Refinancing your car loan can be a great way to get your payments into a more comfortable range or save money with a better rate. However, it’s always important to understand what you’re doing before taking the plunge.
What is Refinancing?
In the simplest terms, refinancing a loan is paying off the existing loan with the vehicle as collateral. Often, the purpose of refinancing is to get a better interest rate, change the length of the loan or get a lower monthly payment.
There are several reasons people choose to refinance. For some, they’ve worked hard on their credit, and now they qualify for a better rate. Others have changed jobs or lost one and have a tighter budget; refinancing allows them to get a more affordable monthly payment. Whatever the reason, it’s best to go in knowing everything you can.
When is it Right to Refinance your Auto Loan?
A few scenarios can help you determine whether refinancing is the best route for you. Definitely consider refinancing if:
- You have improved your credit score – A better score means a better interest rate.
- Interest rates have gone down – If interest rates have fallen well below what you financed for, you may save a lot by refinancing.
- Your finances have changed – If you have had a reduction in income, refinancing can help lower your monthly payment. This is especially helpful when your budget is a lot tighter.
- Your lease is expiring – Maybe you never bought the car in the first place, but leased. Refinancing lets you purchase it.
How do you Refinance a Car Loan?
There are a few steps you’ll need to take to refinance. They include:
Step 1: Gather documents. You’ll need everything available on your on your current loan. This means the lender’s information, payoff amount, the current monthly payment and the interest rate.
Step 2: Bring ID and important information. You’ll want a driver’s license, pay stubs, proof of insurance, the VIN and your social security number.
Step 3: Check your credit. Always check your credit before applying for something new. This gives you room to dispute errors, make sure your score has gone up and see if there is anything else you can do to optimize your overall financial picture. It’s essential to know what lenders will see, and it also gives you the ability to answer any questions they may have regarding something on your report.
Step 4: Apply. Make sure to apply to several lenders (within a two-week period so you don’t take a large hit to your score). Applying to more than one gives you more rates and terms to choose from.
Step 5: Go over the terms and rates, then choose. Go over all of the information upon approval. Select the loan that works best for you. Some of the things to look at are whether your payoff term is shorter or longer, what the rate is and what your monthly payment will be. Evaluate it based on your situation—you’ll know which loan works best for you.
The Benefits of Refinancing an Auto Loan
There are several possible benefits people are looking for when refinancing an auto loan. They include:
- A lower interest rate.
- A shorter loan term.
- A more affordable monthly payment.
One area consumers get into trouble is using predatory lenders. When applying, make sure to do a quick run on the company’s reputation and look at reviews to determine that they are legit. While refinancing doesn’t work for everyone, it can save you money, or help you out of a tight situation. The key is to look everything over, and make sure it really is the best route for you.