Are you frustrated with costly interest payments from month-to-month on your auto loan?
Do you lack the flexibility on your payment terms that you wish you had?
If so, you’re not alone. Luckily, refinancing your auto loan is a way to get your monthly finances back on track. Still unsure? Using an auto refinance calculator to estimate your savings will give you a better idea of what you might be missing. To start off, let’s dive into some basics of refinancing an auto loan so that you have all the information.
Once you have all the information regarding refinancing your auto loan, the overall picture will become more clear. There are real potential benefits, you’ll just need to figure out if the time is right, whether you’ll meet the requirements of lenders, and how to go about the process.
When to Refinance Your Auto Loan
Refinancing your auto loan is a great way to bring down monthly costs, lower interest payments, and ultimately save money. However, there are a couple determining factors that decide when you should refinance your auto loan. You’ll want to evaluate these factors and then make a decision as to whether you’re ready to refinance your auto loan or not.
The Health of Your Credit Score
Your credit score is going to be what financing companies use to determine the terms of your new loan. That means you’ll want to have improved your credit score since the time that you took out the initial loan. If you’re following good credit score habits, and have made on time payments on the initial loan, you’ll likely be able to get better loan terms.
You can use a free credit monitoring tool to check the health of your credit score at any time. Lenders may also check your FICO Auto Scores to determine how good of a candidate you are for a loan. The bottom line is that your credit score shows lenders how likely you are to pay back a loan. That’s why having a strong credit score will result in better refinancing outcomes.
How Much You Owe Compared to the Value of the Car
If your car is worth more than the amount of money that you owe on your auto loan, it will be easier to refinance. If you owe more money than what the car is worth, that’s commonly referred to as being “upside down”, or “underwater”. Depreciation with cars can be tricky, especially considering a new car loses about 20% of its value the second it’s driven off the lot.
Additionally, some lenders will avoid refinancing loans if it is an older car. Check with lenders to see what their policy is regarding the age of vehicles they will refinance. The bottom line is, if your car is still relatively new and holds value, it’s probably a good time to refinance.
Current Interest Rates
Auto loan interest rates, similar to those in the mortgage lending space, tend to fluctuate. That means if you refinance at the right time, you can end up paying a lower amount of interest on your auto loan. There are various websites you can use, such as Bank Rate, to monitor the interest rates of auto loans with various terms.
Is It Difficult to Refinance An Auto Loan?
The difficulty of refinancing an auto loan really depends on the unique situation of each borrower. Lenders are going to have a variety of requirements that borrowers have to meet.
There are a couple of factors that could make refinancing more difficult for you that you’ll want to pay attention to.
The first one is the mileage of your vehicle. Typically, lenders will be willing to offer lower rates for vehicles that have fewer miles on them. Additionally, some lenders have limits on how many miles your vehicle can have for you to refinance with them.
The next thing you’ll need to pay attention to is the make of your vehicle. Some lenders only offer refinancing loans on certain vehicle makes. You’ll want to check in with potential lenders to see if they will approve your vehicle if that information isn’t clearly listed.
You also probably have to do some searching around with different lenders. Some lenders don’t offer the option to current borrowers to refinance their loan, and you might be able to find better loan terms out there, anyway. There are online tools available that allow you to shop around different lenders to find the loan that’s right for you.
How to Use an Auto Refinance Calculator to Estimate Savings
An auto refinance calculator is an online tool that can give you an estimate of how much you could save by refinancing your auto loan. To get started, you’ll need to know the following information:
- Current monthly payment
- Current interest rate
- New loan term
- Current loan balance
- New loan interest rate
Once you gather that information, you can simply input it into an auto refinance calculator to get your results. The auto refinance calculator will tell you your new loan payment, monthly payment savings, difference in interest, new loan total payments, and the new loan’s payoff date.
How to Apply to Refinance Your Auto Loan
There are several different steps you’ll need to follow if you want to refinance your auto loan. Read on to ensure that you’re all ready to apply when you find the loan that’s right for you.
Gather Information About Your Current Loan
Before you officially apply to different lenders for refinancing loans, you’ll need to know some important information about your current loan. The things you need to know are your monthly payment, the remaining balance, the loan term, the interest rate, and the contact information of your current lender.
You also need to determine if your current loan has any prepayment penalties. These can get in the way of refinancing. You’ll want to find your original loan contract, or if you can’t find that reach out to your current lender’s customer support center to ask.
Prepare to Apply
To apply for auto financing, you’ll need a set of documents that the lenders will request. Make sure that you have the following things at the ready:
- Drivers License
- VIN Number
- Proof of Employment
- Social Security Number
Your vehicle’s VIN number can be found on the front of the dashboard in most passenger cars. If you can’t find it there, you can also check the vehicle’s title, or use a vehicle history report website if you’re in a pinch.
In terms of proof of employment, the two most commonly used items are pay stubs or W-2 forms. If you don’t have either of those things, you can request for your employer to submit a letter verifying your employment.
If you don’t know your social security number by memory, you’ll want to get a hold of your social security card. If you’ve lost it, you can get a replacement from the Social Security Administration’s website. Once you have those four things ready, you can move forward with the process.
Check Your Credit Score
As we alluded to before, you’ll want to apply for auto refinancing when your credit score is in good standing. So you’ll want to check your credit score before applying for any refinancing.
There are multiple ways available for you to check your credit score. The first and most common method is by using a credit score service or free credit scoring website/app. If you have trouble with that method, you may be able to get your credit score from your credit card company, financial institution, or a loan statement.
How to Choose an Auto Refinance Loan
Choosing from auto refinancing loan options comes down to personal preference. Obviously, you’ll want to lean towards the loans that offer you the best terms, as that’s the reason you’re refinancing. There are also different types of lenders that you’ll have available when you’re shopping around. Among them are banks, credit unions, online lenders, and more. The reputation of the lender is also an important factor that you should consider.
Does Refinancing An Auto Loan Negatively Affect Your Credit Score?
Unfortunately, applying for auto refinancing will negatively affect your credit score. Lenders will have to pull up your credit, resulting in a hard inquiry on your credit report. However, hard inquiries only lower your credit score by a few points.
You’ll want to do any shopping around for different loans within a short period of time. If you do this, the hard inquiries will be grouped together on your credit report, meaning that your score won’t get dragged down more than once. Hard inquiries don’t stay on your credit forever, and they will typically disappear after a two year period.
The Bottom Line
If your credit score and current loan situation permits, refinancing your auto loan is a smart financial move. There are plenty of tools available at your disposal to compare loan offers, estimate savings and terms, and check your credit health. This makes auto refinancing easier for those who want to save money on interest, or don’t like the payment terms on their current loan.
Use our auto loan refinance calculator today to see what you could be saving!