Simply put, refinancing is replacing an auto loan contract with another on the same vehicle. This is typically done to save you money on your monthly payment. There's no flat cost to refinance but you may face fees and charges associated with your new loan. These should be minimal compared to your savings though if you play your cards right.
Car refinancing steps. To refinance your car you first need to qualify, which means knowing where you stand in terms of credit. You'll also want to gather the information you need about your car and your loan. Refinancing is typically reserved for borrowers with good credit, so if your credit score isn't stellar, you need to check that it's at least higher than when you originally took out your loan.
Next, contact your current lender and get the payoff amount on your loan. You're typically given what's called a 10-day payoff, which includes your loan amount and 10 days of interest charges. You need this information to apply with a new refinancing lender. You also need to know the year, make, and model of your vehicle, its mileage, and whether or not there's equity in your vehicle. If you're in a negative equity position, you aren't eligible to refinance your car.
Finally, it's time to shop for the best rates and terms you can find. You can do this by applying for refinancing with several lenders to see which offer is right for you. This is called rate shopping. When you put in several applications for the same type of credit within a two-week period, only one hard inquiry should impact your credit score even though they all show up on your credit report.
Is refinancing a good idea? Before you dive into refinancing, it's important to ask yourself why you're choosing this option. Has your credit score improved enough to qualify you for a better interest rate? Have overall national interest rates dropped? Maybe your financial situation has changed? Perhaps you need to add or remove a cosigner or co-borrower?
Whatever your reason, the main goal of refinancing should be to lower your monthly auto loan payment. You can do this by qualifying for a lower interest rate, a longer loan term, or both. If you simply stretch your loan term you can still lower your payment, but without a lower interest rate, you end up paying more overall.
Does refinancing a car save money? Let's assume that a borrower takes out a $20,000 loan, with bad credit, and qualifies for a 12% interest rate for 60 months. This borrower is paying $444.89 per month, for a grand total of $26,693 with interest.
Now let's imagine it's been 18 months, and the borrower has already paid $8,008.02 but needs to lower their monthly payment. The borrower applies for refinancing on the remaining balance of their loan, with is just under $12K. At this point, the borrower has 42 months left on the original loan.
Assuming the borrower qualifies for a $12,000 at 10% interest, for 48 months. They're both extending their loan term, and qualifying for a lower interest rate, which is a good way to shrink your monthly costs the most. The new loan gives them monthly payments of $304.35, for a total of $14,609. Even with interest, they're saving almost $140 a month and over $4,000 total by refinancing.
Our take. Refinancing can be a great way to save money on your monthly auto loan costs. If you're not sure where to turn to start your refinancing process, we want to help. Simply fill out our fast, free, auto loan refinancing request form to get started today.