How to Refinance Your Car Loan | 6 Tips to Make It Easy
- February 17, 2021
- 6 min read
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Are you considering refinancing your car loan? There are many benefits to doing so, such as saving you a substantial amount of money each month. But what is the best way to go about getting a better monthly payment on your auto loan? We’re here to help.
Today, we’re going to share some helpful tips that will speed up the process and make things go smoothly. Fortunately, you can typically apply for refinancing in less than an hour. And when you follow these steps, you can ensure a faster loan response.
Before we get started, let’s take a moment to explore the pros of refinancing your car loan and how it can benefit you.
Why You Might Want to Refinance
When you refinance your auto loan, you stand to potentially save money every month on your loan payment. Refinancing your loan means getting a new loan in its place, which you will begin paying off just like your previous loan.
Lower Interest Rate
The big savings come in the form of lower interest rates, which lessen your monthly financial burden while giving you greater financial freedom. Even if the difference is negligible, your monthly savings could add up to a big payoff by the end of your loan term.
In the event that you are unable to secure a better loan, you might want to consider taking on a new loan that comes with a longer term. You’ll be paying off your car loan longer, but your monthly payments will be lower as a result.
Just keep in mind that this could increase your total interest fees over the life of your auto loan. But if you’re finding that you’re having difficulty making your current monthly payments, this could help you get back on track and live comfortably.
Changing Interest Rates
Another reason why you might want to refinance your car loan is due to changing interest rates. This often happens, with interest rates dropping since you first took out your car loan. It’s always a good idea to keep an eye on interest rates after you receive your loan. Although the difference is often minimal, it adds up over time.
Some borrowers experience improved finances after getting their car loan. Since lenders look at your monthly income to determine your loan payments, you might get a better rate if you are now making more money every month.
Please note that you always want to make sure that your lender allows you to pay off your loan early. Some loan entities penalize you for doing so in the form of a fee. As such, you don’t want to proceed with refinancing your auto loan until you are sure that you can without getting charged.
Now that you know when it makes sense to refinance, let’s talk about the application process and what you can do to make it go smoothly.
6 Tips to Refinance Your Car Loan
1. Gather Documents
You’re going to need to have certain documentation handy before you apply. For starters, find one of the most recent receipts from your car loan payments. Examine it to ensure that you know what your current monthly obligation is, as well as how much is left to pay.
You’ll also need to know your loan term, which is how much time is left to pay off your car loan. Next, check for your current interest rate so you’ll know how much extra you’re paying on your loan each month.
On the payment stub should be a phone number that you can call to reach your lender’s customer service if you have any questions.
Find your original loan contract. It should tell you whether there are any prepayment penalties. In the event that you misplaced your contract, the lender’s customer service department can provide you with the above information or send you a copy.
Items You Will Need
- Current pay stubs or proof of employment
- Your VIN (Vehicle Identification Number)
- Social Security Number
- Driver’s license
2. Check Your Credit
If you’ve been on-time with your car loan payments for a year or more, there’s a good chance that your credit score has since improved. As such, there’s also a good chance you will benefit from refinancing your car loan.
You will also need to have kept your other financial commitments to improve your credit score. To be sure, you’ll want to check your credit report and look for any issues that could affect your ability to refinance.
You can get this on your own by taking advantage of the many free credit check programs online. The good thing about checking your credit is that it will not lower your score.
It’s always best to apply to multiple auto loan refinance companies, as this will allow you to compare interest rates and help you determine the best offer. Fortunately, the application process doesn’t cost you a dime, and you will soon be able to learn if you qualify for a lower interest rate.
Pro tip: Ensure that you submit all applications within 14 days. Since they will be seen as similar queries, they will typically get grouped as one. In doing so, you can expect a minimal drop in your credit score, usually around five points.
If you scatter your loan applications out several weeks apart, you could significantly reduce your credit score and negate your ability to successfully refinance your auto loan.
4. Calculate Your Numbers
A car loan refinance calculator is a handy tool. There are many free ones available online that you can use as often as you like. Once you’ve found one, begin by entering your current loan information, starting with the original loan amount.
Next, plug in your interest rate and the term of the loan using numbered months. After that, enter your loan’s remaining balance, as well as how many months are left before the loan is paid off.
Once that data is plugged in, you’re going to need to enter the number of months that you wish your new loan to be, plus the interest rate that you hope to get.
With this information, you will be presented with your new monthly payment. Hopefully, it is lower than what you are currently paying. The loan calculator should also display your new savings over the course of the new loan.
It’s a good idea to check your vehicle’s value using online services like Kelley Blue Book. If you determine that your car’s value is less than the balance of your loan, you might not be able to refinance your auto loan.
It’s also important to consider the time left on your current loan. If you are close to paying it off, it’s typically better to ride it out than to refinance.
5. Examine Your Loan Term
If you are able to refinance, you have the option of leaving your loan term unchanged. That said, you might want to consider the following options:
Pay off the Loan Sooner
If you often make payments of the same amount, you might be able to continue those same payments but with a shorter loan term. Doing this will save you money since you’ll be paying less interest over the course of the loan.
Extend Your Loan Term
If your financial situation has changed for the worse and you are having a hard time making your loan payments on time, you may want to extend your loan term. Doing this will lower your monthly payments, thus making it easier to fulfill your financial obligations.
But as we explained earlier, you’ll likely be paying more in interest in the long run. However, if it means the difference between meeting your payment arrangement and potentially losing your car, it’s better to pay the additional interest.
After you submit the new loan application, the lender you chose will send you loan paperwork. With this, you will be signing new loan documents so that a new loan can be created. You will also get new interest rates, as well as a new loan term.
Your lender will pay off your old loan, at which time you will start making payments to your lender. There is a fair amount of paperwork and other details involved, but it can usually be completed in just a few hours.
Refinancing your car loan is easy when you know how to approach the application process. We hope you found our tips helpful and encourage you to explore our other beneficial articles for more ways to improve your financial standing.
When you visit Seek Capital, you can learn more about credit scores, how to get a small business loan, the best auto refinancing loans, and much more.
If you have any questions, we invite you to reach out to us any time. We are always happy to lend a helping hand and look forward to serving you.
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