Want to swap out your old car loan for a new one with lower monthly installments or a lower interest rate? Consider refinancing your car loan if you are not satisfied with your current loan settlement. If you are new to loan refinancing, follow this article to find out how to refinance your car loans.
When facing budget issues, many people tend to use the strategy of loan refinancing to address their budgeting problems. Refinancing refers to the process of replacing an existing loan with a new and more efficient one, typically through a different lender. This way, you can easily swap out your old loan for a new one with lower payments, a lower interest rate, or a longer loan term.
If you have a current car loan that you’ve become unsatisfied with, looking for a better auto loan or refinancing your current car loan will probably save you money and be relatively painless. Loan refinancing is typically faster than taking out the loan for the first time and often takes less than an hour. Likewise, the decision-making process is also a quick one as lenders claim to make the decision in minutes.
Refinancing mortgage loans is quite normal but is refinancing car loans similarly beneficial and worth the effort? The answer lies in your situation. Refinancing your car loans can make sense in several situations. In the event that your credit has just gotten better, there is a good chance that you can lower your interest rate and monthly installment amount. You can also decrease your loan term by getting the loan paid off quickly. Or you can just do vice versa and increase the loan term if you are having trouble making large monthly payments.
Refinancing loans is a good idea if it allows you to save money on interest over the course of the loan. However, refinancing is not always a wise financial move, especially in the current economic turmoil where interest rates are continuously rising. So you need to consider your situations and circumstances before applying for a loan refinance.
In this article, we will break down everything you need to know about how to refinance a car loan, including how to decide whether or not it’s the right choice.
A primer on refinancing loans
Before diving into the details on how to refinance your car loans, let’s have a primer on some of the basics first. The term loan refinancing refers to the process of taking out a new loan with better conditions to replace a previous loan with not-so-good conditions. The new loan is usually taken out from a different lender or bank than that of the previous loan and comes with a lower loan fee.
Normally people refinance loans to get rid of previous loans that are not much favorable and budget-friendly. There are a number of other reasons as well that force people into refinancing loans. Down below, we have described the reasons why one needs to refinance a loan.
Why refinance your car loan?
Borrowers usually go for refinancing their car loans in order to pay less interest on a monthly basis. You can opt for more budget-friendly options when getting a new loan to replace the existing one. When you choose a lower interest rate by refinancing your car loans, you are saving hundreds or even thousands in total interest over the life of the loan.
And if everything goes well in refinancing, you may end up with a lower monthly installment, which will help you free up money to pay off other loans. Lower monthly payments can also reduce your debt-to-income (DTI) ratio, which reflects your monthly debt payments divided by your monthly gross income. A low DTI is helpful in many ways. If you are planning to apply for a mortgage, later on, a low DTI could help you qualify for a better interest rate.
Apart from that, if you need to shorten the overall loan term so that you can pay off the loan quickly, you can refinance your car loan with a new one that has a shorter loan term. You can also do vice versa. If you are having problems paying large monthly installments, you can opt for a new loan with a longer term, which will eventually provide you some wiggle room in your budget. Another reason to refinance your car loan would be to remove any co-signer from the loan that you got in the first place.
When is the right time to refinance your car loan?
There is no perfect time to refinance your car loans. Whenever refinancing makes sense and can help you save money, you can go on and refinance your car loan. That’s why it is important to always consider your situation before going for refinancing options. Here are some of the situations when refinancing makes the most sense.
- Your credit score has improved – Refinancing is a good option to consider when your credit score has recently soared. Because otherwise, you might not be eligible for refinancing your car loan. Even if interest rates in the market have not changed, improving your credit score might be enough to get your interest rates lowered on the new loan. If your credit score has improved after signing up for your initial loan, refinancing can help you get better loan terms that can reduce the amount you spend on interest overall.
- Your initial loan was a vendor deal – When you finance your vehicle through vendors or car dealers, they tend to charge higher rates than banks or other loan financial institutions in order to have the maximum profit. In this case, refinancing with a different lender can help you get lower loan rates overall.
- Auto prices have been discounted – Mostly, car loan rates fluctuate depending on the prime auto rates and some other factors. So if auto rates have gone down since getting your initial car loan, refinancing can be a budget-friendly option to opt for a new loan with better loan terms than before.
When refinancing your car loan might not be the right choice?
Yes, refinancing isn’t always a smart move, especially under specific circumstances where refinancing might just do the opposite of what it’s supposed to do. When it feels like refinancing your car loan might not just serve its purpose of getting you some better loan terms, better not do it. Here are some of the situations when refinancing doesn’t make sense.
- When the initial loan is about to be paid off – If you are close to paying off your loan, refinancing might not be the right choice. You might not be able to save on your money. It is better to just stick with your old loan unless you suddenly have a tight budget and want to extend your loan term to reduce monthly loan payments.
- When you are underwater on the initial loan – If you weren’t able to keep up with your previous loan terms and installments, refinancing your car loan might be difficult. Refinancing also comes with its own terms and conditions, one of which is to have a clear loan history including on-time monthly payments etc. And if you were upside-down on the original loan, lenders might not just qualify you to replace it with a new loan.
- You have an older or used car – Sometimes, lenders are reluctant to refinance your car loan if you have an older car or one that has many miles on it. So, if you’ve got a vehicle that’s an older model or has quite a few miles, refinancing might not be the right choice.
- Interest rates have increased – One of the major purposes of refinancing your car loan is to get lower interest rates and when that couldn’t be fulfilled, refinancing might just not be worth your time and attempt. Especially in these times of inflation when interest rates are continuously soaring high, you might just land yourself in hot waters by replacing your original car loan with a new loan.
How to refinance car loans?
Normally the process of refinancing a car loan is the same as applying for any other car loan. However, there are a few extra steps that you need to take care of. Down below we’ve described each step in detail so keep reading to get detailed insights on the loan refinancing process.
Examine your financial situation pre and post refinancing
This is one of the most important and initial steps when considering refinancing your car loan. Refinancing might not yield the same results for everyone. While refinancing, one rule of thumb is to always consider and examine your circumstances of whether refinancing will prove beneficial in the long run or not. Consider the impact on your financial situation before and after refinancing – is it gonna save you a big chunk or will there be no effect whatsoever?
Make sure to do the math and if it turns out that refinancing might not turn out economical or budget-friendly, then it’s not worth your time or attempt. If refinancing cannot save you big, or even some considerable amount, it is better not to go for it. Moreover, you should also consider your eligibility before applying for loan refinancing. For example, if you have a bad credit score or if you weren’t able to keep up with your previous loan payments and terms, you are less likely to be approved for loan refinancing.
Reviewing your initial loan and knowing where you stand with your payoff payment is also an important thing to consider. If the amount left to pay off the initial loan is under the minimum amount that the lender will lend, you won’t qualify for refinancing your car loan.
If you had taken out the initial car loan at a time when interest rates were high, or you had a low credit score, refinancing might be a good option to consider if such situations have altered – the interest rates have gone down or your credit score has improved. Apart from that, if you have other reasons like not being able to pay large monthly loan payments due to a tight budget, you can refinance your car loan and get your loan term extended with the new loan. This way, you can end up with lower monthly payments and save money for other loans or finances.
All in all, the main point of refinancing is to save money. And if you aren’t able to do that, refinancing might just not be the right financial move.
Assess your credit score
Your credit score plays a major role in defining your eligibility for the refinancing of loans. Your credit score and history are looked over thoroughly by the lenders when you apply for a new loan. If you have made the right financial moves since you got your first car loan, chances are that your credit score may have improved. So you see, it’s always important to pay down your credit card debt and make on-time payments. Basically, every financial move counts – if it’s the right one, well enough but if it’s not, you better get started to work on it.
When applying for refinancing car loans, make sure to check and evaluate your credit score to see where you stand and if you fall under the eligibility criteria for different lenders. This way, you will be able to get an idea of the potential interest rates. If there are no negative marks, no late payments, or delinquencies, you are probably headed in the right direction. And if your credit score hasn’t improved for a while, it is good to wait and get some work on it before applying for refinancing.
Even though lenders have different minimum credit score requirements, most of them prefer a good credit score over an average one when assessing refinancing applications. The better your credit score, the lower the interest rate on the new loan, and the more likely your refinancing application is to get approved. In the end, it all depends on your credit score and payment history.
Shop around and compare different offers
When you have examined your financial situation and found out that refinancing is the best move, it is time to get started with the next steps. Refinancing is best and the most economical when done through a different lender. If you choose the same lender or bank that financed your initial car loan, refinancing becomes meaningless. So, it’s best if you use a different lender or financial institution for refinancing your car loan.
When choosing a different lender, you need to carefully opt for the most economical deal, one that will save you a considerable amount of money and is worth the time and effort you put in refinancing. Some lenders, banks, or credit unions offer lower or discounted interest rates as compared to other loan institutions. Always compare the rates offered by different lenders to get a clear view of what top lenders are offering.
Shop around a little to see which option is the best for your financial goals. Interest rates fluctuate a lot, so it is best to compare a few lenders before deciding. And once you’ve found the best fit for your financial goals, apply to it right away.
Get your documents together
The paperwork for refinancing your car loan is as important and necessary as that of the initial loans. You will be required to submit the documentation that lenders require, which includes proof of your income, proof of insurance, and details of your initial car loan. Dig out your original loan contract and if you cannot find it, you can contact the lender’s customer service to get the information you need.
Make sure you are aware of your current monthly payment, remaining balance, current loan term, and the interest rate you are paying on it. Apart from the current loan documentation, you also need to submit some vehicle documents including the driver’s license, vehicle’s make, model, mileage, and Vehicle Identification Number (VIN).
A good rule of thumb is to get all the required documents ready ahead of time to speed up the refinancing timeline. Once you’ve submitted all the paperwork, make sure to follow up with both lenders frequently to ensure that your new loan is going to the right place.
Look over the details and sign the contract
You’ve applied for the refinancing of your car loan and are done with the paperwork as well. But the process doesn’t end here. The lender will go through the underwriting process to determine your qualification for the loan and what loan terms are suitable for you. If you qualify, all the loan terms and other details will be written in the refinancing contract. Make sure to carefully go through it in detail to understand what you’re getting yourself into.
When you’ve reviewed the terms, sign the contract and note the time when to start making payments on the new loan. There will be two situations, either you will be provided the check to pay off the previous lender or the new lender will pay off your previous debt themself. Whatever your situation is, make sure to manage this transition to the new loan carefully to avoid missing payments. Also, you need to pay attention to the communication from both your previous lender and the new one to make sure everything is buttoned up.
Refinancing your car loan can prove to be an economical move in your financial life. If you had taken your initial loan at a time when you weren’t able to secure lower interest rates due to bad credit or whatever reason, refinancing provides a very good reason and motivation to work on your credit score and then get a new loan that has lower interest rates than the previous one. Since credit score is the core of your financial life, every financial move that you take depends on it.
If you have decided to refinance your car loan, make sure to do the homework and investigate auto loan rates to compare those terms with the terms of your current loan. Ultimately, choose a loan whose terms are better, more economical, and budget-friendly for you. Hope this article has got you covered on the basis of how to refinance car loans and what circumstances make refinancing the best option. Now that you are aware of how refinancing car loans works, it is time for you to assess your situation, decide whether refinancing is the best move or not, and then continue accordingly.