How to Refinance Your Car Loan | Auto Loans and Advice News2america

Refinancing an auto loan can help you lower your interest rate, reduce your monthly payments or even allow you to tap into the equity of your vehicle. And unlike a mortgage refinance, refinancing a car loan is inexpensive.

If your credit score has improved since you first took out your auto loan, interest rates have gone down, or you believe refinancing could improve your financial situation, here’s what you need to know.

Credit Score Interest Rate
750+ 7.19%
700-749 7.97%
600-699 9.84%
451-599 12.57%

These rates were provided through The Average Auto Loan Refinance Rates shown above reflect the average annual percentage rates (APR) of auto loan refinance offers received by consumers on Engine by MoneyLion marketplace. These rates are based on an average requested loan amount of $20,000, with a 48-month loan term, and the consumer’s credit rating. Actual rates across the entire auto loan refinance market will vary based on loan amount, loan term, consumer’s credit rating, and lender.

How to Refinance a Car Loan

Refinancing an auto loan is a straightforward process. Here are the steps you’ll take.

Review Your Current Loan

Take a look at your loan balance, monthly payment and interest rate to see where you stand. Compare what you see to current auto loan interest rates to get an idea of whether your rate is high.

You’ll also want to check your loan agreement to see if there’s a prepayment penalty, which may kick in if you pay off the loan too early – and that includes payoffs through refinancing.

Check Your Credit

Check your credit score and credit reports to get an idea of your overall credit health. Has your credit improved since you first took out the loan? It is possible that you’ll be able to secure a lower rate. Even if your credit has remained the same, refinancing could still make sense.

If your credit score has decreased, your odds of obtaining more favorable credit terms are low.

Shop Around

You can refinance your car loan with your existing lender, but before you do so, take some time to compare terms from several top auto lenders. Look at things like interest rates, terms and eligibility criteria.

While one lender may offer a better interest rate, it may have vehicle age or mileage restrictions or shorter repayment terms than you’re comfortable with.

Some lenders have preapproval tools that can provide you with quotes after just a soft credit check, which won’t impact your credit score. Others, however, may require you to submit an official application to get an offer.

Choose a Lender and Apply

Once you’ve decided which lender is best for you, submit an application. You’ll typically need to provide several pieces of information and documentation during the process, including:

  • Your current lender’s information.
  • A 10-day payoff amount.
  • Your personal information, including your name, date of birth, Social Security number, address and contact information.
  • Employment and income information and documentation.
  • The car’s vehicle identification number, make, model, year and mileage.
  • Evidence of insurance coverage.

After you submit the application, the lender will use a guide like the National Automobile Dealers Association book to assess the vehicle’s value. It’ll also run a credit check and review the vehicle details to determine whether you qualify and what your interest rate will be.

Accept the Offer

If the lender approves your application, it’ll provide you with the offer details, including a rate, monthly payment, repayment term and other important information.

Note that a car refinance typically doesn’t include closing costs, which are standard for mortgage refinance loans. “Refinancing with someone else or your same lender can be an easy process and, in most cases, lower your monthly payment, helping you save money,” says Zander Cook, chief operating officer and co-founder of Lease End, a company that helps drivers buy out or refinance their leases. “Combine this perk with a lack of closing costs, and you may be saving more.”

If you agree to the terms, sign the offer and return it to the lender. You may be able to complete the process online, though you may need to speak with a loan officer over the phone or in person at some point.

From start to finish, refinancing an auto loan typically takes between one and two weeks.

Reasons to Refinance Your Auto Loan

There are a few reasons why you might consider refinancing a car loan, including:

  • Lower interest rate. If interest rates have gone down in general, you may be able to secure a lower rate even if your credit score has remained the same. “If your financial standing has improved since taking your loan, you could take advantage of better interest rates for even greater savings,” says Cook.
  • Lower monthly payment. A lower interest rate can naturally reduce the loan’s monthly payment, but you could also get a lower payment by extending your repayment term. “It may be beneficial to extend the term to secure a lower monthly payment and create additional disposable income to pay other monthly bills,” says Benita Pender, consumer lending manager at Tropical Financial Credit Union. Keep in mind, though, that extending your term may result in more interest charges over the life of your loan.
  • Shorter repayment term. If you want to pay off your loan faster and can afford a higher monthly payment, refinancing with a shorter repayment period can help you accomplish your goal. What’s more, opting for a shorter term can improve your chances of getting a lower interest rate.
  • Tap your equity. Some lenders allow car owners to get a cash-out refinance loan, allowing them to access some or all of the equity they have in their car. Just be aware that doing this could make you go upside down on your loan, especially if you borrow more than the car is worth.

If you’re thinking about refinancing your car loan, think carefully about your reasoning to ensure that the new loan makes sense.

Reasons to Skip Refinancing Your Auto Loan

While refinancing a car loan can provide long-term benefits for some car owners, it may not be the right fit for everyone. Here are some situations where it may not make sense:

  • Your credit score has declined. If your credit is in worse condition than it was when you got your current loan, your chances of saving money with a lower interest rate may be low, even if interest rates have gone down in the meantime.
  • You’ll have to pay a prepayment penalty. Prepayment penalties can average 2% of the remaining loan balance. The average auto loan balance was $20,987 in 2021, according to Experian, which would translate to a penalty of roughly $420. Depending on how much you can save over time with your new loan, it may not be worth the upfront cost.
  • Your car is almost paid off. Refinance lenders have a minimum loan amount they’ll issue. Depending on your current balance, you may not be able to meet the minimum loan amount for the lenders you’re considering. Even if you do, if you can pay off the loan in the next year or two, extending that term to three or more years may cost you far more in the long run.
  • You’re upside down. If you have negative equity in your car, you may have a hard time finding a lender willing to refinance your existing loan. If one does, the interest rate may be too high to make the process worth it. 

What Comes Next?

Now that you know how to refinance your car loan, review your situation and your financial goals and consider how an auto loan refinance can help. Take your time to assess your credit situation and your options, and don’t be afraid to back out if you decide that it’s not the right move for you.

If now isn’t the right time, continue to evaluate your auto loan regularly to avoid missing out on better terms in the future. “Given the state of the economy, it is always in the best interest of a member to look for ways to lower their monthly obligations,” says Pender. “Due to the ebb and flow of the economy, a six-month interval would be suggested.”

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