When the going gets tough, you can refinance your car loan to reduce your monthly payments or save some money by getting a lower interest rate. When you refinance your car loan, you basically replace your current auto loan with a new loan, usually with another lender. Your vehicle will be held as collateral on your new loan.
If you are wondering, “can I refinance my existing car loan” read on to find out when you should do it.
Can I Refinance My Existing Car Loan?
You can definitely refinance your existing car loan with a new one to qualify for a low interest rate or lower monthly payments. However, before you go ahead and search for an interested lender, you should consider the following factors to determine that refinancing your car loan is a wise decision:
1. Prepayment Penalty
Many lenders charge a prepayment penalty if you pay your car loan off earlier than the agreed time. Read your loan terms to see if your lender charges a prepayment penalty and compare the cost of the penalty with the money you’ll save with your new loan.
2. Credit Requirements
Many lenders require your credit score to be better than average to qualify for auto loan refinancing. Make sure you have a good credit score and check your lender’s credit requirements before applying. You may want to improve your credit score first.
3. Interest Rates
If the interest rates in your state have increased ever since you took out the original loan, you can get a lower interest rate on your auto loan. Your lender also offers a lower interest rate if your credit score has improved.
4. Repayment Period
If your repayment term will be longer than your current repayment period and you don’t need lower monthly payments, it’s not worth it to refinance your car loan because you will have to pay more in interest over the complete loan term.
What You’ll Need
You will need the following documents to apply for auto loan refinancing:
- Vehicle registration
- Proof of income
- Proof of insurance
- Copy of driver’s license
- Proof of residence
- Payoff statement
So if it makes sense for you to refinance your existing car loan, gather all the documents you will need, compare various offers from different lenders, and maximize the savings on your car loan by refinancing it.