Pay Off Your Old Loan
Your next step is to ensure that your old loan is fully paid off with your new one.
Honestly, theres no better way to achieve this than to simply reach out to your two lenders to ask how theyd like to handle the payoff.
These days, its common for lenders to pay each other directly. This is a great option for you since it removes a step and absolves you of any transaction-related fees that might arise if you were the payor.
Now, before ending payments on your old loan, youll want to get super, ultra, 100% written confirmation that your old loan is fully paid off. The reason being, you dont want to botch the landing, miss a payment, and ding your credit score. Pester your lenders via online chat if you have to, but make sure that the old loan is paid off!
Once your old loan is paid off, lets tie a bow around this whole process with what may be the quickest, yet most important step of all.
Evaluate Your Cars Loan
Next, figure out if youre upside down on your loan. This means you owe more than the cars value. If thats the case, you wont be able to refinance.
You can get the fair market value of your car using Kelley Blue Book, which is what most lenders use too.
If you dont owe more than the car is worth and you have decent equity in it, youll have a higher chance of securing the loan.
Should You Refinance Your Car Loan
Look at the big picture and see what you have to gain from refinancing your car loan. Will you save money? Did your credit score improve?
If you decide refinancing is right, shop around for the best deal. Using an online auto loan refinance marketplace is the easiest way. Here are a few worth considering:
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When Can You Refinance
You do not need to wait any minimum amount of time before refinancing your car loan. You just have to meet all the requirements for the new loan to refinance. Refinancing is possible immediately after buyingeven before you make your first monthly payment. Just be sure that you actually end up with a better deal, and that refinancing doesnt cause you to pay more for your vehicle.
In some cases, you may be unable to refinance until you have documentation from your states Division of Motor Vehicles . Gathering registration details may slow you down somewhat.
Your Credit Score Improves
Your score not only could determine the interest rate on your car loan it may impact the premium you pay for auto insurance and what other fees your lender might charge. If your current credit score is higher than it was when you bought your car, refinancing could be a good option. Ask your lender to consider giving you a lower rate.
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What You Need To Refinance
To refinance an existing loan, you need the following :
Decide If Refinancing Your Car Loan Makes Sense
Refinancing doesnt always make sense. If youll extend the term and the interest rate is only slightly lower, for example, youll pay more over the life of the loan.
Make sure you can afford a shorter term and that youll get a lower interest rate. Next, look at the fees. Is there a prepayment penalty? What does the lender charge for you to refinance? Figure that into the total loan cost.
Finally, look at the bottom line. Whats the total cost of interest over the loan term plus fees? Is it less than whats left on your existing loan?
If not, or theres not much of a difference, it may not make sense to refinance.
If it does make sense, move onto step 2!
#2. Collect Necessary Documents
To refinance your car loan, you must identify who you are and that you can afford the loan. Just like when you bought the car, youll need:
Personal Information
You must provide information about your identification, including your Social Security number and birthdate. Most lenders also want a copy of your drivers license.
Proof of Income
To prove you can afford the loan, you must provide proof of income with paystubs .
Current Auto Loan Information
Get as much information on your current loan as possible, including the interest rate, outstanding balance, and bank name for the new lender.
Vehicle Information
Proof of Auto Insurance
No bank will lend you money without proof of auto insurance. You must prove you have current and valid insurance before theyll fund the loan.
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Applying For An Auto Loan
“When you don’t have the cash on hand to pay for a new car, a car loan can help you buy itwhether the vehicle is new or used,” explains Joyce. “When you get an auto loan, you borrow money from a lender to buy a car. You agree to pay back the funds over a set period of time, plus any fees and interest you accrue.” Like refinancing your mortgage, refinancing your auto loan involves signing a new loan to cover the cost of your existing auto loan. Joyce says that most refinanced auto loans are held by the car and then paid off in a predetermined timeframe with a fixed monthly payment, which typically spans over the course of few years.
Like any major financial investment, doing your homework before picking a new loan is smart. By shopping for quotes as a car owner, you’re accounting for fees, interest, and down payments. Using a resource such as presents the best deals for your financial situation in addition to using an auto loan calculator which estimates your monthly payments as well as how much you’ll be able to borrow.
Why You Can Trust Bankrate
Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. Weve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next.
Bankrate follows a strict editorial policy, so you can trust that were putting your interests first. All of our content is authored by highly qualified professionals and edited by subject matter experts, who ensure everything we publish is objective, accurate and trustworthy.
Our loans reporters and editors focus on the points consumers care about most the different types of lending options, the best rates, the best lenders, how to pay off debt and more so you can feel confident when investing your money.
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How Much Does Refinancing My Car Cost
Theres no one-size-fits-all rule here. It will always depend on your specific plan and circumstances. If youre extending your loan term then youll pay more over time, even if youve bagged yourself a better interest rate.
How does this work? Say you have a year left to pay off your car, but you want to extend it to two. Even with a lower rate, youre paying interest for twice as long, so over time your repayment could add up to more.
However, the money you save month by month could benefit you in other ways you might be saving for a house deposit, with that extra money being an invaluable contribution and getting you onto the ladder faster. Instead of feeling the immediate pinch, you just pay it back for longer. Alternatively, if you get a good deal, it could cost you less.
Consider If Refinancing Makes Sense For You
Before you start the application process, it’s important to determine if refinancing is the right move for you right now. Here are some factors to consider:
- : To qualify for the best terms on the new loan, your credit history typically needs to be in great shape. If you’re not quite ready, consider waiting and improving your credit score first.
- Prepayment penalty: Some lenders will charge you a fee if you pay off your auto loan earlier than agreed. Check your loan terms to see if you have a prepayment penalty and how much it’ll cost you compared with the potential savings you expect to get from the new loan.
- Origination fee: Some lenders may charge an upfront fee when you refinance. This fee can vary from lender to lender, but it’s important to compare it with the potential savings to see if it’s worth the hassle.
- Length of repayment period: If your new repayment term is longer than your current one and you don’t necessarily need the lower payments, it may not be worth it simply because you may end up paying more in interest over the life of the loan.
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Shop For The Best Deal
With any type of loan, it’s important to get quotes from multiple lenders. You can start by getting quotes from online lenders like LendingClub and CarsDirect. But you may want to check with small local banks and as well.
In general, you shouldn’t worry about multiple inquiries showing up on your credit report. In many cases, auto loan lenders can use a soft inquiry to give you a rate quote and wait to perform a hard inquiry until you actually apply for a loan.
And even multiple hard pulls will usually be viewed as one hard credit inquiry as long as they take place within a 14-day span.
When Should You Refinance Your Car Loan
There are two main reasons that an auto loan refinance can be a smart financial move:
- If your credit score has improved, you can benefit from your improved financial standing with a refinanced loan at a lower interest rate.
- If youre feeling like youre stretching your monthly budget with your current payment, you can refinance your car loan to a longer term. By dividing your payments over an extended period of time, youll have a lower monthly bill that can lower your financial stress. But keep in mind that you might incur additional interest charges by extending your existing loan with four years remaining to, say, a five- or six-year loan.
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Pros & Cons Of Refinancing Your Auto Loan
When buying a car, many buyers accept the loan package they are offered at the dealership. Though convenient at the time, you may later come to regret the conditions of your auto loan once youve started making payments. Refinancing your auto loan is one way to get better terms and potentially reduce your interest rate and monthly payments, helping you save more money. An auto loan refinance involves taking out a new loan to pay off the balance of your existing loan, and transferring the title to the new lender. While refinancing your auto loan can improve your overall finances, it may not always be the right choice for you. There are a few things to consider before applying for an auto loan refinance.
Estimate The Value Of Your Car
The cost of your loan isnt the only factor to consider when thinking about whether to refinance. Youll also want to get a sense of what your car is worth.
If your car is newer with low mileage and a sizable balance that will still take years to pay off, you may be a good candidate to refinance. If its worth less than what you owe, you may be out of luck. If your vehicle is almost paid off, it makes less sense to refinance because interest will make up a small portion of your remaining payments.
You can use a resource like Kelley Blue Book to get an idea of what your car is worth.
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Benefits And Drawbacks Of Refinancing
- Lower interest rate. When you refinance your car loan, one of the most important advantages is typically a lower interest rate. As with any loan, interest is usually what accounts for the highest costs. Keep an eye out for a car loan with a lower interest rate than what you are currently paying. Interest rates tend to fluctuate, so its all about selecting the right time to refinance to get the lowest interest rate.
- Lower repayments in the immediate future. If you extend your loan term when you refinance, you can lower your repayments. This is good for those who are struggling to make their regular repayments every month due to their financial situation. Adding additional years to your car loan will lower your repayments and free up some much-needed cash in the shorter term.
Should I Refinance My Car
Many people decide that refinancing their vehicle is of benefit, and well start by taking a look at some of the reasons why.
With refinancing, you can free up extra cash which can have a significant impact on your life. A new loan plan where you pay out a little less each month can enable you to have a bit more disposable income for when life throws surprises and throw it does. On the other hand, paying off your loan quicker with bigger instalments will enable you to access better interest rates, meaning you save money overall.
Its not uncommon to refinance for debt management reasons – you may find income retained from a new plan helps with settling other bills and necessities.
Comparing car finance plans may show that there are better deals out there, especially if your credit score has improved. Well talk more about this later.
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Process Of Refinancing A Car
The process of refinancing vehicles is actually fairly straightforward. It works in a similar manner to the original purchase. However, unlike haggling about the value of the vehicle, you are locked into the cost associated with the original purchase. Essentially, the new lender buys your debt and then lends that amount to you, typically at a lower rate and with an improved term.
There is some key information to gather before taking the leap. Approach the lender and discuss the interest rates available, along with any fees you will be expected to pay. Find out if there are penalties associated with refinancing and learn what the term of the new loan will be. Determine whether the costs of refinancing, both immediate and over the long term. From there, you can decide if it is amenable to your financial situation.
Coronavirus Auto Finance Relief
COVID-19 has hurt lots of peoples finances. If youre worried about being able to keep your car, you may be able to get some help. Credit Karma has gathered a list of automakers and lenders that are offering relief options. We also have some other resources if youre looking for financial assistance.
But you may be looking to refinance to take advantage of lower interest rates which resulted from the Fed dropping its rates because of the pandemic. If thats the case, youll want to consider the advice in the article above.
In addition, some dealers are offering extreme financing deals for new vehicles, which may make sense for you if you were already considering trading in your car.
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Should You Refinance For A Longer Or Shorter Term
In order to decide how to approach your refinancing, there are some key things to consider. A key aspect is the duration of the new loan. The term of the agreement dictates what it will cost you in the long run. Loans with a shorter term will cost more on a monthly basis, though will end sooner. This results in less interest payments over time.
Conversely, longer-term agreements have smaller monthly payments. However, that does not mean you will ultimately pay less. Long-term loans have more time to compound the interest. It results in your paying a significantly higher price for the vehicle than you would with a shorter term.
In order to understand how the term of the loan will play into your households larger financial picture, there are other details to consider.
Financial Situation
Consider your ability to make payments and how much you can afford. Weigh this against your willingness to pay out the loan faster, even if it means some frugality. Additionally, consider whether you will qualify for a better rate. If your credit is better than when you initially entered into the agreement, you should be fine to proceed.
New Loan Term
When you pay out a loan over a longer term, you are eventually spending more in interest. Depending on how well you are able to make your existing regular payments, it may be worth discharging the loan faster. Conversely, if youre struggling and dont have a long-term solution yet, refinancing is a reasonable option.
Monthly Payments
Shop For A Refi Lender
You should apply for an auto loan refinance with several different banks and lenders, including your current bank, online lenders and other local and national banks and credit unions. You can often leverage one banks offer with another bank to get a better rate.
When you apply for an auto loan refinance, it will show up immediately on your credit report and count as a hard inquiry. A hard inquiry can cause a five-point drop in your credit score, so every auto loan refinance request has consequences to your credit.
However, if you submit all the applications within 14 to 45 days of each other, those multiple applications will only count as one inquiry. If you wait too long, you may miss the shopping window. In that case, each application will be treated as separate hard inquiries, and will have a greater negative impact on your credit score.
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