Auto loans are becoming an increasingly popular way for Americans to finance a new car purchase, with figures showing that auto loan debt has risen to an all-time high of $1.35 trillion.
But if you bought your car on the spur of the moment or you didn’t get a great auto loan deal from the start, it could be worth verifying whether switching to a car loan with more favorable terms could improve your finances. Refinancing to one of the best auto loans could allow you to pay a lower interest rate or adjust your payments to better suit your lifestyle.
When you refinance your car, you simply take out a new loan to replace the existing one. Some of the most common reasons for refinancing are as follows:
Benefits of refinancing an auto loan
Falling interest rates
In today’s low-rate environment, there’s a good chance you’ll be able to take advantage of a cheaper loan than the one you already have. Even a drop of two or three percentage points on your APR can add up and reduce the amount of interest you pay over the life of the loan. A lower rate will also allow you to pay off your loan faster.
Your credit score has improved
The better your credit score, the more likely you are to qualify for the best loan rates. If you had bad credit when you first took out your auto loan, it’s worth checking whether your credit score has since improved and whether you could benefit from better rates.
Your financial situation has changed
If your budget has gotten tighter due to unexpected medical bills or job loss, for instance, refinancing could enable you to lengthen the loan term by two or three years and lower your monthly payments. The downside is that a longer loan term will increase the amount you pay in total for your car, including interest. But this may be worth it if finances are tight.
Alternatively, if you have more disposable income now compared to when you took out the original loan, you could refinance to shorten the loan term. Your monthly payments are likely to be higher as a result, but you’ll pay less for your loan overall and you’ll be debt-free more quickly.
What to consider before refinancing
While refinancing can have many benefits, it won’t be the best option for everyone, and it is prudent to consider the drawbacks before proceeding.
For starters, many auto loans charge prepayment penalties for paying off your loan earlier than anticipated. If the cost of these penalties outweighs any savings you will make, refinancing won’t be right for you.
Refinancing may also not be worth it if you’re nearing the end of your car loan. This is because payments usually go toward the interest at the start of a loan, while in the last year or so payments go toward the principal. Thus, if you’re refinancing towards the end of the loan, any savings you make on interest are likely to be much smaller and not worth the effort of refinancing.
There’s also little point refinancing if your credit score has declined since you took out the original loan, or if you’re planning to apply for a mortgage or credit card soon. Too many credit inquiries in a short space of time can suggest you are having financial difficulties and will reduce your chances of getting accepted.
Finally, be aware that some lenders simply won’t allow you to refinance. Due to the speed at which cars depreciate, some lenders will not refinance cars older than seven years or those that have a high mileage. If you’re upside down on your loan and owe more than the vehicle is worth, it can also be harder to qualify for a new auto loan.
How to refinance your car, step-by-step
If you’ve considered the above and believe refinancing to be right for you, here is what you’ll need to do:
Check your credit
If you haven’t already, it is sensible to check your credit to see whether your score has improved and if you’re likely to qualify for more favorable rates. Don’t despair if your credit score is not as good as it could be – it can often be improved by using the best credit repair services.
Remind yourself of your existing loan details
Before making your application, you’ll need a few details about your existing auto loan. These include your current monthly payment and remaining balance (the payoff amount), the length of the loan term, and how much interest you’re paying.
Gather relevant documents
Make sure you also have the following information ready:
- Details about the make and model of your car, plus its vehicle identification number (VIN)
- Proof of auto insurance
- Proof of income and employment
- Proof of residency such as a utility bill or bank statement
- Proof of identity with a photo ID and proof of residence bill
Once you have the relevant information to hand, you can start comparing refinancing deals. Be sure to compare the interest rate, the term of the loan and the overall cost of the loan, including fees.
Make your application
Once you’ve found the right auto loan for you, you’re ready to apply. You’ll be sent the loan paperwork from your chosen lender and you’ll then need to respond to the lender’s requests. You may be asked about your debt levels, employment history and so on.
Finalize your offer
If you’re happy to proceed, you can finalize your offer and sign the contract. At this point, you’ll be sent a document containing all the terms of your new loan. Your new lender will usually pay off your old loan so that you can start making payments to your new lender as soon as possible.
Refinancing has the potential to save you thousands of dollars over the long term, but it’s crucial that you research your options carefully first to ensure it’s the right choice for you. Once you’ve successfully refinanced, you might want to consider the best roadside assistance services so that you can be confident you won’t be left stranded at the side of the road in an emergency.