Most people have heard of mortgage refinancing. Did you know that auto loans are also refinanced?
Refinance of an auto loan is possible. It’s also easier than home loan refinances. An appraisal is not usually required for an auto refinance. There are also no origination fees.
Refinancing is an option if your credit score has improved since your original loan. You may need to know where to start if considering refinancing your auto loan. This guide will walk you through the steps of refinancing an auto loan.
1. Verify Your Credit
Good credit is necessary to qualify for the highest interest rates. You should check your credit score before refinancing an auto loan. Also, make sure your credit report is clean.
A credit report review can help you identify areas that need improvement. Your score can be accessed online or on your credit card statement at no charge. It is also possible to pay through a credit reporting agency.
2. Calculate The Loan-To-Value Ratio For Your Car
Some car owners may find they are “underwater” with their car loans due to depreciation. This means that they owe more than the car is worth. Refinancing might be difficult if you are underwater on your auto loan.
Look at the last bill to find out how much you owe on your auto loan. Refinancing is an option if your car is more valuable than you owe.
3. Be Aware Of Prepayment Penalties
Lenders may charge you a prepayment penalty if your loan needs to be paid on time. Check your loan documentation to find out if your loan has a prepayment penalty. Most cases won’t have one. However, you should make sure to confirm before proceeding.
4. Take Into Account The Remaining Time On Your Loan
By extending your repayment term, you can reduce your monthly payments. However, considering the interest fees you will have to pay, you might pay more.
Refinancing to a shorter repayment term might be a good option since you may get a lower interest rate for a shorter term. While your monthly payment may go up if you choose a shorter term, you might be eligible for a lower interest rate. This could help you save money in the long term.
5. Important Documents Should Be Kept Safe
You should start gathering documents to help lenders determine if refinancing an auto loan is the right decision for you. These are the documents you will likely need:
- Personal Information such as your Social Security Number and Driver’s License
- Income information such as your last two or three pay stubs and tax forms from the past two to three years
- Information about your cars, such as the title, registration, proof insurance, mileage, and VIN
- Loan information, such as the name of the lender and your current balance
- Once you have all the documents, you can start the loan-shopping process.
6. Get The Best Deal
It is important to get quotes from several lenders. Online lenders can provide quotes, but it is worth checking out local credit unions and banks.
It would help if you weren’t concerned about multiple inquiries appearing on your credit report. Auto loan lenders often use a soft inquiry to provide you with a rate quote and then wait to conduct a harder inquiry before applying for a loan. Although a hard inquiry provides a full view of your credit history to a lender, it can hurt your credit score.
7. Apply For A Loan
After you have found the best auto loan refinance deal for you, you can start filling out your official application. Once your lender approves, you can pay off your old loan and make payments to your new lender.