How to Refinance a Car
With all the focus on mortgage refinancing these days, it’s easy to forget that you might have a bundle of potential savings tucked away in your garage.
Despite favorable interest rates and a lot of newish cars on the road, Americans are only beginning to realize the benefits of auto refinancing. And with more consumers taking out auto loans of 60 and 72 months than ever before, even a modest drop in interest rates can really pay significant dividends.
Unlike refinancing your home, seeking a better loan on your auto is a snap, and can save you real money especially if you still have a few years remaining on a high-interest loan you took out for a new car a few years or even a few months ago.
The process is simple: you find a lender willing to loan you the money needed to pay off your current car loan with a new loan that carries a lower APR. Your new lender then pays off your old loan, the title to your vehicle is transferred to your new lender and your new payments begin. It’s a win-win for you, because refinancing lowers your monthly car loan payments, and with an interest rate even a single percentage point lower you can pay off the balance of your car loan faster or put that newfound money to work elsewhere in your budget.
So let’s get started.
Step One: Are You In the Game?
Start by calling your current car loan lender and ask for your car loan payoff amount, how many months of payments you have left on the loan and whether there is a pre-payment penalty clause in your loan. That’s the up-to-the-minute total you owe and serves as the starting point for your shopping. Note that the current payoff amount will change throughout the shopping process if you take a few days to find a loan, so you’ll have to get back in touch with your original lender when you get ready to seal the deal. If you know the process is going to take you a while to complete, ask your lender for a 14-day or one-month payoff amount.
As with any financial decision, auto refinancing depends on your individual financial goals. If your goal is to reduce the amount you are paying in interest, consider an auto refinance loan with the same or reduced term as your existing loan. If your primary motivation is lowering your monthly payment, you might simply consider contacting your current lender and discussing whether they would be willing to extend the term remaining on your existing loan. The downside is that extending the term is likely to increase the total interest paid over the life of your loans.
Instead, you’re probably better off refinancing your auto loan if you can save 1% or more, and you owe more than $7500 or so. The savings from even a 1% decrease in interest rates can make it more than worth your time, as the process is much more simple than other forms of refinancing.
You also must figure out whether your ride is attractive enough of a proposition to attract a lender. Banks differ widely in their qualification requirements, but most banks are unwilling to refinance a vehicle that is more than seven years old, has more than 100,000 miles on it, or is used as a commercial or delivery vehicle.
Step Two: Get a Copy of Your Credit Report
The cleaner your credit report is, the better your chances of securing the best rates and saving some real money on your auto loan. A credit health check begins at annualcreditreport.com, where you can request your latest report. You can obtain a copy of each of your major credit reports (Experian, Equifax, TransUnion) annually, for free.
Step Three: Go Shopping!
If refinancing still seems to make sense after running your calculations, it's time to start shopping by asking several lenders for a detailed quote. Most lenders will not refinance their own auto loans, so you’ll need to shop around to find a new lender. Shopping for refinancing grows easier every day, thanks to a whole range of great online comparative tools.
Be sure you shop based on used car interest rates, or better yet, ask whether the lender has refinancing rates. A refinancing will not be eligible for new car rates.
Some tips as you begin the shopping process:
-- Make sure that your refinancing applications are in precisely the same names – first, middle and last – as the names on your current loan documents. If the names don’t match up, especially if you’re shopping online lending services, you’ll be rejected immediately and you’ll repeat the process endlessly.
-- Have your current auto loan documents on hand and be ready to provide an account number, as it speeds up the process tremendously.
-- Also have your vehicle’s year, make, model and 17-digit VIN (Vehicle Identification Number), found on your dashboard or registration.
Step Four: Compare Your Offers
Not every auto refinancing loan is the same, and little variations in terms and rates can make a huge difference, so read your offers carefully.
The only fees typically associated with an auto refinance loan are the standard transfer of lien holder fees (usually $5 to $10) and state re-registration fees ($5 to $75). These fees may vary by lender, your state of residence or the state your refinancing lender is based in, however, so look them over carefully and make sure you ask about any other hidden fees that might pop up. Also be sure to check if your existing lender has any pre-payment fees that might factor in to your decision to refinance.
From there, it’s fairly straightforward: grab a calculator and rank your offers based on the details in each quote. Once you've carefully compared all of your options, submit your loan application to the bank with the best deal.
Finally, make sure you verify that your new lender paid off the original lien by ensuring that it issues a notice stating their lien was satisfied in full. You’ll want to make sure you have a copy to verify that this paperwork was properly processed.
From there, sit back and wait for those new billing statements to arrive, and enjoy the savings piling up.
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