If your auto loan seems unfavorable after a while, all is not lost—you can still lower your remaining payments.
When you take out a loan to buy a car, you agree to make repayments at a specific interest rate. However, if you have the opportunity to swap that loan for one with a lower interest rate, you’ll end up making lower monthly payments, which could save you money in the long run. Once you decide to refinance your auto loan, you'll need to prepare just like you did when you applied for your initial loan, and if you want the best rates, you'll need to get your finances in order to earn the best credit score possible. Read on for tips to help you refinance your auto loan.
How Refinancing Works
When you refinance an auto loan, your goal is to get a new loan with a lower interest rate to replace your old loan.
Just like with your original auto loan, when you refinance, the interest rate you pay is based largely on your credit score. All other things being equal, the higher your credit score, the lower your interest rate is likely to be. If your credit score has improved since you originally got your loan, you're likely to get a lower rate. Even if you have the same credit score as when you took out your original loan, you could qualify for a lower rate if market interest rates have fallen since you took out your loan.
The Refinancing Process
Think of refinancing as simply applying for a new loan. You’ll need to provide anything that will show the bank that you’re a low-risk borrower. Start by gathering together your pay stubs or other proof of your income, and prepare to grant permission for the lender to check your credit. Information about your current loan, such as the monthly payment and remaining balance, will also be required, along with information about the car itself, such as the VIN, mileage, make and model. While good financials might get you into a lower-rate loan, if your income and credit score are too low, you might not qualify for a refinancing at all. If this is the case, spend a couple months working on improving your credit score before you try to reapply for a refinancing loan.
Benefits & Considerations When Refinancing
The biggest benefit of refinancing an auto loan is saving money. If you’re able to reduce your interest rate even by the smallest of margins, you could save a substantial amount of money in the long run. For example, let's say the interest rate on your original 5-year loan is 4.5 percent and you’re able to reduce it to 3 percent by refinancing, dropping your monthly payment from $373 down to $359. While you might shrug your shoulders at a monthly savings of just $14, over the 5-year life of your loan, you'd end up saving about $840.
The biggest element to consider with refinancing your auto loan is that your lender might get you into a loan that actually ends up being more expensive for you. For example, a lender might offer a loan with a much lower monthly payment, but with a seven- or nine-year term, in which case you'll end up paying much more in the long run. Lenders might also try to tack on additional fees in the contract paperwork. Always ask what fees are involved and double-check your refinancing contract before you sign it.
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This article is intended to provide general information and shouldn't be considered legal, tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation.