Refinancing your auto loan can be an attractive option if it saves you money over the life of the loan or reduces your monthly payments.
There are a few scenarios where refinancing your car loan makes good financial sense:
You could be better off sticking with your original plan if your loan has an early termination fee or early payoff penalty.
Take a look at your credit scores. Late payments, using more than 30% of your available credit on revolving accounts, and having a lot of credit inquiries in the past two years could hurt your credit score. Making even small improvements to your credit file could help you get a lower interest rate on your new car loan, which may result in lower monthly payments. People with the highest credit scores generally receive the lowest rates. In 2018, the median credit score of auto loan borrowers at the time they took out a loan was 704.
If your credit utilization ratio is high and you can afford to pay down your credit card balances, do so before applying to refinance your car loan. Each time a lender asks for your credit score, it recalculates using the most recent information in your credit report. Since credit card companies report to credit bureaus once every 30 days, it could take a month or more to see an improvement in your score if you decide to pay down your card balances.
It may be possible to get a better deal with your current lender. Check with them first to see if you are eligible for an interest rate modification. This could decrease your payments immediately without the need for a new loan.
If your current lender canât offer a better interest rate on your current loan, itâs time to shop around for better terms. Your new lender will need some information from you to process your application for a car loan:
The documentation required to qualify and execute the loan depends on the bank, credit union, or online lender you choose. Pay particular attention to their requests to avoid processing delays.
You can compare rates online or visit lenders in person to fill out refinancing applications. Before you can compare new loan options, youâll need to fully understand the terms of your current loan.
Make sure you understand whether your current lender charges penalties for paying off your loan early. Figure those penalties into your calculations when deciding whether refinancing is in your best interests.
Verify the structure of your loan contract to understand whether you pay simple interest or pre-computed interest. Simple interest, calculated on the amount you owe, means the quicker you pay off the loan, the less interest youâll pay. Pre-computed interest is a fixed amount, calculated and added at the beginning of the contract. Even if you pay off the loan early, you still pay 100% of the interest. Auto loans are usually simple interest loans.
Understanding the structure of your current loan will help you compare your options as you seek to refinance the payoff amount. Choose terms that best fit your individual financial situation. Make sure potential lenders offer a low or no-fee simple interest loan with an interest rate lower than your current loan.
Upon approval, youâll receive loan details like the total amount, fees, interest rate, length of the loan, and monthly payment. Itâs up to you to decide whether the loan fits your budget and your financial goals.
When you decide to accept the terms of a loan, your new lender will pay off the previous loan. Keep your former lender informed about the situation so you can avoid late fees and penalties during the transition.
Fees. Unlike refinancing a mortgage, the fees to refinance an auto loan are typically modest. Lenders may not charge an application fee, and though you may have to pay a fee to transfer your car title with your county or state, those fees are typically less than $75.
Your new lender provides information to help you understand your payment options. Authorizing automatic payments from your bank account is the best way to avoid late fees and protect your credit rating. Late payments have a negative impact on your credit score, which could trigger interest rate increases on other accounts. You may also be eligible for a decreased interest rate or smaller loan fees if you agree to automatic payments.
Check with your former lender to verify that it closed the account. If you made monthly payments via automatic withdrawal, make sure to terminate that arrangement.
The Federal Reserve made the most significant increase to the federal funds rate in 10 years in September 2018. In January 2019, interest rates on new vehicle loans averaged 6.19% â this is the second-highest recorded rate in about a decade. In response to a federal funds rate increase, auto lenders often raise interest rates on car loans incrementally. More recently, the Fed decided to hold the federal funds rate at the previous level.
With generally higher auto loan rates, it may be more difficult to find a lower interest rate than your current loan. When you explore the option of refinancing your vehicle, make sure that you can secure better terms with a lower interest rate than your current loan.
While this may seem like great news, accepting a loan for more than your car is worth is known as being âupside downâ on your loan. If you can afford to make extra payments to reduce the amount you owe, do so. Owing more money on your vehicle than itâs worth could make it difficult to purchase a new car in the future.
Before accepting a loan offer, look carefully at the terms. Watch out for excessive loan origination fees and early payoff penalties. Take note of late payment penalties. Look for information about whether thereâs a grace period after the monthly due date during which you wonât get charged a fee.
Ask questions about anything that isnât clear in the paperwork. This document represents a legal commitment, so itâs crucial to avoid surprises and verify that the loan includes the terms you want most.
Refinancing an auto loan isnât for everyone. If you can secure a new loan with a lower interest rate or a payment that fits more easily into your budget, refinancing could be the best way to reach your financial goals. Here are four good places to look for auto refinancing in 2019.
LendingTree is our parent company. LendingTree is unique in that they allow you to compare multiple, auto loan offers within minutes. Everything is done online. LendingTree is not a lender, but their service connects you with up to five offers from auto loan lenders based on your creditworthiness.
By clicking âSee Offersâ youâll be directed to our parent company, LendingTree. You may or may not be matched with the specific lender you clicked on, but up to five different lenders based on your creditworthiness.