Securing a low-interest loan should always be your absolute first priority when financing a car – or anything else. Cars have a very high depreciation rate, so it’s in your best financial interest to pay as little as you can in interest.
If you, however, managed to land yourself a high-interest car loan and have regretted it, there are things to do about it even if your car isn’t fully paid off yet.
It’s called refinancing. Refinancing a car will automatically pay your current loan off and replace it with a new loan, most of the time, it’s with a different lender, with brand new tailored terms.
You might want to refinance your car for any reason; your interest may be unusually high, your monthly payment may be too much because of the interest, you want to pay it off early, but the loan’s agreements make it difficult to do so, you may have become unemployed, or you have a lower salary, or any other reason.
Your credit score may have also improved, making you qualify for a lower interest rate than your current one. Some people extend their term because they want a smaller monthly payment, but that financially doesn’t make sense when you can refinance the loan. Extending the loan can make your monthly payments lower, but it will most likely cause you to pay quite a bit more interest over the life of your loan.
What You Need to Refinance a Car Loan
Having reasonable credit, and making sure the terms of your current loan allow you to draw out the foundational paperwork you received when you originally refinanced the vehicle.
1) Having reasonable credit
You probably won’t qualify for a better loan (lower interest) if your credit score is low. It’s critical to check your most recent credit score before you submit a refinancing application. If you’ve been paying your bills (rent, car loans, etc.) on time for the past few months/year(s), your credit may have improved, giving you access to better deals and lower interest rates.
On the other hand, if you have made late payments, and/or have too much debt, your credit may have either not improved or even worse, may have been dropped. You can review your credit scores on AnnualCreditReport.com.
Refinancing your auto loan will spare you the most if your score has gone up since you previously took out your car loan. While a FICO score above 700 will get you the best car loan rates, car loan rates can change dramatically for individuals with poor, reasonable or average FICO ratings – it pays to search around!
2) Know Your Current Loan
Making sure the terms of your current loan allow you to draw out the foundational paperwork you received when you originally financed the vehicle. It’s critical to understand all the terms of your existing loan before you start shopping around for better loans.
Terms you need to know include but are not limited to:
- Loan term length
- Current loan interest rate is
- Your minimum monthly payment
- Your remaining balance on your loan
Understanding the big picture of your existing loan will make it certainly less complicated for you to decide if a new loan would be worth the effort, you’ll be applying to receive it.
Finding Lenders for Your Car Loan Finance
If you reviewed your credit and terms of your current loan and are still considering to refinance your car, the next thing you need to do is compare competing offers from different lenders. You have to make sure you qualify for all the offers you’re comparing; otherwise, the comparison will be worthless.
Your current lender
Your current lender can also have a new offer that you might like. Tell them you’re interested in refinancing your car and check out any new offers they have for you. If you’re responsible, they’ll probably want to keep you around as a customer, so they should most likely offer you some better terms.
Local banks or credit unions
Other lenders with competitive rates and fees are worth a look, a local bank or a small credit union is usually a great option. Those specific institutions tend to offer lower rates than the rest, they may also be way more flexible about loan size and credit issues.
Online lenders (trusted ones) are usually one of the best, if not the best, source. You can research and apply for your loan whenever and wherever you want. They also have ridiculously low rates, if you do your research beforehand.
When you find a loan that works for you, make sure you are conscious for any service fee or any early payment penalties that you’re not used to. If you’ve set your mind on a specific offer, the next thing you have to do is submit your loan applications. You’ll need necessary information like employment status and income, information about your vehicle like mileage and model, and information about your current loan like your balance.
If you manage to get approved, the new lender will pay off your existing car loan, and the refinancing plan will be complete. The final step is to transfer the car’s title to the new lender. At this point, all you have to do is continue making car payments to keep your credit score healthy.
Car Loan Refinancing in a Nutshell
If your interest rate is way too high, or your monthly payments are too much, refinancing your car is a great option that could save you money in the long-term. If you have reasonable credit your current loan terms allow you to refinance, check new offers from your current lender and shop around until you find the most tailored proposal for your needs. You’ll never know if you can get a better deal until you do the research. It might require some effort, but you might end up with a lower interest loan.