How to Refinance Auto Loan
If you want to save money or lower the annual percentage rate on your vehicle loan, refinancing makes sense. Refinancing your current auto loan can improve your financial situation, help you get better loan terms, and much more. Learn everything you need to know about the process for refinancing your car loan and other loan refinance FAQs today.
Step One: Assess Your Current Auto Loan
First, you will need to assess your current car loan. This step is crucial since it can help you decide whether or not refinancing your car loan makes sense for your financial needs. You will need to review information such as your current monthly payment, your current loan interest rate, the remaining balance on your loan and the remaining months on the term of your current loan.
Does Your Current Loan Have a Prepayment Penalty or Other Fees?
Much of the time, auto loans have certain penalties and fees that may be triggered if you try to refinance loan terms too early. The most common is a prepayment penalty, which occurs when you try to pay off your original loan earlier than expected. Sometimes, prepayment penalties may only be triggered if you took out your current loan within the waiting period.
You should also be aware of other fees that may accumulate when you are refinancing a car. These fees can include registration fees, title transfer fees, origination fees, and additional fees from your current lender.
Step Two: Gather Vehicle, Personal, and Financial Documents
The next step is gathering the documents you will need when you are shopping for a new auto lender. For personal information, you will need your address, contact information, and Social Security number. You will need to provide financial information, such as pay stubs, bank statements, your current monthly expenses, your most recent tax return, and even your employment history.
Other loan documents you need will be related to your vehicle, such as proof that you have auto insurance. You will need to provide information about your original loan, as well as your vehicle identification number, the make and model of your car, and more. Without providing all of this information, loan approval is unlikely.
Step Three: Shop Around to Compare Lenders
There are many lenders to consider when you want to refinance. Online lenders, credit unions, and banks are all common lending partners. When you are comparing several lenders, you will want to pay attention to the estimated lower payment and the interest rates on these loan offers.
Can You Refinance Your Loan at Your Dealership?
Auto lenders tend to be the best partners for car refinancing. Refinancing an auto loan at your dealership can streamline the entire process, especially if your main goal is to lower your monthly payment. Furthermore, your dealership can help you save money on your car refinancing even if you have bad or poor credit, which may not be the case with other lenders.
Step Four: Submit Your Auto Refinance Loan Application
Your loan application will need to include details about your current loan balance, such as the remainder of your loan term on your existing loan. Your application is subject to credit approval, which means a lender may reject your application if your borrowing history makes you seem like a risky borrower.
It can take several hours or several days to refinance a loan. If you are refinancing with your existing lender, such as your dealership, then your application may be approved in only a few hours. If you submitted an application to a new lender, it may take up to two weeks for your new loan to be approved.
Step Five: Confirm Your Old Loan Is Paid Off and Start New Monthly Payments
Finally, you will want to double-check that your original loan to your previous lender has been paid off before you start making payments on your new loan. If you are switching lenders, then your original vehicle loan will usually be paid off by your new lender and the remaining balance will be rolled into your new auto financing.
Verifying that your old loan has been closed can help you protect your credit score, so be sure to get written confirmation that your previous loan account has been closed. However, you will need to keep in mind that it can take a few weeks or months for your credit report to reflect these changes. Check your credit score frequently to make sure there are no errors.
When Should You Refinance Your Car Loan?
In general, most lenders will not allow you to refinance your car loan if your vehicle was purchased in the last six to 12 months. If your current lender has a waiting period before you can refinance a loan, then you will need to abide by this period to avoid penalty charges. It can also take this long for the vehicle loan to show up on your credit report, so waiting a bit to refinance is the best thing to do for your credit health.
Furthermore, you may need to postpone your refinancing plans until the title of the vehicle has been transferred to your name. Usually, it takes 60 to 90 days for a title to transfer from the previous owner or car manufacturer. Some other signs it might be time to refinance your car loan include:
Your Monthly Payment Or Current Interest Rate Is Too High
If your current monthly payment or interest rate is too high for you to comfortably make payments, then it might be time to refinance. When you struggle with making on time payments, this can impact your credit score over time and make it more difficult to pay off your car loan, since late fee penalties can stack up. Failure to make on time payments can also result in car repossession.
Sometimes, you may feel that your current interest rate is too high because the market has changed. If interest rates on auto loans were very high when you purchased your car, but these rates have recently dropped, it might be a good time to strike when the iron is hot, so you can get a lower interest rate.
Your Credit Has Improved
If you have been cleaning up your credit and your credit score increased, then refinancing your car loan is smart. When you have a better credit score, financial institutions are more likely to offer you lower interest rates. You can improve your credit report by paying off other debts like credit card debt or using other strategies.
Your debt to income ratio is very important when your goal is to improve your credit. Most lenders will assess your debt to income ratio to determine your financial ability to pay off a new or existing loan. When you have a high debt to income ratio, this makes it look like you can't pay off a new loan; on the other hand, when you have a low debt to income ratio, your credit score will increase and lenders will feel more confident that you are a responsible borrower.
What Is the Best Credit Score for Car Refinancing?
When you apply for any vehicle loan, you are more likely to get approved if your credit score is considered fair, good, or excellent. Usually, this means your credit score is at least in the mid 600s to low 800s.
For refinancing, it's best to have a credit score of at least 600 so you can get a good interest rate when you are negotiating the new terms of your loan. If your credit score is any lower, you may not be approved or your potential lender could increase your APR.
Your Loan Balance Is Not Higher Than Your Vehicle Value
If you have positive equity on your vehicle because the value of your vehicle is lower than the remaining balance on your auto loan, then it's a good time to refinance. Having negative equity on your vehicle can make it harder to be approved for a new loan, since the market value of the vehicle is higher than your existing loan balance.
You Want to Pay Off Your Loan Sooner
If you want to pay off your auto loan more quickly, then it may be a good idea to refinance a car loan. Refinancing a car loan can help you pay off your loan early faster because more of your monthly car payment will be applied to the principal balance of your loan rather than a high interest rate.
What Are the Benefits of Auto Loan Refinancing?
One of the main benefits of car loan refinancing is the ability to lower your monthly payment without increasing the length of your auto loan term. The term of your existing loan will be rolled into your new loan, but you will simply have a lower monthly payment and interest rate.
Another benefit of refinancing your car is the ability to shorten the overall term of your loan. If you can afford to do so, you can opt for fewer months on your new loan agreement so that you can pay off your loan more quickly.
Will Your Credit Score Be Impacted By Refinancing a Car Loan?
It's likely that your credit score will be affected by refinancing a car loan. When an old loan is closed on your credit report, your score may drop until the new loan is established as part of your credit history. Likewise, shopping around for a new lender and getting multiple quotes can potentially impact your score because of lenders running hard credit inquiries.
No matter what, your credit score won't drop significantly or for a very long time when you refinance a car loan. Any changes to your score will bounce back after a few months, especially when you make consistent on time payments. You may even find that your score will increase over time, since your overall debt to income ratio will decrease faster.
How Can Your Dealership Help With the Car Refinancing Process?
Whether or not your dealership was part of your original car financing, the dealership can still help when it's time to refinance your car loan. For one thing, the dealership finance department may partner with a captive lender, which is a lender that is associated with the car manufacturer. A captive lender is an excellent lending partner if you have a low credit score or very little credit history.
When you are refinancing a car loan through a dealership, you also have the chance to negotiate your monthly vehicle payment. This may be especially important if your previous payment plan was unaffordable for your budget. Lower monthly payments can make it easier to avoid making late payments. Your dealership can also offer you better interest rates than other lenders.
Can Your Dealership Help You With Other Goals?
In addition to auto refinancing, your dealership may be able to help you lower other vehicle ownership costs. When you refinance your car loan, you may want to consider signing up for an extended warranty or a prepaid service plan to reduce the cost of common vehicle repairs at the dealership service center, such as oil changes. You can even sign up for specific vehicle protection plans for certain parts of your car, like the paint, tires, or wheels.
When you refinance a car loan, you can benefit from a lower interest rate, lower loan payments, and quicker loan payoff. For many drivers, it's best if your new lender is your dealership, since the loan terms are more competitive. If you're ready to talk about refinancing, or you want to compare loan offers, contact the financing department at Landmark Dodge Chrysler Jeep RAM at 816-836-0100 today.