As a car owner, you can relate to a situation where you are halfway through paying off your car loan, but you realize things would have been better if you had a more favorable interest rate. In some cases, it could be one of those auto loans with bad warranties and unnecessary fees. While many people are knowledgeable about refinancing a mortgage, only a few know how to refinance a car loan, as an option to lower monthly expenses.
Refinancing a car loan could save you hundreds of dollars annually, and sometimes thousands especially if your current car loan interest is above 6%. Unlike consolidating credit card balances and refinancing your mortgage, car loan refinance is easy, fast, and inexpensive. What’s more, you won’t have to spend money when submitting an application. The funds are also available, often within a day. Read on to learn more about how to refinance a car loan, what steps you need to take, and the different institutions offering refinance options.
What Does it Mean When You Refinance Your Car Loan?
Refinancing a car loan is where you pay off your current loan by borrowing from another lender. The money is used to pay off your old car loan debt. The lender sets new terms under which you begin making loan payments. Refinancing is an excellent idea if your goal is to become debt-free.
Here are some situations where refinancing a car loan would be a wise decision:
Lower Payment – If you’re looking for more breathing room, or you cannot afford to continue paying your current monthly payments, refinancing your car loan allows you to enjoy a lower payment with an extended repayment period.
Signed a Bad Car Deal – Salesmen in car dealerships can be overwhelming, and you may get tempted to spend more than what your budget allows. Refinancing your car loan can help reduce the interest you pay if you signed a bad deal on a car.
Reduced Interest Rates – Auto loan interest rates change from time to time. Edmunds reported that in July 2017, car loan interest rates hit a six-month low. You can take advantage of these rates by refinancing.
Convenience – Refinance will be a good idea if you’re planning to move your accounts to a single lender for consistent service and ease of use.
Improved Credit Score – If you bought a car on a high-interest loan and overtime this affected your credit score, this would not be the perfect time to refinance. However, if your credit score has improved, lenders would be willing to consider you at a competitive rate.
Steps to Take When Refinancing Your Car Loan
Once you’ve decided on how to refinance a car loan, there are specific steps you need to take to ensure that your request is approved. These steps include:
1. Get to Know the Requirements
First-time applicants are overwhelmed about the different options available on how to refinance a car loan, and this leads to more costs. Be sure to do your homework before applying for any loan as not all financiers have similar auto loan refinance requirements. For example, Chase Bank requires you to have a car that is less than five years and one with a maximum of 75,000 miles.
Conversely, BOA requires you to have $6,000 remaining on your loan and that the car has not done more than 120,000 miles. Also, it needs to be not more than ten years old.
2. Calculate Potential Savings
Before you rush to fill out an application, it’s critical to assess your savings. Banks and various unions have an online refinance calculator that helps you know how much you will save when you refinance.
You’ll be asked what your credit score is, your desired terms, and how much you would want to borrow. Once you have the estimate, you can decide if the savings are worthwhile or a refinance would just be a waste of time.
3. Find Out if There Are Prepayment Penalties
Check to see if your original auto loan has early payment penalties. Some lenders fine you for early repayment, as this eats into their profits. Also, a few lenders need the interest paid before you touch the principal. This ensures that they get the whole interest amount.
Pre-arranged auto loans also require you to repay the principal and interest in full, irrespective of the time you pay the loan. Having this information is essential before you decide on how to refinance a car loan.
4. Get Your Information
A lender is going to need some important information from you as part of the car loan refinance application. You will need to have:
Car Loan Details – You’re required to know what your current interest rate is, how many months are remaining in the term of your loan, and how much you are required to repay.
Car Details -Information such as odometer reading, current market value, make and model are important when looking for a lender.
5. Research on Different Lenders
Credit unions, banks, insurance companies, and some car dealerships refinance auto loans. This can be overwhelming with numerous options to choose from. It’s best to begin with any bank, insurance company, or credit card company where you have an account. Chances of getting a better deal as a customer are high.
Get estimates from various lenders, as they might have an array of varying loan rates. Online quotes give you a chance to find out what each lender provide in regards to the length of the loan, terms of APR, and other terms.
Check these details to avoid surprises later on:
- Conditions for repossession;
- Pre-payment penalties;
- Penalties for late payments;
- Finance charges;
- Complete the application;
It’s time to submit your application once you’ve known the best offer that works for you Institutions like Bank of America and Wells Fargo have avenues where you can submit your application online. Chase Bank asks you to bring the signed documents or mail it. The financier will pay off your old auto loan and set up new payment terms.
Recommended read: How to Apply for a Car Loan
Best Auto Refinance Companies
Various online lenders offer car loan refinancing. The best fit for you will depend on the loan terms, interest rates, car restrictions, and the loan approval process. Here are some top three picks to help in your search:
Lightstream is run by SunTrust Bank and its one of the best options if you need a new car loan fast. Being insured by the Federal Deposit Insurance Corporation makes it an established and reputable lender. All you need is to submit information on the kind of loan you want, your zip code, and the amount you need.
The United Services Automobile Association provides a 3-year auto refinance loans plan with rates as low as 1.5% on models 2015 or later. You need to be a member of the USAA to qualify for the loans. Also, the association doesn’t charge any application fees.
MyAutoLoan is a clearinghouse that offers refinance loans within 24 hours. What’s different about this institution is that it connects borrowers with lenders. Once you fill out an application form, you’ll receive offers from different lenders.
These are some of the steps on how to refinance a car loan. Remember that the earlier you refinance, the more you will save on the cost of the loan. Moreover, you’ll get a lower interest rate. Be sure to explore all options and understand the terms and conditions of your refinanced loan.