Refinancing debt is a great way to adjust your budget to accommodate the monthly payments. To refinance your car loan means replacing the old loan with a new one so that you have a lower interest rate and lower monthly payments.
In addition to extending the length of the loan term, it helps you improve your cash flow and save a significant amount in the long run.
Read on to know what considerations to make before refinancing and how to go about it step by step.
Factors to Consider Before Refinancing Your Car Loan
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Your Current Credit Score
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It’s best to have a good credit score to qualify for better rates on the new loan. Your payment history is an essential determinant of your credit score. Ensure you confirm your credit score and go through your credit report to ensure all the information is correct.
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Your Car’s Loan-to-value Ratio
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Your car’s value depreciates over time. If your outstanding loan balance is high, the debt may be more than the car is worth. This poses a challenge when trying to qualify for refinancing.
To avoid any surprises, find out how much of the loan amount remains, then use an online calculator such as Kelley Blue Book to approximate the car’s current market value.
If the outstanding amount is less than the car’s value, you can proceed with refinancing. If it’s more than the car’s value, it’s better to build some equity first by improving your credit score before you refinance your car loan.
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Prepayment Penalties on the Original Loan
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Some lenders charge you for paying off the loan before the loan term is complete. Check your documents or call your provider to confirm.
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Time Remaining on the Existing Loan Term
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Although extending the loan term reduces the monthly payments, it increases the total interest you’ll pay. You can choose to refinance your car loan at a shorter time, with a lower interest rate than the longer terms.
The monthly payments may slightly increase, but you’ll save on the total interest. If your loan term has one or two years remaining, consider continuing with payments on your existing loan.
How to Refinance Your Car Loan
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Collect Documents
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Some information and documents that you’ll need for the refinancing process include:
Personal Information
You’ll need your Social Security number, driver’s license, documents to show your monthly expenses, rent or mortgage payments, and previous addresses.
Proof of Income
Most lenders ask for your paycheck stubs, tax returns, and employment history from the last two or three years.
Proof of Auto Insurance
Ensure you have an insurance card or any supporting documents.
Details of your Existing Loan
Have documents that show the outstanding amount, details of the lender, current monthly payments and interest rate, and the remaining loan term.
Vehicle Information
Ensure you know the Vehicle Identification Number (VIN), make and model, year, and mileage.
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Evaluate Your Credit
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The new loan is similar to the old one in that your credit score plays a significant role in determining the new interest rate. Higher credit scores translate to lower interest rates.
Therefore, if your score has some improvements, you’re likely to qualify for lower rates than the original loan. For the best rates, take a look at the RBFCU refinance auto loan rates.
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Apply
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The only way you can be sure that you’re getting the best deal possible is by comparing interest rates and loan terms from several lenders. Keep in mind that some lenders have limitations on the acceptable duration that you need to pay off the original loan before you can refinance your car loan.
Although the application process is free of charge, it’s essential to note that the lender must verify the information. It counts as a hard inquiry and will lower your credit score by some points.
It is therefore advisable to submit all the applications within 14 days. If there are similar queries on your credit report within this period, they will all get considered one, which means your credit score will only drop once.
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Run the Numbers
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It’s easy to estimate your monthly payments on the new loan using an online auto loan refinance calculator. The first step is filling in the details of your existing loan on the calculator. These include the loan amount, current interest rate, and loan term in months.
You’ll then fill in the outstanding balance on your loan and the remaining months on the loan term.
The next step is filling in your desired loan term in months and the interest rate to expect. You’ll see the new monthly payment amount, the monthly and total savings over the loan’s term.
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Evaluate Loan Terms
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If you’d like to proceed with refinancing, you can choose to retain the loan term, get a new shorter term, or extend the period to a longer one.
With a shorter term, you’ll be able to pay off the loan faster. You can negotiate to maintain the monthly payment amount or get a slight increment, but the loan term will still be shorter. It’s a great way to avoid paying higher total interest over the loan term.
If you decide to extend the loan term, you will have lower monthly payments. It’s the right move if you’d like some wiggle room in your budget or you’d like to improve your cash flow.
A longer loan term translates to lower monthly payments, but the loan’s total interest will be higher in the long run.
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Complete the Process
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With all the appropriate documents, completing the application process is easy. You’ll need to fill an application form and present the documents to the lender.
If you get the approval, the lender will provide a document that shows the new loan’s terms, such as the monthly payments and payment methods.
The lender then proceeds to pay off the old loan so that the new monthly payments go to them. They are also responsible for transferring the car title from the previous lender.
Frequently Asked Questions
Can You Remove a Cosigner From a Car Loan?
Yes, you can choose to refinance your car loan to remove cosigners. It’s the easiest way to remove a cosigner since the new loan will only be between you and the new lender. The new loan will have different terms that don’t include the cosigner if you’re refinancing through the same lender.
How Many Times Am I Allowed to Refinance My Car Loan?
There’s really no limit on the number of times you can refinance your car loan. However, it’s not the best idea to frequently refinance your car loan, as it hurts your credit score. The more you refinance, the more difficult it becomes to find favorable terms and rates.
Can I Refinance an Auto Loan Over 100k Miles?
Yes, it’s possible to refinance your car loan with over 100K mileage. The challenge is finding a lender who has a high mileage threshold. If you do get one, you can expect to get higher interest rates compared to newer cars.
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