Your credit score is a powerful tool for determining whether you’re able to qualify for loans and what kind of interest rates you’ll. If you borrowed money to buy a car but your score wasn’t that great, chances are you’re paying a pretty penny in interest.
Refinancing your auto loan can help you to snag a lower rate and potentially reduce your monthly payment, which could save you some serious money. If you’re not sure how to refinance a car loan, here are the most important things you need to know before approaching a lender.
Make sure you check your credit before you refinance.
Refinance car loan basics
An auto loan refinance is similar to a mortgage refinance in terms of the way it works. Essentially, you take out a new loan and use it to pay off your existing car loan. You then make payments on the new loan, according to the repayment schedule the lender sets.
These are the most common reasons to refinance a car loan
First, refinancing can help you lower your interest rate, which could make your auto purchase less expensive in the long run.
Let’s say you took out a $25,000 loan at 7.5% with a 60-month term. If you stuck with the original rate, you’d pay just over $5,000 in interest. If you made payments for a year and then refinanced the remaining balance at a rate of 4.5% for 48 months, you’d save around $1,200 over the life of the loan.
Second, refinancing can reduce your monthly payments. Using the previous example, the original payment amount would come to $501 a month. With the new loan terms, the payment would be around $433 a month, putting roughly $70 back in your pocket.
Third, a car loan refinance can allow you to shorten or lengthen the loan term, based on your preference. The longer the loan the term, the lower the payment would be but the more the interest charges would add up. If you bought the car with a co-signer, refinancing would allow you to remove them from the original loan and the title.
Fourth, it’s possible to use an auto loan refinance to cash out any equity value you have in the vehicle. That can come in handy if you have other high interest debt that you want to pay off.
How to refinance a car loan
Refinancing a car loan means you need to learn the following steps to prepare before approaching a lender. First, make sure you’re in a position to refinance. If you’re currently making payments on a car that’s worth less than the loan value, you’re going to have a hard time convincing a lender to agree to an auto loan refinance.
In that scenario, you may have to turn to other lending options. For example, you could take a personal loan or a home equity loan. Just bear in mind that using the equity you’ve built up in your home to secure a loan can be risky if you might have trouble making the payments.
Also, take a close look at your credit to determine whether you’ve got a shot at qualifying for the loan (before you apply). Lenders want to see that you’re able to manage all of your debts responsibly, which means making the payments on time and keeping your balances low. If you haven’t checked your credit report or score recently, sign up for Credit Sesame’s free credit monitoring service to see where you stand.
Can you refinance an auto loan with bad credit?
If your credit is less than perfect, getting a refinance loan through a traditional bank may not be an option. Bad credit refinance auto loan lenders specialize in dealing with borrowers who, for one reason or another, have lower credit scores.
Refinancing a car loan with bad credit might make sense if you need to cash out the car’s equity, lower your monthly payments or remove a co-signer. It’s also possible to reduce your interest rate in the process.
The steps involved are the same: check your credit, find a lender and fill out the application. When you’re comparing lenders, pay close attention to the rates they offer and the fees they charge. If your credit score is in the low-600s range or below, you’re likely to be offered subprime rates. You should still aim to get the lowest rate possible.
Get the best auto loan refinance rates
An auto loan refinance can backfire if you’re not taking the time to shop around for the best deal. Credit Sesame’s auto loan research center is a good place to start if you need to get a feel for the kind of refinance rates that are available.
Talk to your existing lender, compare rates at online banks and check out the terms at your local credit union to zero in on the right borrowing option.