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, then you’ll end up making lower monthly payments, which could save you money in the long run. Once you decide to refinance, you'll need to prepare just like you did when you applied for your initial loan. If you want the best rates, then you'll need to get your finances in order to earn the best credit score possible. Read on for tips on how to refinance your car loan.
How Refinancing Works
When you refinance, your goal is to get a new loan with a lower interest rate to replace your old loan.
Just like with your original car loan, when you explore how to refinance a car loan, 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, then you're likely to get a lower rate. Even if you have the same credit score as when you took out your original loan, then you could qualify for a lower rate if market interest rates have fallen in the interim.
The Refinancing Process
Think of refinancing as simply applying for a new loan. You’ll need to provide anything that will show the financial institution that you’re a low-risk borrower. Start by gathering your pay stubs or other proof of income. 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 solid 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 learning how to refinance a car loan is saving money. If you’re able to reduce your interest rate even by the smallest of margins, then 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 through refinancing. Your monthly payment has dropped from $373 to $359. You might shrug your shoulders at a monthly savings of just $14, but you'd end up saving about $840 over the 5-year life of your loan. The biggest element to consider is that your lender might get you into a more costly loan. For example, a lender might offer a loan with a much lower monthly payment, but with a seven- or nine-year term. You'd 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 signing it.
If you’ve wondered about how to refinance a car loan, then click here to learn about Navy Federal Credit Union’s refinancing program. With low rates and low monthly payments, you’ll find it’s easy to apply for your auto loan. Click here to apply online through Navy Federal for your auto loan refinancing today.