Has your financial situation changed recently? Or are you having difficulty keeping up with your monthly auto loan payments? Whether the goal is to land better terms or save more money, auto refinancing is almost always a good move.
What Happens When You Refinance Your Vehicle?
In a nutshell, auto refinancing entails applying for a new loan to pay the balance off on your existing loan. This way, you can enjoy the flexibility that comes with a new loan. For example, it makes sense to consider a car refinance in the following scenarios:
- You may want to qualify for a lower interest rate
- You may want to remove a co-signer from your existing loan
- Your financial situation has either improved or gotten worse
- Your credit score has improved
All in all, refinancing is all about landing rates and terms consistent with your financial needs as well as long-term plans.
How to Refinance Your Car Loan
Step 1: Determine Whether It’s Feasible
Sure, refinancing is about reaping benefits from a lower interest rate and better terms but is it a one-size-fits-all solution? No. There are certain factors you may want to determine before making the leap. Hence, start by asking yourself the following questions:
- Are there any title transferring or reregistering fees involved?
- Is there a penalty for paying the loan off early?
- Is your car too old? (Some lenders may refuse to refinance your vehicle if it’s eight to ten years old)
- Is your car’s market value lower than the outstanding loan amount? (Being upside down on your loan makes it harder to qualify for a new one)
- Have you checked your credit history? (It only makes sense to refinance a loan if your score has improved)
Step 2: Determine What Documents You Need
One of the most important aspects of dealing with an auto refinance is having all necessary documents on hand. Some of them include:
- Details about your current loan, such as the balance and lender’s information
- Details about the car, such as the model, mileage, make, and the year you bought it, along with the vehicle identification number.
- Personal information like previous addresses, social security number, and the amount you pay for monthly rent or mortgage
- Proof of auto insurance
- Proof of income, through a paycheck stub, for example
Step 3: Apply for Prequalification
Prequalification is more like a soft inquiry that doesn’t hurt your credit and is often considered a good place to start. Here, the lender looks at information like your credit score and the vehicle’s condition. However, the process should not be taken as guaranteed approval because, ultimately, you will have to apply again and also deal with the hard inquiry that comes along with it.
During this phase, you must shop around and compare the rates being offered by different lenders in the market. Remember, while you may want to choose the longer loan term offer, it may not exactly be a great idea.
This is because you’ll end up paying greater interest despite having lower monthly payments, which may cause you to become upside down. Most importantly, figure out why you want to refinance in the first place. Only by determining your needs will you be able to land the right loan.
Step 4: Apply Away!
Now that you’ve shopped around, compared the rates, and compiled the required documents, you’re more than ready to apply. This is when you’ll need to fill out an application for the lender you’ve chosen and attach all necessary documents. As opposed to the prequalification phase, this application will be like a hard inquiry, and there’s a good chance that your credit scores may experience a momentary dip.
Once you’ve signed the necessary paperwork and had your loan approved, you can request your lender to provide you with the new terms. Make sure to maintain copies of all the records since they’ll include details on payment due date, the minimum amount for each month, and of course, all the options available to you for making loan payments.
Step 5: Viola! You’re Almost Done
For the most part, the transition from your old loan to the new one is taken care of by the new lender. However, before you stop making payments on your original loan, make sure to speak to your previous lender and confirm whether the amount has been paid in full by the new lender. As soon as your last loan is paid off, you can start making payments on the new loan and boost your credit by making on-time payments.
In the end, it’s important to understand that while refinancing is an excellent option to find the right auto loan that fits your needs, you must do your research and determine whether it is a feasible option for you at the moment. There’s a great possibility that you may end up getting better loan terms, but at the same time, it’s also likely that you may end up with an even higher interest rate. Hence, make sure to weigh the pros and cons and speak to different lenders in the market before you make a decision. Remember, auto financing is surely a great option, but it may not always be the right one for you.