Car Insurance

How Hard Is It To Refinance A Car

By Peter Mondrose Peter Mondrose is the Head of Insurance Content at Bankovia. He received his degree in Economics in 1998 and a second degree in Journalism in 2004 from the University of Chicago. Most recently he served as Head of Content at QuoteYeti.com, and editor at BusinessPundit.com 8 minute read

If you know how to refinance a car loan, you may save a lot of money on interest each year. Below, we’ll explain how. It’s possible that you may be losing money if you don’t know how to refinance your vehicle loans. According to RateGenius, borrowers may expect to save an average of $989.72 per year by refinancing their auto loans in 2020. In addition to that, the same study showed that over 42% of Americans who successfully refinanced their vehicle loan saved over $1,000 each year.

To take advantage of these discounts, you’ll need to understand how the refinancing process works. If you’re considering refinancing your current auto loan, we’ll walk you through all of the processes you need to follow, and also explain whether or not this is a wise option. As a result, you’ll be more equipped to make an informed decision about whether or not refinancing a car loan is a smart option for your unique financial position.

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What does refinancing a car loan mean?

The term “refinance” refers to the act of taking out a new loan to pay off your old one. Your old debt is paid off and replaced with a new loan by a new lender. Typically, this is done in order to secure a better deal on a loan.

The APR (annual percentage rate) is your interest rate plus any related fees, and you may wish to decrease it in order to save money on interest payments throughout the life of your loan. It’s also possible to extend the term of your loan, which would lower your monthly payments and make them more manageable.

How to know if refinancing a car loan is right for you

It’s critical to weigh the pros and drawbacks of refinancing your auto loan before making a final decision, regardless of your motivations. Refinancing makes sense in certain situations but not in others.

When is refinancing a car loan a good idea?

In these cases, it may be a smart idea to switch to a new car loan.

  • Rates on loans have dropped. Car loan APRs, as well as interest rates in general, tend to follow economic trends. Refinancing a car loan at a cheaper interest rate is more possible if the average interest rate is decreasing.
  • Because of the rise in your credit score. In determining the conditions of a new auto loan, your credit history is critical. If your credit score has improved since you initially took out a vehicle loan, you may be able to save money by refinancing and getting a lower interest rate. Alternatively, you may be able to find a new banking institution that you prefer.
  • Getting a refinancing that reduces your term length, or the amount of time you have to pay back your loan may allow you to pay it off faster and save money on interest.
  • It is possible to avoid paying interest on 24 months of payments if you have a 60-month auto loan and qualify for a 36-month auto loan refinancing at the same or lower interest rate.
  • You’re having a hard time paying back your loans. Refinancing your auto loan may be an option if you are unable to keep up with your present payments. Because the payments are spread out over a longer length of time, the monthly cost is usually lower. But you may end up paying more interest in the long run.

When is refinancing a car loan a bad idea?

You should avoid refinancing your auto loan in the following circumstances:

  • If interest rates have risen on average when you initially took out your auto loan, it’s probably not the greatest time to refinance your loan. Assuming you don’t need to extend your loan’s term length to make monthly payments more manageable, a higher interest rate is probably not what you want.
  • As a result of the decrease in your credit score. It’s unlikely that refinancing would save you money if your credit score has dropped since you took out your initial auto loan.
  • You owe more on the debt than you owe. A car loan that is in default indicates that the borrower owes more than the vehicle is now worth. Without lower borrowing rates or shorter terms, refinancing does not make financial sense. If you want to refinance your car loan, you may have to pay the difference between what you owe and what the car is now worth.
  • It’s expensive to pay in advance. Depending on the terms of your automobile loan, you may be subject to costs known as prepayment penalties for paying off your loan early. As a way to offset some of the money lenders are losing due to the lack of interest payments, this is being implemented. If you have a significant prepayment penalty on your current auto loan, refinancing may not make sense.

How to refinance a car loan (in 6 simple steps)

Refinancing a vehicle loan begins with the following steps:

Check your credit score

When it comes to getting a vehicle loan, the most important element is your credit score. Many lenders may provide lower interest rates and longer terms if you have an excellent credit score. Refinancing a car loan is the same.

If you’re considering refinancing, knowing your credit score might help you make an informed decision. If you believe your credit score has altered when you initially took out your current vehicle loan, this is extremely essential. Refinancing may not be a good idea if your credit score has dropped. However, if your score has gone up, you may be eligible for better terms. Experian offers a free FICO score check, which is a sort of credit score.

Organize your loan information

When you apply for refinancing, you’ll be asked for details regarding your current auto loan. For example:

  • Loan balance remaining. The balance is due on an existing loan.
  • The monthly payment amount. The amount you pay on your loan each month.
  • Interest rate. The percentage of interest that you must pay on a loan.
  • Current lender. The name of the lender that is currently servicing your debt.

With a paper statement or an online account, you can get this information easily. Make sure to contact your lender if you can’t find the information you need. Then you may jot down the details and have them at hand when the time comes.

Organize your personal information

Refinancing a vehicle loan often necessitates having personal information on availability in addition to the loan details. Car-buying documentation like these could include:

  • There are several ways to show proof of income. pay stubs, tax returns, bank statements, and more.
  • For identification purposes, your driver’s license and Social Security number may be necessary.
  • Proof of insurance is almost certainly going to be requested. If you have an insurance policy, the policy document should include a list of your coverages, your insured vehicle(s), and any other pertinent information. Insurance companies can provide these papers for you if you don’t have any on hand.
  • Residence: Water, gas, and electricity bills are frequent examples of utility bills recognized as proof of residency. Another option would be a recent mortgage statement or leasing agreement.
  • This includes the VIN (Vehicle Identification Number) and year, make, model of your automobile. On the vehicle’s title, registration, and insurance records, you’ll normally discover this information.

Apply for your new car loan

Car loan refinancing is available at many banks and credit unions, and you can usually apply online. Consider using an online marketplace that allows you to compare several interest rates from different lenders without hurting your credit score to get a better sense of what’s out there.

Since you’re effectively applying for the loan, most direct lenders will run your credit when you inquire about auto loan rates. This may temporarily affect your credit score, but it will not have long-term consequences. However, a soft credit check may be performed by some online marketplaces, meaning that your credit score will not be impacted. Before deciding on a certain vehicle loan refinance, you may utilize these websites to get an idea of what the rates will be.

When applying for many loans that need a hard credit check, package them together so you don’t make a large dent in your credit score. Multiple loan applications made during a short period of time, between 14 and 45 days, are counted as a single hard inquiry by credit scoring algorithms.

Evaluate your loan offers

When evaluating loan offers, it’s crucial to keep in mind that each one is unique. The greatest deal isn’t usually the one with the lowest interest rate or the longest term length, since it relies on your unique financial circumstances and any other charges you may incur.
When analyzing your loan offers, here are some things to keep in mind:

  • Reduced monthly payments are possible because of a low-interest rate. You can save money by getting a lower interest rate than your current one.
  • Choosing a shorter term means you’ll have to make fewer payments over the course of the loan, but you’ll also have to pay more each month. Longer repayment terms imply a higher initial loan amount, as well as a higher total interest cost. However, if you’re looking for a cheaper monthly price, it may make sense.
  • Be on the lookout for re-registration and re-titling expenses as well as prepayment penalties.

When looking at these aspects individually, they should be regarded in the context of the larger picture. When comparing loans, a low-interest loan with high costs may be less beneficial than a higher-interest loan with lower fees.

Finalize your refinanced auto loan

Once you’ve decided on a loan offer, you’ll need to sign the loan agreement. You’ll have a hard inquiry on your credit immediately if you haven’t already. After making a hard inquiry, you may notice a modification in the conditions of the loan offer. Your creditworthiness is better understood and the lender has altered their offer accordingly. Don’t forget to re-read the loan agreement before signing it. All of the documents and information you obtained before may also be required at this stage.

Bottom Line

Financial opportunities might open up when you know how to secure a loan. In addition to making it easier to plan out your finances, it may also save you money in the long run. When you buy a car from a dealership and take out a loan to pay for it, the process is quite similar. Having various loan alternatives might help you narrow down your selections if you don’t have all of the required documentation on hand.

However, keep in mind that the greatest vehicle refinancing for one person may not be the best for another. When assessing your loan offers, take into account your financial condition and repayment obligations to determine which refinance offers are most suited to your needs.

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