How to Refinance a Car Loan

Refinancing a car loan replaces your current loan repayment terms with new ones that are more manageable for your situation. It isn’t exclusive to people who can’t make their next payment. In many circumstances, a borrower will refinance their loan to save money on interest or to acquire a lower monthly payment. Let’s go over how to refinance a car loan, including finding the best deal, with this VW of Marion guide.

How To Refinance Your Car Loan

“Sign here” used with permission via Unsplash by Scott Graham

Just like getting pre-qualified for an auto loan, refinancing an auto loan you already have is relatively straightforward. The three main steps are to get your documents in order, get approved, and then choose a loan from the lenders who approved you. It’s important to qualify for and compare offers from multiple lenders because some might have hidden fees.

What Documents Do You Need To Refinance a Car Loan?

To apply for car loan refinancing, you must provide information about your current car loan and the vehicle. You’ll also need to supply your legal name, address, Social Security Number, proof of employment, and proof of insurance.

Regarding insurance proof, a membership card is often enough. Some lenders will be more specific, such as wanting verification for a particular level or type of coverage.

How To Get Approved for Auto Loan Refinancing

You can apply for auto loan refinancing with a bank, online lending companies, or local and national credit unions. The application process will require the lender to evaluate the vehicle and all your information, so expect a waiting period of 10-15 days.

Every lender will be different, and so will their terms. Try shopping around and see if there are any special circumstances, such as being a college graduate, that could earn you a bonus with one company.

How To Get Better Interest Rates for Refinancing a Car Loan

You can find better interest rates by considering other factors of a loan that have wiggle room. For example, you might find a refinanced loan with a lower interest rate, which then rises after a few years.

Most advice on getting better interest rates on anything comes down to improving your credit score. Beyond the obvious like making payments on time, try to utilize 25% of your available credit or less. It helps to request credit limit increases on any cards, which would then lower your credit utilization ratio.

How To Calculate Monthly Payments on a Refinanced Auto Loan

Calculating a new potential monthly payment, and how much you’ll save on the new loan, is quite easy. Online calculators will let you input the current monthly payment and remaining balance on your auto loan. Then, you insert the interest rate and loan terms of your current loan and the refinancing loan, respectively. Calculators like this will be able to tell you what your new monthly payment would be if you switched, as well as the monthly savings and total amount saved on interest over the entire payment.

Does Applying for Auto Loan Refinancing Lower Your Credit Score?

When you apply for an auto loan refinancing, it will appear on your credit report instantly and will count as a hard inquiry. Most credit score reductions resulting from auto loan refinancing applications last for about one year. Because a hard inquiry may result in a five-point decline in your credit score, repeat car loan refinancing applications will have ramifications for your credit.

If you submit all of your applications within 14 to 45 days of each other, they should be counted as a single inquiry. Staying in that window will help ensure your applications are all counted as a single inquiry, resulting in a minimal impact on your credit score.

Approved for Car Loan Refinancing: What’s Next?

Once you’ve been authorized by numerous lenders, thoroughly examine their various offers. The annual percentage rate, or APR, and total interest paid throughout the life of the loan are the most crucial factors. Find a combination of payment, interest, and other factors that work for you. An offer may look just right, but be certain you’ve factored in any additional fees the lender will charge. Be cautious about lenders who have early repayment penalties.

Longer-term loans often feature higher interest rates and smaller monthly payments. A shorter-term loan will have greater monthly payments and a lower interest rate. Examine your budget, consider future life goals, and determine what you can afford in the long and short  term.

After you choose a refinancing offer and sign the paperwork, the new lender will transfer the current loan, and you’ll begin making payments under the new terms. It’s also critical not to get behind on your auto payments during this transition period.

Should You Refinance Your Car Loan?

The majority of borrowers will refinance their auto loan if the opportunity allows them to pay less interest. When you refinance a vehicle loan to a cheaper interest rate, you can save hundreds or even thousands of dollars during the loan’s term. Other people might be refinancing for a smaller monthly payment, freeing up funds for other purposes.

A reduced payment will also lower your debt-to-income (DTI) ratio, which is calculated by dividing your monthly debt payments by your monthly gross income. A low DTI may also help you qualify for a better interest rate if you plan to apply for a mortgage someday.

Some borrowers, on the other hand, opt to refinance their auto loan to a shorter term to return the debt faster. You may also refinance a car loan to a longer-term, which can provide you some monetary cushioning in case of emergency expenses. Another reason for refinancing is if you originally obtained the auto loan with a co-signer and now wish to remove them from the loan. Whatever the reason, if it gets you a better auto loan, refinancing is probably worth it.

Getting new terms for a car loan allows someone to save money or accommodate a change in circumstances. Even if you’ve recently taken out a loan, refinancing now may save you money and strengthen your credit over time. Contact VW of Marion’s financing department to find out if you might be well-suited to a refinanced auto loan.