Refinancing your auto loan might help you save money by decreasing your interest rate. The process involves replacing the current car loan with another one, usually with a different lender. Your car will be used to secure the loan as it did for the original loan. Here are the specifics on how to refinance a vehicle loan and what you should know before applying.
Refinance of a car loan
There are many reasons you should consider refinance car loan with another lender. These are some benefits that you need to be aware of:
Lower interest rate
A lower monthly repayment: if your repayment term remains the same, a low interest rate will often translate into lower monthly payments. To lower your monthly payments, you can apply for a loan that has a longer repayment terms. Although this will result in higher interest fees over the loan’s lifetime, it can still be worthwhile if you have a tight monthly budget.
Choose a shorter term to repay your debt. You will save money and be able to eliminate your debt sooner if you choose shorter terms. However, the monthly payments will still be more costly.
Get cash out of your equity. There are many auto lenders that offer cash-out refinance loans. These loans allow you to repay the original loan and then get cash to pay off other expenses. This is usually only a possibility for folks who have a significant amount of equity in their car.
When you have considered these benefits, decide if refinancing makes sense for you.
1. Look at if refinancing makes economic sense for you
Before you start the application process it’s important that you determine if refinancing the right decision for you. Here are some points to consider:
Credit requirements – To get the best terms on a new loan, you need to have great credit. If you aren’t quite ready, working on your credit score now.
Prepayment penalty – There may be a fee charged by some lenders if your auto loan is not paid in full. Look over your loan terms and compare the cost of the prepayment penalty to the savings you will get from the new auto loan.
If you refinance: You may be required to pay an origination charge. These fees can vary from lender to lender. However, it’s worth comparing them with the savings potential to determine whether it’s worth the hassle.
Duration of repayment period if your new term is longer than your existing one and you don’t have to pay lower monthly payments, it may be a waste of money.
2. Review your credit
Your credit score is likely to be higher than it was when the auto loan was first granted. Take a look at your credit score to find out where you stand.
3. Gather all necessary documents to submit a loan request
After you submit the application, you will be asked to provide documents to your new loan lender. This will make the loan process run more smoothly.
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
4. Compare offers
Compare offers from multiple lenders to get the best savings. Some lenders will give you prequalification before you submit your application. Others will require you to have a full credit report before giving you any interest rate information.