What Is Car Loan Refinancing?
Auto loan refinancing or car loan refinancing is nothing but taking a new loan with much lesser interest rates to pay off the existing car loan. Benefits that come along with such loans are the flexible duration and lessened monthly payment.
Similar to a home mortgage loan, a car is used here as collateral for refinancing. It has fixed interest rates, fixed tenure, and fixed monthly rates.
When Does it Make Sense to Refinance Your Car Loan?
Like any other investment, buying a car is also an essential financial decision that shouldn't be taken lightly. So car loan refinancing is one of the options to go for if you are running out of money or unhappy with an existing loan.
Even though refinancing is a better option, buying one at the right instance is more important. So before purchasing a refinancing loan, consider certain factors below:
Decreased Interest Rates:
Check for the interest rates; if it's lower than your current rates, even by 1 or 2 percent, then it's time to opt for refinancing. This little change can have a significant effect on your monthly payments. Don't consider if its the same or higher than what you have currently.
Improved Credit Scores:
Over time, after taking the loan, if there is an improvement in the credit score, you can apply for refinancing. An improved credit score can reduce interest rates significantly.
For example, if the credit score is 620 and below, it is considered a bad credit score. A score of 720 and above is regarded as an excellent rating, which can get you attractive interest rates. Credit scores can be increased by paying off the bills and loans on time.
Dealer Loan or Bank Loan:
Usually, dealer loans will come with hidden charges, and with high-interest rates, so is a bank loan. Before moving forward, consider comparing your existing loan plan with other dealers, credit unions, and banks.
This effectively allows you to compare loans and do negotiations with them to zero down on a dealer or a bank loan that offers a comparatively lesser rate of interest.
Improved Financial Status:
If you find any financial growth personally, perhaps if there is an increase in income or monthly expenses have been decreased relatively, then going for refinancing is a good idea.
Increased Monthly Expenses:
Managing monthly expenses is stressful when it is unavoidable; in addition to it, a car loan will constitute most of the costs. So as discussed earlier, refinancing with lower interest rates will decrease monthly car payments, which in turn automatically reduces monthly expenses.
Here Is What You Need to Refinance Your Loan
Now you know the importance and benefits to refinance, let's discuss how and what is required for refinancing
Check Credit Score:
Before applying for refinancing, keep a record on the credit score, as the interest rates are heavily dependent on this. The higher the credit score, the lower the interest rate. If the payments are made on time, then the credit report will be decent enough to apply for refinancing.
Keep the Paper Work Ready:
Get details of the current loan like remaining tenure, remaining balance amount to be paid, interest rate, and if there is any penalty for pre-closure of the loan.
You may also need to have personal documents such as Social Security Number, income certificate or payslip, and driving license. As well as that, documents related to the car like valid car insurance, registration number, model name, and year of manufacture and mileage will be requested.
Also, calculate the current value of the car in the market. If it's less than the loan, then it's not worth refinancing.
Compare and Calculate:
Do thorough research on lenders and their interest rates before deciding to refinance. After shortlisting, ask for undefined charges, penalty fees, and closure charges as these vary widely between lenders.
Run online loan calculators of banks or lenders to calculate the actual refinancing loan amount you would require. If the figure looks much better than the existing one, then go ahead and apply.
Apply and Close the Process:
Once the new lender is decided, apply for a refinancing loan with necessary documents. The new financer would close the previous loan. Make sure the car loan is transferred to the new lender's name. Now you will have a new interest rate with a new loan period and a new monthly payment.
Refinance Car Loans FAQ
Am I Eligible for Refinancing at a Lower Interest Rate?
Eligibility Depends on your credit score history. If you have made payments of your current loans correctly for 6 to 12 months, then your credit score would have improved. You will qualify for refinancing at lower interest if you have a good credit score.
Does Bad Credit Score Allow Me to Refinance?
Having a bad credit score can be difficult for refinancing, but it's not impossible. Check with the different lenders and dealers, as each of them will consider different credit scores.
A goal of regular payment for 6 to 12 months can increase your credit score, and then you can apply for refinancing. If you cannot afford to make payments on time, then contact your lender as they might increase the tenure, which can decrease the amount to be paid every month.
Does Refinancing Affect My Credit Score?
After applying, lenders will make a pre-qualification test, which will determine if you are qualified or not. This inquiry will not affect your credit score.
Keeping all the details, as mentioned above, in mind, let's see some of the providers that we recommend :
It is an online marketplace of lenders that offers an average of 5.49 % of interest rates. Pre-qualification can be verified without affecting credit scores. They have three types or refinancing :
- Traditional Refinancing
- Cash Back Refinancing
- Lease Payoff Refinancing
It is an online portal with over 150 lenders operating in 50 states. It provides an interest rate as low as 2.99%, with average monthly savings of $76.
CapitalOne refinances used and new cars, SUVs, and mini cars. They do not charge any fee for application; however, there can be state fees. They do not have a prepayment penalty charge.