By LOUIS DENICOLA
Congratulations! A lender just approved your application for auto loan refinancing. Whether you want to save money with a lower interest rate or free up your budget with a lower monthly payment, refinancing an auto loan could help your financial situation.
For example, Credit Karma members who refinanced an auto loan between July 2015 and June 2016 through Credit Karma with the same or shorter term look to save an estimated average of $3,207 on total interest. Members may have achieved these savings through refinancing by getting a lower interest rate, reducing their loan term or lowering their loan balance by making an initial down payment.
Approval isn't the final step, though. You still have to decide whether or not to accept the refinancing offer, and you may need to choose between several different terms.
Check your original loan for a prepayment penalty.
Before accepting a refinance loan offer, check your original loan for a prepayment penalty. Compare the cost of the penalty with the savings that could come from refinancing.
If you have a precomputed interest auto loan, you might be stuck. With this type of loan, the principal and interest were added together, and each payment you make is subtracted from that sum. When you pay off the loan early, which you'd do with refinancing, you'll still wind up paying all the original loan's interest.
On the other hand, you may not have a prepayment penalty at all, which is the best scenario. But you may want to check the new loan's terms to see what will happen if you want to pay off that debt early.
Pick your terms.
You may need to decide between several different offers, either from the same lender or multiple lenders. The terms of the loan offers may depend on the amount of money you want to borrow, the information in your application and your credit.
Your interest rate could also vary depending on the length of the repayment term you choose.
Consider the effect of choosing different repayment terms. If your new loan has a shorter repayment term, you could save money on interest over the life of the loan (as long as there's no prepayment penalty on your old loan). But your monthly payments could stay the same - or increase.
Your monthly payment could decrease if you extend the repayment period, but you could also wind up paying more in interest over time. This could be a good idea if you're having trouble making ends meet with your current monthly payments.
Finalize the refinancing.
Don't feel pressured into accepting a refinancing offer just because you got approved. If the terms aren't appealing, you can decline the offer and apply again later or with a different lender.
You could also try to ask the lender if they can offer you any other terms -- perhaps a lower monthly payment with a longer repayment period, for example.
When you decide to accept an offer, you'll usually need to finalize the process by verifying your information and signing the loan documents. Depending on what company you refinance with, you may receive and be able to fill out some of the information electronically.
Others may require you to sign and mail back physical documents, or go into a branch to complete the process.
The requirements depend on the lender and your application. You may need to send copies of paystubs or tax documents to verify your income, or an official letter to verify your address.
Other documents you may need to send include:
- Copies of your registration, insurance or driver's license.
- Pictures of the vehicle's exterior and odometer.
Depending on where you live, you may also have to send the title to the new lender or give it authority to request a title transfer directly from your previous lender.
To do this, you may need to send a notarized limited power of attorney form, or fill out the form at one of the lender's local branch locations. You'll also typically have to pay a fee to the state to transfer the title and re-register the car.
Once the lender receives your completed paperwork, it could either pay off your current loan by sending money directly to the original lender, or in some cases, it might send you the money, and you'll be responsible for paying off the loan.
Until you're certain the payment went through -- you may receive a notification or welcome letter from your new lender -- continue making payments as usual. You don't want to miss an auto loan payment, as it could hurt your credit.
After a lender approves your auto loan refinancing application, you may be faced with several offers and need to determine which makes the most sense for you.
If you decide to accept an offer, you'll need to work with the lender to verify your information, complete the loan documents and transfer the title. Then, you'll be paying down the new loan each month and, with your loan's hopefully improved terms, you'll be able to save money or make payments easier.
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