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If you’re one of many Americans wanting to refinance your car, we’ll walk you through the steps.
Refinancing your car includes several steps: shopping around, gathering the necessary documents, pre-qualifying, submitting an application, and finalizing the loan. If you’re one of the many people struggling to keep up with their car loan payments or you’re simply looking for a way to save money, you might be interested in refinancing your car.
In a recent report, RateGenius found that almost 20% of borrowers who refinanced their car loan via banks, credit unions, and other online options saved more than $150 on their monthly payments. And on average, each borrower reduced their old loan interest rate by half (from 14% to 7%). That’s some pretty big savings!
Read on to learn more about how to refinance a car, determine your potential eligibility, and whether or not it’s the right move for you.
In a nutshell, refinancing a car simply means taking out a new loan with better terms to pay off your existing loan. By refinancing, you can often get a lower interest rate, a lower monthly payment, and even a shorter loan term that could help you get out of debt sooner.
Though auto refinancing has many upsides, whether it’s the right decision for you will ultimately depend on your circumstances. So before taking the plunge and signing on the dotted line to lower your current monthly payment, make sure you understand what refinancing a car loan entails.
If your high car payment gives you anxiety or eats up a chunk of your monthly budget, you might want to consider refinancing. But how do you know if it’s the right move for you? Here are a few things to keep in mind:
Typically, the higher your credit score, the more willing lenders are to offer you a lower rate. If you’ve been working diligently to achieve a good credit score, refinancing your vehicle could save you hundreds and thousands of dollars over the life of the loan due to a more affordable interest rate.
But, if your credit score hasn’t budged since you took out the original car loan at the dealership — or, worse, if you now have legitimately bad credit — refinancing your vehicle might not result in much, if any, savings. Unless, of course, interest rates have dropped due to economic conditions or other factors.
If you’re unsure where you stand in terms of your credit health, get a copy of your credit report at annualcreditreport.com. Under the Fair Credit Reporting Act, you’re entitled to one free credit report annually from each of the three major credit bureaus. If you find errors on your credit report that are damaging your credit score, dispute them right away!
A prepayment penalty is a fee — typically around 2% of the outstanding loan amount — that your lender might charge you if you pay off your car loan early. You might be thinking, “Shouldn’t they reward me for paying off my debt in full and on time? Why are they punishing me with a hefty charge instead?”
Here’s the simple answer: Lenders can’t collect as much interest when you pay off your loan ahead of schedule. For this reason, many lenders impose prepayment penalties to compensate for the interest revenue they lose out on.
Apart from the prepayment penalty, there might also be other costs associated with auto loan refinancings, such as title transfer fees and application fees. So make sure you’re financially ready to cover these expenses before refinancing your vehicle.
If you only have a few months remaining on the total amount of your loan, it might not be worth the hassle of refinancing your car with a new financial institution — especially if your current lender charges a prepayment penalty. On the other hand, if you still have several years to go until you reach your payoff amount, refinancing your car loan could save you a significant chunk of change in interest charges over the life of the loan.
If you still aren’t sure whether it makes more financial sense to refinance or keep your current loan, use RateGenius’s auto refinance calculator to see how much money refinancing can save you.
Being upside down on your car loan means you owe more on your current loan than the car is worth. In other words, you have negative equity in your vehicle.
If you’re upside down, refinancing might not be the best option for you. And you might want to wait until you’ve paid down enough of the loan principal so that the remaining loan balance equals the car’s value. Otherwise, lenders might be reluctant to take you on because of your high risk.
And though some lenders might allow you to roll your current outstanding loan balance into your new one, it adds to your overall debt and can worsen your financial situation.
Wine, blue jeans, whiskey, and leather boots all get better with age. But it’s hard to say the same for cars. Vehicles are depreciating assets that tend to wear down after a few years — no matter how diligently you keep up with maintenance and repairs.
Of course, there are some exceptions. With the advent of modern technology and engineering, car models like Toyota Landcruiser SUVs can often reach 200,000 miles or more without breaking down.
But generally speaking, most auto lenders still limit vehicle age to 10 years and mileage to 100,000 or 150,000 on refinances. So, if you’re looking to refinance your 1997 Audi A4 Sedan that has racked up more than 150,000 miles, you might have difficulty finding a willing lender.
If this is your first time refinancing your vehicle, it can be overwhelming trying to figure out the steps to take. But don’t worry, it’s not too complicated! Once you’ve determined that refinancing makes sense for you, here’s everything you need to know:
Once you’ve decided that refinancing is the way to go, the next step is to shop around. There are many different lenders out there (such as banks, credit unions, and other online options), and it’s essential to compare rates and terms before choosing one. Using an online auto loan marketplace like RateGenius is an excellent way to compare efficiently.
After you’ve selected a few lenders you’re interested in, it’s time to gather the necessary documents. Here are examples of documents that lenders typically ask for:
Your lender might have some other documents they need you to submit, but this list is a good starting point.
A pre-qualification gives you an estimate of what terms and auto loan rates a lender is willing to offer you based on a soft credit pull — don’t worry, this won’t affect your credit score. By getting pre-qualified, you’ll have an idea of how much your monthly payment is before submitting a formal application.
If you’re ready to commit to working with a certain lender, submit your application! This part is pretty straightforward because most lenders have streamlined the online application process.
Remember that your credit score might take a hit when you submit your application since lenders will need to do a hard credit inquiry. But don’t worry. According to Equifax, this negative impact will eventually subside after one year.
If your auto refinance application is approved, congratulations! Now it’s time to transition to making payments to your new lender. But before doing so, reach out to your previous lender to confirm that your original loan has been paid in full. If not, wait until everything is finalized before you stop making payments on your current auto loan.
Depending on the lender and whether you need to submit additional documents, the auto loan refinance process can take anywhere from 2 to 15 business days. To avoid unnecessary delays, turn in the requested documents on time and respond to your lender’s follow-up questions. Missing information in loan applications can drag out the process even longer, so be sure to carefully review your application before submitting it.
Whether you choose to refinance with the same lender or work with a new one, make sure to do your due diligence and compare rates before making a final decision.
Taking your time to understand all of your options can help you avoid predatory car loans and get the best deal possible. And if your application is denied, don’t despair! Figure out why you were rejected and take steps toward increasing your approval odds next time.
Also, it’s crucial that you understand disclosures when refinancing an auto loan. Disclosures are documents provided by the lender that outline all the terms, conditions, fees, and interest rates associated with your loan. They are designed to protect you and your personal finances by ensuring you have all necessary information before agreeing to the loan terms. By carefully reviewing and understanding disclosures, you can make an informed decision about refinancing your car loan, ensuring it aligns with your financial goals and offers the best terms possible.
In general, you cannot directly refinance an auto loan with a credit card. However, there are some ways you might indirectly use a credit card to pay off an auto loan, like via a balance transfer, personal loan, cash advance, or by using credit card rewards like cashback, for example.
It’s important to carefully consider the terms, fees, and interest rates associated with any method of using a credit card to pay off an auto loan. Additionally, be aware that using a credit card to pay off a significant amount of debt can impact your credit score and financial stability. It’s always a good idea to compare options and consult with a financial advisor before making any decisions about refinancing or using credit cards for loan payments.
Are you ready to compare rates or apply to refinance your car loan? It only takes a few minutes to apply with RateGenius and we offer a vast network of lenders for a range of qualifying rates and payments. We’ll compare all the loan offers and find the right loan that fits all your needs and financial goals.
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