How to refinance a car loan
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Most of us have heard of mortgage refinancing. But did you know that car loans can also be refinanced?
Not only is it possible to refinance a car loan, but it’s generally a much simpler process than a home loan refinance. Auto loan refinance will very rarely require an appraisal and there are usually no origination fees.
If your credit has improved since you took out your original loan, refinancing could save you a lot of money or allow you to remove a co-signer.
If you’re considering a car loan refinance, you may not know where to start. This step-by-step guide will show you how to refinance an auto loan.
1. Check your credit
To qualify for the best interest rates, you’ll need a good credit rating. A score above 660 is a good start, but aim for a score above 740 if you want the best rates.
Before you refinance your auto loan, you’ll want to check your credit score. You also want to make sure there are no errors on your credit report.
You can find your free credit report at annualcreditreport.com from any of the three major credit bureaus each week until April 20, 2022. Although this report does not give you your credit score, it will show you information on your credit and payment history. , which lenders use to decide whether or not to give you a loan. Reviewing your credit report can help you know what you need to improve.
You can get your score for free from your credit card statement or online account. You can also pay it at a credit reporting agency.
2. Estimate your car’s loan-to-value ratio
Due to depreciation, some car owners will find that they are “under water” on their car loans, which means they owe more on their car than it is worth. If you’re under water on your auto loan, you might have trouble qualifying for a refinance.
Start by taking a look at your last auto loan bill to see how much you still owe. Then use an online tool like Kelley Blue Book or Edmunds to estimate your car’s fair market value. If your car is worth more than you owe, refinancing may be a viable option.
3. Watch out for prepayment penalties
A prepayment penalty is a commission that some lenders charge if you repay your loan earlier than the agreed payment schedule.
Check your loan documents or call your lender to find out if there is a prepayment penalty on your loan. In most cases, there won’t be. But you’ll want to make sure before you go ahead.
4. Consider the time remaining on your loan
Where are you on your car loan repayment schedule? If you only have a year or two left, you might be better off sticking with your original loan.
You can reduce your monthly payments by extending your repayment period. But when you add the money you’ll pay in interest charges, you might end up paying more overall.
On the other hand, refinancing on a shorter repayment term might be a good idea, as you might get a lower interest rate with a shorter term. Your monthly payment will likely increase with a shorter term, but if you qualify for a better interest rate than you currently have, it may not increase as much as you think. You could actually save money overall.
5. Gather important documents
If you decide that refinancing your auto loan is right for you, you’ll want to start gathering the paperwork that lenders will need. Here are the types of documents you will likely need:
Once you have gathered the necessary documents, you are ready to start the loan search process.
6. Buy the best deal
It is important to receive quotes from several lenders. You can start by getting quotes from online lenders like LendingClub and CarsDirect, but you might want to check with smaller local banks and
as well as.
In general, you shouldn’t worry about multiple inquiries appearing on your credit report. In many cases, car loan lenders will use a soft inquiry to give you a rate quote and wait to do a thorough inquiry until you actually apply for a loan. A thorough investigation gives the lender a full view of your credit history, but can negatively affect your credit score.
Buy a new interest rate with LendingClub and see how much you can save »
Credit bureaus generally consider multiple difficult applications as one firm credit application, provided they occur within 14 days.
7. Apply for a new loan
Once you’ve found an auto loan refinance offer you like, you can continue to complete a formal application. If you are approved, your lender will repay your old loan and you will make payments to your new lender in the future.
Your car title will also need to be transferred to your new lender. In many cases, the lender will take care of this themselves.
You should receive documents from your new lender that include all of the terms and conditions of your new loan. Be sure to keep your loan documents in a safe and accessible place.
Although car loan refinancing isn’t for everyone, it can help you save money over the life of your loan by lowering your interest rate or shortening your repayment term.