Love your car, but not your loan? Many Americans are paying way too much on their auto loan each month, averaging about $550 per month on new car payments.* If your loan payments are too high for your budget or you’re overpaying on interest, then refinancing might be right for you.
What Is Refinancing?
Refinancing is when you replace your current loan with a new one from a different lender. For example, you might have applied for your original loan with a bank that partnered with the car dealership. You decide to refinance through your local credit union, which buys out your original loan. From there, you make your new auto loan payment to your credit union.
A refinanced loan can have an entirely different term length and interest rate than your original loan. So if you’re unhappy with any of your current loan’s terms, it might be time to refinance.
When to Consider Refinancing
You should consider refinancing your auto loan in the following situations:
• The original interest rate was high. A lot can change in the months after buying a car. For example, the Federal Reserve may cut interest rates, lowering rates for many types of new loans. If you’re looking to lower your interest payments, refinancing after rates have dropped is an easy way to save.
• Your credit has improved. If you’ve been making timely payments on your auto loan, there’s a good chance your credit has improved. The better your credit history and the higher your credit score, the more you’re seen as a responsible borrower by lenders. This means you’re more likely to be approved for a loan with a great rate.
• You want to lower your monthly payments. Are car payments taking a big bite out of your paycheck? Refinancing your loan could reduce your monthly payment. This can be accomplished by extending the loan, such as from 36 months to 48 months. For example, maybe you originally borrowed $30,000 with a 36 month term and 3.8% interest rate. Your loan would be $883 per month. After six months, you have $25,234 left and decide to refinance. Even if the interest rate stayed the same, if the new loan had a 48 month term, you would pay only $568 per month.
Another factor to keep in mind: how long you’ve been paying your current loan. It’s more financially savvy to refinance when you’ve not been making payments for too long. That’s because you pay more interest in the beginning and less toward the end of your payment plan.
How to Refinance Your Auto Loan
It doesn’t take long to apply for a refinance, and many applicants can receive a decision in just a few minutes. Follow these steps and you’ll be on your way toward a refinanced auto loan:
1. Check your credit. Before submitting an application, you should be reasonably confident that you’ll qualify for the loan you want. Pull a free credit report from annualcreditreport.com to see if your credit history is in your favor and has no mistakes. You can also check your credit score to get an idea of the interest rate you’ll qualify for.
2. Gather information. You may need to provide the following:
• 10-day payoff amount
• Account number, monthly payment amount, months remaining and interest rate of your current loan
• Current lender’s address
• Driver’s license
• Pay stubs from work
• Social Security number
• Vehicle identification number, mileage, proof of insurance and registration
3. Submit the application. It costs nothing to submit an application and you can expect an answer quickly.
4. Verify the switch is worth it. Use an auto refinance calculator to help you decide if it’s worth refinancing your loan. You should carefully consider whether it’s more important to pay off your loan quickly or lower your monthly payments.
5. Complete the loan forms. Confirm the interest rate and term length and sign the final documents. Your new lender will then pay off the old loan and you’ll start making payments on your new loan.
Switch to a Loan You Like
Learn more about Advancial’s auto loan options, including rates and current offers. You can also apply online today.
* Source: LendingTree.