rate, get a loan that will save you money. In short, do the calculations in advance and see how much you’ll save. Avoid a loan that will only bring more costs and financial constraints.
7. Organize Your Paperwork
Pre-approval is crucial, but it does not mark the end of your car refinance loan. Gather all documents the lender needs, including proof of insurance, proof of income, and information regarding your loan. Depending on your lender, you may also have to show pay stubs, W-2s, insurance cards, and many others. The vehicle’s details that you must provide are mileage, model, make, and VIN. This is a lot of paperwork that can take time to organize.
Put all the documents together and counter-check to ensure everything is ready. After submitting the paperwork and receiving the check, clear your current loan. Follow up and make sure everything is cleared on time. Remember to make timely payments for the new loan. It’s a chance to help grow your credit.
Things You Should Consider Before Refinancing Your Auto Loan
You have several things to consider before you refinance your car that will help you make a sound decision. While refinancing your vehicle is a good idea, it’s not always the most excellent option. Here are things to put in mind before you begin the process:
1. The Requirements
Every lending institution has specific criteria to determine who’s eligible for a car refinance. Some of the general ones include confirming that you are up to date with your current loan repayments. This will ease the process of applying for a refinance and increase your chances of qualifying.
2. Prepayment Penalties
Prepayment penalties are the amount you may have to provide for repaying your loan earlier than scheduled. Some lenders do not charge this. Those who do are sometimes too costly and affect the overall cost of your refinance. Refinancing should save you money and improve your finances.
3. Remaining Time
If you’ve paid your loan for a long time and are almost done, it’s a great idea to finish it instead of applying for a new loan. Refinancing is time-consuming and costs money. Avoid it when it doesn’t sound like the best option. Sometimes refinancing can sink you deeper into debt.
4. Financial Situation
Check your debt-to-income ratio because your lender will consider it before giving you a new loan. Try to pay off as much debt as possible before applying for a car refinance. A better financial state increases your chances of getting better terms.
Refinancing is a great way to get a car loan that suits your needs. Take time to research and collect essential information to find a loan with the best terms. This can change the direction of your financial journey for the better. By switching lenders, you can lower monthly installments and the total balance. You only need to investigate car loan rates and settle for the best. If you feel stuck with your current car loan, consider refinancing.
You might also be interested in: 9 Tips To Consider Before Refinancing Your Mortgage Loan