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How Do You Refinance a Car Loan?

Thursday, July 18th

How Do You Refinance a Car Loan?

If you are like many other drivers, your car loan is one of the largest expenses in your budget. In fact, in the average U.S. household, car loan debt ranks only behind housing-related debt and student loans. The good news is that you can take control of this aspect of your finances by refinancing your car loan.

When you refinance a car loan, you may secure a lower interest rate than you initially did. A lower interest rate could result in faster debt reduction, a lower monthly payment or both. By refinancing your current loan, you can adjust the loan term and payoff date. If your monthly payments are burdensome, you can move the payoff date back to create lower payments. On the other hand, if you want to pay off the loan sooner, you can choose a shorter loan term. Some car lenders even let you take cash equity out of your car through a refinance.

Are you wondering what it takes to refinance a car loan? In most cases, the process is fast and easy, and it could be completed within a few days with minimal effort. If your auto loan is no longer strategically beneficial to you, walk through these easy steps to take advantage of a better option.

Check Your Credit Rating

If you have already started researching auto loan rates, you may be thrilled by how competitive today's interest rates are. However, before you get too excited, understand that auto lenders generally use a tiered rate structure. The interest rate advertised generally represents a lender's most attractive rate for the most well-qualified applicant. This means that the interest rate that you qualify for may be higher than what is advertised.

What is a well-qualified applicant? The qualifications for the best rate available vary by lender. However, in most cases, only those who have excellent credit scores and a sizable amount of equity may qualify. The best way to determine with certainty what rates are available to you is to apply.

Because credit scores drive auto loan interest rates, it makes sense to review your credit rating before you start shopping around. You may be able to review your credit scores directly by requesting a free copy of your credit report online from any of the three major credit reporting bureaus. Many credit card companies and banks also enable account holders to keep tabs on their credit scores at no cost.

In addition to looking at your credit scores, focus your attention on each line item in the report. Ensure that all information is accurate. In some cases, taking a few weeks to correct an error can result in a significant credit score boost. If your credit scores are particularly low, it may be worthwhile to focus on improving your credit rating before you refinance a car loan. Depending on your situation, steps like paying down credit card debt or paying bills on time may result in a higher credit score over the next few months or longer.

Crunch the Numbers

Refinancing a car loan makes sense for many people, but it may not be strategic in some situations. For example, if you are underwater with your car loan, you would be required to pay down your loan balance as part of the refinancing process. This is because auto lenders generally offer refinance loan amounts at 80 to 90 percent of the current value. This varies slightly by lender. Use Kelley Blue Book or another reputable valuation resource to estimate your vehicle's current value. Compare the value to your loan's payoff balance.

Even if you are not underwater, refinancing a car loan may not always yield the results you want. For example, if your credit scores have declined or interest rates have increased since your purchase, you may not qualify for a lower interest rate than what you already have.

Best Car Loan Refinance Providers

Because each situation is unique, you should carefully review your options. Take a moment to research your current loan's payoff date, payoff amount, interest rate and loan payment. Then, familiarize yourself with the loan programs available. By using an online calculator, you can easily compare monthly payments for different scenarios. Before you finalize your decision to refinance a car loan, ensure that the new interest rate, loan term, payment and payoff date are aligned with your goals.

At this point in the process, you may not yet have a firm interest rate quote because you have not formally applied for a loan. Some lenders will tell you via phone or email what their current ballpark rates are for your specific credit score. With this information, you can crunch realistic numbers to base your decision on. Keep in mind that auto loan interest rates fluctuate frequently.

Compare Your Options

Once you have determined that refinancing your auto loan will yield substantial benefits, you are ready to shop around. You may have already received estimates from a few lenders, but now is the time to get firm quotes. To do so, you will need to formally apply. Most auto lenders today have online applications that can be completed in only a few minutes. To simplify and speed up the process, you should have all relevant information on hand. This information includes the VIN, the car's mileage, your income and employment information, your auto insurance details and other essentials.

As a rule of thumb, request at least three to five quotes before making a final decision. To simplify your comparison process, request a quote for the same term length and loan amount from each lender. This enables you to make an apples-to-apples comparison. While the monthly payment on a quote will undoubtedly receive your full attention, you also should pay attention to fees and total interest charges over the life of the loan. Some lenders, for example, charge a higher origination fee and may have various junk fees that you would be responsible for.

Follow Through

After you have selected the loan offer that you want to move forward with, your next step is to notify that lender that you wish to proceed. You will need to sign the paperwork to finalize the loan. Then, the loan will be funded. At funding, your new lender will likely pay off the current loan balance directly. There are no hard steps for you to take at this point, but you should follow through to ensure that everything has been done correctly.

After a few days have passed, contact your old lender to ensure that the loan has been satisfied. Keep in mind that you are responsible for payments until the loan has been paid in full. Then, contact your new lender to confirm the payment amount and the date of the first payment. A few weeks later, review your credit report. Ensure that the old and new loans are reported correctly. If you identify any issues, the best time to address them is now. It can be more difficult to obtain documentation to correct errors once a significant amount of time has passed.

Are you eager to take advantage of the benefits of refinancing your auto loan? Whether you want to adjust the payment, reduce interest charges or pay the loan balance off sooner, you could enjoy these benefits with the right terms on a new car loan. Because each auto owner has unique circumstances and goals to consider, it is important that you compare the loan options available to you along with your objectives. While refinancing an auto loan only takes a day or two in most cases, it is worthwhile to do your homework upfront. By doing so, you can take full advantage of the benefits available to you.

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Car Loan Refinance FAQ

Unless you got a really great deal when you bought your car, you're probably paying a high interest rate on your loan. Refinancing is a great idea if interest rates have dropped since the time you made your purchase, saving you hundreds (or thousands!) of dollars over the lifetime of your loan.
Eligibility requirements vary based on the lender and your state of residence. Most financial institutions require that your car be 10 years old or newer and have less than 150,000 miles - though you may find that some lenders have more stringent requirements. Some vehicle makes, such as Hummer, Saab and Isuzu, may be excluded from refinancing offers as well.
That depends. If you can get a new loan at a lower interest rate, chances are good that you'll save money on your monthly payments. But, if you refinance into a loan with a much longer repayment term, do the math to make sure you're not paying more in the long run. Also factor in any fees that may be charged for your new loan, because they will cut into your savings.
Probably not at your local bank! While it's tempting to go with the simplicity of refinancing through the financial institution you've always used, they're not going to compete for your business: they already have it! A better method is to look at your options online, where it's easy to get car loan refinancing offers from several lenders at once. Plus, internet-based lenders often have less overhead, which translates into lower rates for your refi.
Absolutely. For many smaller banks and credit unions, online lending lets them reach customers they might not find otherwise - which equals greater savings for you. Of course, it's important to do your homework and make sure that any service you use for your car loan refinancing is reputable and will protect your personal information, especially if you are required to enter your Social Security Number for identity verification. A strong rating from the Better Business Bureau is a solid way to establish that a service is legitimate.
Sometimes. Beyond the interest you'll pay on any loan, you may find origination fees or other costs for processing your application, updating your title, and so forth. Read the fine print before you commit to a lender for your auto refinancing.
Not necessarily, but it helps. As with any type of borrowing, higher credit scores usually translate into lower interest rates. And, some lenders have a minimum credit score of 580 (give or take) to be eligible to apply for auto refinancing loans.
Instead of applying directly with a single financial institution, you can use a referral platform to get quotes from multiple lenders at once. These services use vetted partners in their network, using your application to match you with banks and credit unions willing and able to fund your auto refinance loan. From there, the experience varies: some referral providers require you to re-enter all of your initial application information directly with the lender you select, while others streamline the process and transfer your details to the lender you've chosen. Be aware that you may get multiple emails, texts and phone calls from interested lenders when you provide your information to a referral platform!
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