You may be able to refinance an auto loan to lower your interest rate, lessen your monthly payments, or even access the equity in your car. Additionally, refinancing a car loan is less expensive than refinancing a mortgage.
Here’s what you need to know if your credit has increased since you first took out your auto loan, interest rates have decreased, or you think refinancing could help your financial condition.
Rates on average for refinancing auto loans in June 2023
|Credit Score||Interest Rate|
Refinancing a Car Loan
An auto loan refinance is a simple procedure. You should follow these procedures..
Examine Your Present Loan
To find out where you stand, look at your loan balance, monthly payment, and interest rate. To determine whether your rate is high, compare what you see to current vehicle loan interest rates.
Check your loan agreement to see whether there are any prepayment penalties that could apply if you pay off the loan early, including through refinancing.
Examine Your Credit
To gain a sense of your overall credit health, check your credit score and reports. Has your credit since you first obtained the loan improved? You might be able to negotiate for a lesser fee. Refinancing might still make sense even if your credit hasn’t changed.
Your chances of getting better lending terms are slim if your credit score has dropped.
Refinancing your auto loan with your current lender is an option, but before you do, take some time to research the conditions offered by a number of reputable auto lenders. Examine elements such as interest rates, terms, and eligibility requirements.
Even if one lender may offer a lower interest rate, it can have restrictions on car age, mileage, or payback terms that are shorter than what you find acceptable.
You can get quotations from some lenders using preapproval tools after only a mild credit check, which won’t lower your credit score. For some, though, you might need to submit a formal application before you can receive an offer.
Select a lender and submit an application
Apply once you’ve determined which lender is ideal for you. During the procedure, you will normally be required to supply a number of pieces of information and paperwork, including:
- Details of your existing lender.
- a payback period of ten days.
- Your name, date of birth, social security number, home address, and phone number are all examples of personal information.
- Information and documents on employment and income.
- The manufacturer, model, year, and mileage of the vehicle, as well as its VIN.
- proof of insurance protection.
The lender will determine the value of the vehicle after you submit your application using a resource like the National Automobile Dealers Association book. In order to ascertain whether you qualify and what your interest rate will be, it will also do a credit check and look through the vehicle facts.
Take up the Offer
If the lender accepts your application, it will give you the offer’s specifics, which will include the rate, monthly payment, payback duration, and other crucial factors.
Keep in mind that closing expenses, which are usual for home refinance loans, are typically not included in a car refinance. “Refinancing with someone else or your same lender can be an easy process and, in most cases, lower your monthly payment, helping you save money,” says Zander Cook, chief operating officer and co-founder of Lease End, a business that assists drivers in terminating or refinancing their leases. “You might be saving more if you combine this benefit with the absence of closing costs.”
Sign the offer and give it back to the lender if you accept the conditions. Although you might be able to finish the process online, you could eventually need to speak with a loan officer on the phone or in person.
Refinancing an auto loan normally takes one to two weeks from beginning to end.
Motives for Refinancing an Auto Loan
You might think about refinancing a car loan for the following reasons:
- Interest rate reduction- Even if your credit score hasn’t changed, you might be able to get a better rate if interest rates have dropped overall. Cook advises that if your financial situation has improved since you took out the loan, you should take advantage of lower interest rates to save even more money.
- Monthly payment reduction- The monthly payment on a loan can naturally be decreased by a lower interest rate, but you can also achieve a cheaper payment by extending the repayment time. According to Benita Pender, consumer lending manager at Tropical Financial Credit Union, “extending the term may be advantageous to secure a lower monthly payment and create additional disposable income to pay other monthly bills.” However, keep in mind that extending your term can mean paying more interest throughout the course of your loan.
- shorter term for repayment- A refinance with a shorter payback period can help you achieve your objective of paying off your loan faster if you can afford a higher monthly payment. Additionally, choosing a shorter term may increase your ability to obtain a cheaper interest rate.
- Increase your equity- A cash-out refinance loan from some lenders enables automobile owners to access all or part of the equity they have in their vehicle. Just keep in mind that if you borrow more money than the automobile is worth, you risk going upside down on your loan.
If you’re considering refinancing your auto loan, thoroughly consider your justification to make sure the new loan makes sense.
Why You Shouldn’t Refinance Your Auto Loan
While some car owners may profit long-term by refinancing their loans, it might not be the best option for everyone. In the following circumstances, it might not make sense:
- Your credit rating has dropped- Even if interest rates have decreased since you obtained your current loan, your prospects of saving money with a reduced interest rate may be slim if your credit is in worse shape than it was when you obtained it.
- There is a prepayment penalty that you must pay- Prepayment fines are typically 2% of the outstanding loan total. According to Experian, the average auto loan balance in 2021 was $20,987, so the penalty would be about $420. It might not be worth the up-front expense depending on how much money you can save over time with your new loan.
- Your auto loan is nearly paid off- Lenders who offer refinancing have a minimum loan amount they’ll offer. You might not be able to satisfy the minimum loan amount required by the lenders you’re considering given your existing balance. Even if you do, extending the term to three or more years may end up costing you far more in the long run if you can pay off the loan in the next year or two.
- You are turned around- Finding a lender ready to refinance your current loan may be difficult if you have negative equity in your car. If so, the interest rate might be too high to justify the process.
What Follows Is?
Review your situation and your financial objectives now that you are aware of how to refinance your car loan, and think about how it might help. Take your time evaluating your options and credit position, and don’t be afraid to back out if you feel it’s not the best course of action for you.
If this isn’t the appropriate time, keep reviewing your auto loan frequently to avoid missing out on future opportunities for better terms. “Given the state of the economy, it is always in a member’s best interest to look for ways to lower their monthly obligations,” asserts Pender. Considering the ups and downs of the economy, a six-month gap is recommended.