If you have a car loan, you’ve probably heard about refinancing. However, you might not be aware of the potential benefits or what to consider when deciding to refinance. You also might not know how to refinance your auto loan.
The process can seem confusing, but we’re here to make it straightforward. We’ve gathered all the information you need to go about refinancing an auto loan.
1. Decide why you want to refinance
Refinancing can save you money on your car loan. However, whether or not it’s right for you depends on your current situation.
First, what is the current state of auto loan rates? You can locate this information by doing a brief internet search for current loan rates. Then compare what you find to your existing auto loan. You can also use services to alert you when interest rates have dropped.
To determine if refinancing is a good idea, think about what you want to get out of refinancing. If your current monthly payments are too high and you need to lower them, refinancing to a longer term, even if the APR hasn’t gone down, can accomplish this.
If you want to save money overall on your loan, you should be targeting lower-APR loans without changing the length of your loan term.
2. Be familiar with the status, terms, and conditions of your current loan
Before you refinance, you’ll want to look at your current loan and familiarize yourself with the terms and conditions. Some loans have prepayment penalties, which might negate any benefits of refinancing.
Refinancing saves you the most money towards the beginning and middle of your car loan. Refinancing also often comes with some fees, and if you’re near the end of your car loan, you may not recoup these costs before you’ve paid off your loan.
Car loan payments are structured so that interest decreases toward the end of your loan. This is another reason why you may not save money by refinancing at this point.
If you’re near the beginning or middle of your car loan and the prepayment penalty is minimal or zero, you’re ready to start the process of shopping. To move forward, you’ll want to know how much you owe on the car, what your current APR is, and how much the vehicle is currently worth.
3. Know your credit score
It’s always a good idea to be aware of what your credit score is and what direction it’s heading. Doing this is particularly true when you’re trying to refinance. Interest rates may have dropped, but if your credit score has also dropped, you may find yourself unable to get a better deal on your auto loan.
If your credit has significantly improved, though, you may have access to a much better APR than when you took out your original loan.
Knowing your credit score means that you can chat with financial institutions to discuss what kind of APR you can get. This process will help you know where to look and whether you’re getting a good deal or a bad one.
4. Shop for refinancing loans
The best way to save money on your auto loan, whether you’re refinancing or not, is to shop around. Compare your prospects at different financial institutions, banks, and credit unions, and keep track of what you find. Keep a spreadsheet of the loan amount, refinance costs, and the APR to narrow down your choices.
5. Gather your information and apply for preapproval
In addition to information about your current loan, you’ll need the following documents:
- Identification- usually social security card/number, driver’s license, or passport.
- Income information- including tax returns and recent pay stubs.
- Car information- including the current value, mileage, and registration.
While you’ll need all of this information to get officially approved for a loan, you can sometimes get preapproved through a more straightforward process. Preapproval happens when a lender looks at your finances and determines that you will be approved for a specific loan if you wish to take it out. Preapproval is a great way to confirm the APR you can get and gain access to some bargaining power.
6. Use a loan calculator to decide on the best deal
Once you’ve compiled your information, decide on your top choices for loans. Then apply for preapproval so you can compare your options. Determining which auto loan will save you the most money can be difficult, especially when comparing different APRs and terms. Using an auto loan calculator is the best way to standardize this.
You’ll find auto loan calculators on our website to help you compare and contrast potential loans and decide on refinancing.