How to Refinance a Car Loan
Looking to get out of your current car loan to a new one with a lower interest rate? Refinancing may work for you. But there are a number of steps to take first. Begin by checking refinancing requirements. Each lender has specific requirements for refinancing and if you don’t meet the requirements you don’t get the refinancing. For example, a lender may require you to have $8,000 or more remaining on your car loan and the car would need to be fewer than 10 years-old with less than 125,000 miles. Does your current lender charge prepayment penalties? You’re going to be paying off your car in full when you refinance and you are going to be hit with your original lender’s prepayment penalty when you do. This penalty will eat into any savings you gain by refinancing. So check the cost of a prepayment penalty carefully. If your current lender doesn’t charge a prepayment penalty, you’ll be able to pay off your old loan without paying a fee.
Shop Around for the Best Rate
If you find an interest rate that is lower than the one on your current loan, it is time to consider refinancing. If the interest rate is the same or higher than the interest rate that you’ve got on your current loan, you might as well hold steady with the loan you’ve got.
To get the best deal on refinancing, you’ll need to shop around. Start with your bank or credit union. You already have a relationship with them and they may be interested in offering you a refinancing deal. There are a number of online lenders that offer refinancing for auto loans as well. So take your time and do plenty of research. You’re looking for the lowest interest rate you can find.
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Check Your Credit Score
One thing every lender will look at when refinancing a car loan is the customer’s credit score. Customers with high credit scores get the lowest interest rates on their loans. If your credit score has declined since your original car loan, it may be difficult to qualify for a lower interest rate on your car loan. But on the flipside, if your credit score has improved since you bought your car, you may be able to land some attractive interest rates on a refinanced car loan.
If your credit score is low, there are things you can do to improve it. Get current on all past-due accounts and pay down debt. Both those things will help to improve your credit score.
Is your credit score lower than you expected? An error could be dragging down your credit score. Get copies of your credit report and look for errors. Taking the time to correct any errors will help to improve your credit score and put you back on track for landing a good deal on a refinancing loan.
Review Your Income
Has your income increased or dropped since you bought your car? If your income has dropped and money is tight, you may be refinancing your car to get a lower monthly payment. If your income has dropped significantly, it may be difficult to qualify for refinancing at a lower rate or qualifying at all. But it is still worth trying. So shop around diligently until you find a deal.
Choosing Your Loan Term
Choosing a longer loan term will help to lower the monthly payment on a refinanced loan. As nice as that lower monthly payment will be, you’ll pay much more in interest charges over the life of the loan. So crunch the numbers before you choose this path.
Choosing a shorter loan term saves on interest and is a good money-saving strategy. So choose the shortest loan term that you can afford when refinancing and save money. Getting a lower interest rate and a short loan term is the ultimate way to save money on refinancing. Just make sure the amount of the refinanced loan payments fit in your family budget. You want to be able to make your refinanced loan payments without a struggle every month.
Gather Your Loan and Car Information
Ready to shop for a refinanced car loan? Gather together all the current information on your current car loan. You’ll need the name of your lender, APR, loan term, monthly payment, pay off amount and your loan number. You also will need the date you began making payments.
You’ll need other information on your car as well, including the vehicle identification number, the exact mileage and the state the car is registered in.
Once you have this information, you’re ready to shop for a refinanced auto loan.
Research and Shop Online
There’s no need to call or visit a lender in person. Refinancing an auto loan can be done online or by a mobile app. And you can find the refinancing loan information that you are looking for online as well. Lenders list loan terms and interest rates online on their websites. So you can compare terms and rates between lenders easily. Just give yourself plenty of time to review several offers. As mentioned earlier, shopping around for refinancing deals will help you land the best interest rate.
As long as you shop for your refinancing loans within a 14-day window, it won’t hurt your credit score. A dozen or more refinancing applications count as one inquiry when you do it all within a two-week window.
Look for Bonus Money
Some lenders will give a small bonus, say $200, for refinancing an auto loan from another lender. So ask about bonus money when you are researching auto refinancing deals.
Pay a Title Transfer Fee
You have a new lender when you refinance an auto loan and you will need to pay a title transfer fee. This fee varies depending on the state where you live. Your new lender may pay this fee on your behalf and add the amount of the fee on to your new final amount.
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