If you obtained your original auto loan through a dealership, it is possible that you did not receive the most advantageous interest rate. Refinance car loan allows you to replace your current loan with a new loan with new terms, which can result in lower monthly payments and, potentially, lower costs throughout the loan’s life.
Steps to refinance your auto loan
This step-by-step guide will walk you through the process of evaluating your current loan and applying for a refinance loan for your car.
1. Determine whether or not refinancing is the best financial move.
Before you begin the refinance process, you must first determine whether or not refinancing is the best financial option for your situation. One of the most common reasons to refinance is to take advantage of a better interest rate, or you are having difficulty keeping up with your vehicle payments.
The first scenario is common if you took out your auto loan at a time when interest rates were high or when your credit score was low, as in the case of the above example. If your credit score has improved since you took out your loan, lenders will most likely offer you better terms, which will allow you to save money throughout the loan’s duration.
As an alternative, if you feel that your current payment is stretching your monthly budget, you may want to consider refinancing your car loan for a longer term to reduce your monthly payments. By extending your repayment term, you will reduce your monthly payments, but you will most likely pay more in interest throughout the loan.
The most important factor in determining whether or not refinancing your vehicle is the best option is whether or not you will save money. If you are unable to obtain a lower interest rate through refinancing, it is not a good idea to do so; refinancing to a higher interest rate will make your loan significantly more expensive.
2. Examine your current loan situation.
Understand exactly how much interest you’ve been paying, how much your monthly payment is, and how much the total cost of the loan will be if you pay it off in full at the end of the term. If you refinance at a lower interest rate, you may save money, but you won’t know for sure unless you know what your current rate is.
3. Get a copy of your credit report.
What was your credit score when you obtained your first auto loan? Do you recall what it was? If you’ve made wise financial decisions since then — such as paying down credit card debt and making on-time payments, for example — your credit score may have arisen as a result. Lenders will consider you to be lower risk and may offer you better interest rates as a result.
Overall, the better your credit score, the more likely it is that you will be offered a lower refinance interest rate by a lending institution.
4. Determine the market value of your automobile.
When deciding whether or not to refinance, the cost of your loan isn’t the only factor to take into consideration. Getting an idea of how much your car is worth will also be beneficial.
If your car is newer, has low mileage, and has a significant balance that will take years to pay off, you may be a good candidate for refinancing. If it’s worth less than the amount you owe, you might be out of luck in this situation. Furthermore, if your vehicle is nearly paid off, refinancing makes less financial sense because interest-only makes up a small portion of your remaining payments at this time.
5. Shop around for the most competitive refinancing rates available.
Not all interest rates are created equal, as the saying goes. Depending on the lender, your credit score, financial history, and eligibility will be weighed differently. If you’ve decided to refinance, start with the bank that you already use for other purposes. Existing customers of certain financial institutions may be eligible for interest rate reductions.
Compare the interest rate offered by your current bank with the interest rates offered by other lenders to gain a better understanding of what the best lenders are offering. Prequalification with at least three lenders is a good rule of thumb to follow when purchasing a home.
The bottom line is that interest rates vary widely, so shop around with a few different lenders.
6. Calculate how much money you could save by refinancing.
After you’ve shopped around for rates and determined what you might be able to qualify for, run the numbers to see how much money you’d save by refinancing your car loan versus keeping it. A car loan refinances calculator can be of assistance.
The bottom line is that doing the math ahead of time will allow you to see how much money a new interest rate could save you in terms of interest, monthly payments, or a combination of both in advance.
