Paycheck Chronicles

How To Refinance A Car Loan

How To Refinance A CarWhile I'm not in favor of car loans, I understand that sometimes they are necessary.  If you must take out a loan to buy a car, you want to make sure that you are getting the best possible interest rate and terms.  If you didn't shop around before you took out your loan, you may be paying more than you need to pay.  Refinancing can lower your payment, make the repayment time shorter, or both, depending on your details.  And refinancing a car loan is very easy!

I have refinanced two car loans, and one time I was able to get the lender to lower my interest rate just by telling them I was going to refinance with someone else.  I saved hundreds of dollars in interest.  Interest rates are very low right now - there's a good chance you might be able to save by refinancing.

Know What You Owe

You need to know about your current loan to know if refinancing makes sense for you.  You need to know the current balance, the interest rate, the monthly payment, and any special information.  Special information might include whether your loan has a prepayment penalty (most loans don't) or whether your loan has gap insurance included or added to the loan.  If you don't have this information available, you may need to call your lender to find out.  Write it all down.

Go Shopping For A New Loan

Check with two, three or four reputable banks or credit unions to find out what they are offering for car refinancing.  I have refinanced with Navy Federal Credit Union or USAA Federal Savings Bank, but there are plenty of other good choices out there.  Pentagon Federal Credit Union has great rates!

You will almost always find the best rates with a credit union, though some military-friendly banks like USAA may have competitive offers.  Please shop around!

Compare The Offers

Once you have picked a few financial institutions, call them to ask questions.  Write this all down - it is easy to get confused with all the details.  A few questions to ask:
  1. Will I qualify for the rate listed on your website?  Are there any rate discounts available, such as automatic payments?
  2. Does my car qualify as new, late model used, or regular used?  Is there a different rate for refinances?  Different banks and credit unions have different definitions.
  3. Are you offering any promotional deals right now?  For example, Navy Federal Credit Union is currently offering a $200 bonus to refinance your car from a different lender.
  4. Do you permit financed vehicles to be taken out of the United States?  This is important if there is any chance that you might get orders overseas while you still have a car loan.  Some lenders do not permit financed cars to be moved.  An international move is enough work without dealing with a difficult lender.
  5. Are there any fees or costs associated with the refinance?  You will have to pay to have the title re-issued, as titles list lienholders and you are changing the person who holds the lien.  Title changes typically cost $10 to $50, depending on the state in which your vehicle is titled.

Decide If Refinancing Is Right For You

Compare the terms of a refinance with the terms of your current loan.  Can you get a lower interest rate?  Will you lower your payment or go for a shorter term? There are myriad online calculators that can help you figure this out.

If you currently have gap insurance, consider whether this is still necessary.  GAP insurance is designed to cover the amount between your car's value and the amount of the loan.  Hopefully you can pay off your car to the point where GAP insurance is no longer necessary.  This may lower your costs, too.

Sometimes, especially with lower balances or shorter terms, a refinance will only save a small amount of money.  Is the small amount of energy, and cost of re-titling worth it?

Start With Your Current Lender

If you've found a great refinance deal, call your current lender and ask them to match the offer from the new bank or credit union.  This doesn't often work, but it is worth a 5 minute phone call.  You'll save the time and re-titling fee if you can get your current lender to just lower your rate.  They may not give you the option of whether you would like a lower payment or a shorter term, so decide whether this is important to you before you call.

Go To The New Lender

If your current lender isn't interested in helping you, call the bank or credit union that has the best offer.  If your credit is good, you should get an answer very quickly, sometimes even while you are still on the phone.  Be sure to ask for any discounts or bonuses available.  Once you are approved, you will either need to go to the bank or credit union to sign the papers, or have them sent to you for signatures.

Hold On To Your Paperwork

Once the old loan is paid off, you should receive a release of lien from the previous lender.  Hold on to this; it's a pain to track down a paid off loan years later, and errors do occur.

While it may seem like there are a lot of steps, they are not hard and pretty fast.  The whole thing should take less than a few hours, and sometimes takes only a few minutes.  Lowering your interest rate or shortening your term will save you money, and that is always a good thing.

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