A Guide to Refinancing Your Car Loan
Refinancing a car loan can be beneficial when done at the right time. It’s a bit of a process, though, so some preparation can help when it comes to getting started. This guide will navigate you through how to refinance a car loan.
Determining If Car Loan Refinancing Makes Sense
Before you even start the process of refinancing your car loan, it’s important to make sure this is the right course for you to take. Typically, refinancing makes the most sense if the following apply.
It’s still early in the loan
The earlier in the loan you are, the more sense it makes to refinance since it can maximize the benefits it provides. Conversely, it may not be worthwhile to refinance if you’re late in the loan, especially if there are additional fees involved in refinancing.
Market rates have dropped
Interest rates fluctuate over time. If market rates are at a low, it may be a good time to refinance your car loan since it can yield a reduction in interest and, by extension, lower monthly payments for the duration of the loan.
Your credit has improved
Another factor that could reduce interest and make your monthly payments lower is if your credit has improved. Refinancing with better credit can get you lower interest rates since your loan would pose less risk to lenders.
You have more income available
If you have gotten a better job, a raise in pay, or paid off other debts, you can put more income toward repaying your car loan. Refinancing to a shorter term will raise your monthly payment, but the benefit will be paying off your loan sooner.
You need lower monthly payments
On the other hand, if you need to reduce your monthly payments, refinancing may help you. Either qualify for a lower rate or refinance to a longer term. Note, however, that the latter option generally isn’t recommended, and it may not even be approved.
5 Steps For How To Refinance A Car Loan
Once you’ve decided to refinance, you’ll go through the application process. These steps can help you get the best deal for your new loan.
1. Get your paperwork together
To get started refinancing a car loan, you’ll need some important documents for the application process. These documents include:
- Your driver’s license
- Your Social Security number
- Pay stubs from your employer, or some other form of proof of income
- Your car’s vehicle identification number
In addition, it can help to look at your current loan contract to see the terms, such as the interest rate, the time left to pay it off, and your monthly payments. You should also note if there are any prepayment penalties on the contract since that could influence your decision of whether to refinance and which lender to choose.
2. Apply with multiple lenders
Once you have all the needed paperwork together, it’s time to apply.
Starting with your current financial institution may be a good idea, but it can also be in your best interest to apply with other lenders as well. Doing so lets you get multiple offers that you can compare. Often, you may be able to use competing offers to haggle for even better terms from preferred lenders.
It’s important to note that if you haven’t tried applying for car loan refinancing at a credit union, it can be worthwhile to do so. You’ll need to become a member, of course, but you’ll typically have excellent customer service and good terms for your new loan if you choose to go with a credit union.
3. Evaluate offers
Once you have multiple offers, evaluate them, and see which ones will be the most beneficial. Some terms to look at include:
- Interest rates
- Loan term, or number of months in which to repay
- Monthly payments
- Additional fees or conditions
You’ll want low-interest rates and—typically—lower monthly payments. However, the number of months to repay your loan depends on your situation. Some may want more time to repay their loan while others may want to pay it off sooner at the expense of higher monthly payments.
Determining what a lender is willing to offer is part of selecting the best one for you.
4. Select a lender
With multiple offers in hand, now you can select a lender. Not only will you want one who will give you favorable loan terms, but you also want a lender who provides good customer service and is generally available to answer your questions.
5. Complete remaining paperwork
Once you’ve chosen a lender, it’s time to complete any remaining paperwork connected with your loan.
Refinancing involves applying for an entirely new loan that will be used to pay off whatever is left of the original, after which you’ll start making payments on the new loan. Your lender will provide any required paperwork and have you fill it out, then they’ll process it and—if all goes well—approve your loan.
Knowing When & How To Refinance A Car Loan
As beneficial as it is to know how to refinance a car loan, it’s also important to know when. The advantages of auto loan refinancing ultimately come down to timing. A trustworthy lender can help you determine when the best time to refinance your car is and walk you through the process when the timing is right.