Refinance a car loan could help you save by lowering your interest. This process involves replacing the current car loan with a brand-new one. Your car will serve the same purpose as the original loan collateral. Here are the details of how to refinance an auto loan and what to do before you apply.
There are several reasons why you might want to car loan refinancing with a different lender. Here are some advantages to remember:
Lower Interest Rate
Lower monthly payment: As long as you pay the same amount of interest, your monthly payments will be lower. However, if you’re looking to lower your monthly repayments even further, you might be eligible for a new loan that has a longer repayment term. Although this will result in higher interest fees over the loan’s lifetime, it can still be worthwhile if your monthly budget is tight.
You may choose to pay off debt earlier: However, you may also prefer shorter repayment terms. Shorter terms are usually associated with lower interest rates. This will allow you to save more money and eliminate debt sooner, although your monthly payments might be more costly.
Get cash from your equity: Some auto lenders offer cash-out refinance loans which allow you the opportunity to refinance the original loan to receive additional cash. This option is generally only available to individuals with substantial equity in the vehicle.
When you have considered these benefits, decide if Refinancing makes sense for you.
- Look At If Refinancing Makes Sense
Before you start the application process, it is important that you determine if Refinancing is the right decision for you. Here are some points to consider:
Credit requirements: In order to get the best terms for your new loan, you will need to have great credit. If your credit score is not yet high enough, you might consider waiting to get it better.
Prepayment penalty. Lenders will sometimes charge you a fee to pay off your auto loans earlier than agreed. Look over your loan terms and compare the cost of the prepayment penalty to your savings.
Origination charge: Lenders may charge an upfront fee if you refinance. This fee can vary depending on the lender. However, it’s worth comparing it with the potential savings to see whether it’s worthwhile.
Length of the repayment period: If your new term is longer than the current one and you don’t necessarily require the lower payments, it might not be worthwhile.
- Review Your Credit
The ideal scenario is that your credit score will be higher than it was at the time you obtained your first auto loan. Take a look at your credit score to find out where you stand.
Go through your credit reports and see if you have any credit issues. This will give you an idea of where to focus your efforts.
- Gather All Necessary Documents to Submit a Loan Request
You will normally be required to provide documents to your new lender once you have submitted your application. It’s a good idea to have this information ready before you start the loan process.
Documents that may be required for sharing include:
- Copy of your driver’s permit
- Vehicle registration
- Documentation proving insurance
- You must provide proof of income
- Evidence of residence
- 10-day payment off statement
You will typically also need the vehicle identification number or VIN so that the lender can determine the car’s true value.
- Compare Offers
It’s best to compare offers from multiple lenders in order to maximize your savings. Some lenders will give you prequalification before you submit your application. Other lenders may require that you have a thorough credit check before giving any type of interest rate information.
There is good news. If you submit multiple loans within a very short time frame, FICO will generally combine all the applications into one to determine your credit score.
