When you finance a vehicle, you agree to a certain set of terms, such as an interest rate, loan term, and monthly payments. If you want to change these factors, one option is to refinance your existing loan.
The refinancing process involves swapping one loan for another, often to help you save money. If you’re thinking about refinancing your car loan, keep reading to learn how it works, the benefits of refinancing, and what to do if you can’t refinance.
What Does Car Refinancing Actually Do?
Car refinancing is a process that allows you to apply for a new car loan to replace your existing loan. The main purpose of refinancing is to change the terms of your loan.
For example, refinancing can help you lock in a lower interest rate or adjust the term of the loan if you need more time to pay it off. When you refinance a loan, the new lender pays off the original lender. Then, you start making payments to the new lender, based on the terms of the new loan.
Benefits of Car Loan Refinancing
Refinancing a car loan has a number of advantages, especially if it can help you save money. Here are some of the biggest advantages of auto loan refinancing.
Lower Your Monthly Payments
The main benefit of refinancing a car loan is lower monthly payments. Whether you qualify for a better interest rate, pay more for the value of your vehicle, or extend your loan repayment period, refinancing is a great way to get more affordable monthly payments.
For example, imagine your current car loan of $25,000 has an interest rate of 5 percent for a term of six years, with monthly payments of about $400. If you refinance the loan to a 2.5 percent interest rate, your monthly payment will drop to about $375. Paying an additional $5,000 in principal will lower the payment further to $300 per month. Adjusting for several loan factors can make a big difference in monthly costs.
Add or Remove Co-Signers
If you have a cosigner or co-borrower on your current car loan, you may choose to refinance the loan to remove that individual from the contract. Your financial situation may have improved since you took out the loan, or perhaps the co-signer is no longer in your life. Regardless of the reason, refinancing a car loan often makes it easy to remove a cosigner without a hitch.
Likewise, the borrower can also refinance to add the lender to the loan. Borrowers may be in a different financial situation and need additional support, or they may be married and want to include their spouse in the loan. Either way, refinancing can simplify the process of removing or adding co-signers.
Pay Less Interest
Another benefit of refinancing a car loan is the ability to get lower interest rates. When you pay less money in interest, you pay less money to borrow money. If interest rates were high when you took out the loan, or if you’ve improved your credit score dramatically, you may be able to get a loan at a much lower interest rate if you refinance.
How To Refinance Your Auto Loan
If you’re currently locked into a car loan on less favorable terms, you may want to consider refinancing it. Here is a basic overview of how to refinance a car loan.
1. Consider Your Reasons for Refinancing
The first thing to do is consider the main reasons for wanting to refinance your loan. If it’s a matter of getting a lower interest rate or extending the term of the loan, it could be a good option for you.
However, refinancing is not the right solution for everyone. Plus, you usually have to meet certain requirements around your car’s age and mileage to qualify.
2. Your Credit Score
Next, look at your credit score. A low credit score makes it more difficult to qualify for a lower interest rate. If your credit score hasn’t improved since getting the loan, you may not find better interest rates.
However, if your score has gone up since you took the loan, it’s a good idea to apply for a new loan. You should also look at the national average interest rate to determine if interest rates have fallen since you entered into the agreement.
4. Apply for a Loan
The process for applying for a refinancing loan is largely the same as applying for a traditional car loan. It’s helpful to apply with more than one lender, which allows you to compare options and terms to find the best one for your situation. Although applying for a loan can appear as difficult questions on your credit report, major reporting agencies usually see multiple applications in a short period of time as one question.
Gather all the required documents before you start applying so you have the details in front of you. You may need the following documents to apply:
- Driver’s license
- ID card number
- Proof of car insurance
- Proof of income
- Documents for your current loan
- Vehicle information, including mileage and vehicle identification number (VIN)
5. Complete Loans
After receiving approval for a new car loan, you can complete the process by signing documents and completing loan details. It is important to review all documents and loan terms before you sign it.
Make sure you know how much you owe each month and where to send payments to avoid late fees or missed payments that can damage your credit.
What To Do If You Can’t Refinance
If you don’t qualify for auto loan refinancing, you may want to consider the following options:
If you have trouble making car loan payments, you can sell your vehicle and pay off the loan with the proceeds. However, if you owe more than the car was sold for, this may not completely solve your problem.
Renegotiation of Loan Terms
Your lender may be open to renegotiating loan terms if you explain your current situation. You may be able to pause your payments for a few months until you have more money in the bank. Some lenders can also adjust loan terms to help you get lower monthly payments without refinancing.
With voluntary repossession, you hand over your car to the lender, which allows them to sell the car and charge you for the remaining balance. If you can’t sell your car and want to get out of your loan quickly, this is an option. However, this should be a last resort, as voluntary repossession can impact your credit.
Finance & Insurance Editor
Elizabeth Rivelli is a freelance writer with over three years experience in finance and personal insurance. He has extensive knowledge of various lines of insurance, including auto insurance and property insurance. His byline has appeared in dozens of online financial publications, such as The Balance, Investopedia, Reviews.com, Forbes and Bankrate.