Sarah T.
In particular, individuals who are starting their financial journey pay more interest rates on auto loans because their credit rating has not been proved from a lender perspective. It means that it's difficult to find the credit information needed to repay them.
Other consumers may now have an excellent credit score compared to when they got approved for their current loan. A better credit score could reward you a new lower interest rate, and a lower monthly payment.
Should I refinance my car?
Whether you have recently bought a car or have had it for a few years you may have begun to think about when it would be good time to refinance your auto loan. Refinancing your auto loan has many benefits but there are also other factors you should consider before getting started. To learn more about what refinancing is, read here!
Pros & cons of refinancing your auto loan
When acquiring cars many customers accept the loans that can be offered by a dealer. Although convenient to you initially, it is possible later to regret the loan terms. Refinancing a car loan may reduce the cost or the interest rate and can also help you save some money.
Refinancing for a car loan involves transferring the loan's current amount to a new lender to repay the remaining balance. If refinancing your auto loan will increase your overall budget, it may not always be your best option.
Refinancing a car loan may reduce the cost or the interest rate and can also help you save some money.
Pros:
Lower monthly payment:
- Depending on the terms of your new loan term you could have lower monthly payments. For example, if your new loan has a longer repayment schedule this could lower your monthly payment. It will take you longer to repay the lender but you could be able to save money that you can use to make other financial decisions.
Lower interest rate:
- If you had a bad credit score or no credit at all at the time of applying for your current auto loan, refinancing could help you get a lower interest rate. There is also a chance that at the time of refinancing your auto loan interest rates in general may be lower.
Change lenders:
- Changing the financial institution that you have chosen borrow from can have some major benefits. They may be able to offer you a better interest rate and the loan term you are looking for. Some people also choose to look at a credit union instead of other financial institutions. Some people refinance with their local credit union because of refinance offers, and the perks of working with smaller financial institution.
Co-signer:
- For whatever the reasons may be you could have needed a cosigner at the time of applying for your current loan. Depending on the current credit score refinancing your auto loan can give you a chance to remove the co-signer you previously needed. There is also a chance that you may need to add a co-signer depending on your recent credit history and you will be able to that once you refinance your car loan. We discuss the steps of removing a cosigner in detail here.
Cons:
Longer repayment term:
- If you extend the term of your loan you may have a lower payment but this means you will be paying more interest over time.
Higher fees:
- Like every other type of loan and auto loan will inevitably come with fees. Some of these fees can include title fees, closing fees, and lending fees. You may even have to pay a prepayment penalty for closing your current auto loan early.
Upside down or underwater:
- Being upside down or underwater on your loan means that you have more to pay on your car than the car is actually worth. This can happen if you have an older car and have waited to refinance.
Steps to refinancing your auto loan
Now that you have learned a little bit about the pros and cons to refinancing your auto loan it is important to understand what steps you have to take during the process.
1. Determine if it's the right time to refinance your auto loan.
It could be helpful to ask yourself some guiding questions to determine if your should refinance your car or if now is the right time:
Has your credit score improved? Are you upside down or underwater on your current loan? What fees will you incur?
2. Collect & organize all necessary paperwork.
When you are considering transferring your loan from another lender, you should know what information you need.
- Car Information: You must give the potential lenders the name, year, and vehicle identification number of your car. If you need help finding the VIN number for your car, read more here.
- Proof of Income: Like any other loan you will need to show the lender proof that you make enough to be able to pay back the loan. Don't fret if you are self-employed, we have tips on how to obtain this easily.
- Personal Information: You may need to provide basic information like your social security number, previous addresses, and rent/mortgage payments.
- Credit Scores: Your credit score will determine the terms of your new term. So before starting the process take a look at your credit report to determine if it is a good time to refinance your car loan.
3. Shop around for interest rates.
- When shopping around for a new lender you want to make sure you getting a competitive rate. You can compare the APR (annual percentage rates) of many lenders, and look at what lenders have minimum fees and a repayment timeline that fit your needs the best.
4. Apply for an auto refinance loan.
- Now that you have shopped around for a lender, and collected all necessary paperwork you can now decide to actually apply for the loan. Getting approved for a loan can take a few hours or a few days. How long it takes to get your approval will depend on the state of your credit, loan amount, and documents you submitted.
5. Start making monthly payments.
- Once you are approved for the loan and sign the paperwork you will receive a document from your new lender detailing when your monthly payments are due and how much you have to pay.
Tips for refinancing your car loan
- Consider Pre-Qualifying - The lender pulls out credit reports that are difficult to verify. Despite hard investigations impacting your credit score, each one will probably just reduce your score. It could be beneficial to apply for pre-qualification because that would only count as a soft inquiry. This won't hurt your credit as much and will let you know where you stand with lenders. Learn the difference between pre-qualified and pre-approved here.
- Loan Calculators - There are tons of free online auto loan calculators that will give a better idea of where you stand financially. Our RateWorks auto refinance calculator is a resource you can use to see if refinancing your auto is a good option for you. You can also gain more insight by getting a free quote here on RateWorks.
- Revise Your Monthly Budget - There is never really a bad time to take a look at your budget and see where your money is actually going. Since your monthly payment will likely change it would be good to adjust your budget. If your monthly payment is lower this could afford you to use the money you save to make other financial decisions.
Final thoughts
Making the decision as to when or if you should refinance your car can be relatively easy. Taking up another loan will repay all of your current debt on the new one. Refinancing your auto loan may be the best solution to find better, cheaper repayment terms, and reduce your monthly expenses.
Refinancing can become tricky when you start to take a deep dive into your finances and all of the details of your refinancing requirements. Although a different lender may offer you a lower monthly payment and interest rate, your repayment term could be longer and you would end up paying more interest over time, in addition to hidden fees you won't see until closing.
Consider RateWorks
RateWorks creates and manages your loan without any need for a third-party lender. That means, in just minutes, we can determine your qualifications and build your new loan. We created RateWorks to provide drivers with a successful lending experience. A better option. A resource you can trust that eliminates frustration, offers value, and restores your confidence.
