By LOUIS DENICOLA
Refinancing your auto loan can save you money by lowering your interest rate, or lower your monthly payments and free up your budget. And the process can be simpler and faster than refinancing many mortgages.
Many lenders let you complete the application and approval process online, and the initial approval decision may take just a few minutes. While you may need to provide physical verifying documents, you might be able to gather your information and apply for refinancing in just a few hours.
However, before starting the process, take a few minutes to consider the possible benefits and read over the standard requirements for vehicles and applicants.
3 potential benefits of refinancing an auto loan
1. Refinancing could save you money and allow you to pay off your current auto loan with a new loan that has better terms. This may be especially helpful if, when you first bought the car, you had poor credit or didn't shop around for an auto loan and got stuck with a high-interest loan.
The new loan's interest rate may be lower than your current loan's rate, and you might save money over the lifetime of the loan if the repayment term stays the same.
2. When the interest rate stays the same but the period is extended, you'll likely have a lower monthly payment, which could help free up cash for other financial obligations. However, it could also cause you to pay more in interest over time.
3. If the new rate is higher, it may not be a good idea to refinance. But, if you need to lower your monthly payment, a higher interest rate and longer repayment term might be able to do that.
You can reach out to your current lender and ask if they can modify your loan's terms. You may be able to keep your current interest rate and make lower monthly payments over a longer term.
What you'll need to apply
The requirements for a refinance application vary by lender, but you'll often need to share some, or all, of the following information.
- Personal information. This may include your name, address, previous address, date of birth, contact info, citizenship status, Social Security number and the co-applicant's information if you have one.
- Financial details. This may include your current employer, former employer, total income, housing status and monthly house payments.
- Loan information. This may include your current lender's contact information, current loan balance and term, loan account number, and whether or not you have other auto loans.
- Vehicle's information. This may include the make, model and trim of the vehicle, as well as any special features or options. You may also need its VIN, mileage and state of registration.
You may be surprised to see that you may not need to get the vehicle appraised. According to Russ Meier, who works on retail auto loan origination at Bank of America, the bank uses the vehicle's make, model and other information to determine its value.
Once you submit your information, the lender decides whether to approve the loan. This can be an automated process that takes just a few minutes.
If approved, you'll receive a loan offer or several offers with different terms. Pick one of the offers and submit any required verification documents, such as proof of income and insurance.
Once approved, your new lender may make a payment directly to your current lender. Or they may instead send the loan money to you by direct deposit or check, which you'll then be responsible for using to pay off your current auto loan.
You also may run the risk of triggering prepayment penalties in your original loan that can increase the cost of refinancing. For example, if your original loan is a loan with pre-computed interest, the interest is calculated in total at the beginning of the loan and must be paid off in full, even if you decide to refinance. Check with the lender of your original auto loan to see if a prepayment penalty applies.
Requirements for approval
As part of the underwriting process, the lender might review your income, other debt obligations, and credit scores or reports. Your approval, loan terms and loan amount may depend on their findings.
Contrary to popular belief, a low score may not necessarily exclude you from refinancing.
On the other hand, excellent credit might lead to much better terms.
The specific requirements can range from one lender to another, but these factors could affect their decision:
- How old your vehicle is. Vehicles depreciate (lose value) over time, and you may not be able to refinance older vehicles. For example, Capital One won't refinance a vehicle that's more than seven years old, while Bank of America will go up to 10 years.
- The mileage on your vehicle. Mileage can also affect a vehicle's value, and you may not be able to refinance a high-mileage car or truck. That cutoff is 75,000 miles at Chase, but 150,000 at State Farm Bank® and Nationwide Bank®.
- The value of your vehicle. If the vehicle is worth less than the amount you owe, you have an "underwater loan." You might still be able to get your auto loan refinanced, but you may have to pay the difference.
- The type of vehicle. You may not be able to refinance commercial, delivery or so-called "Lemon Law" vehicles. Motorcycles and RVs also might not qualify for standard auto refinancing, and salvage or rebuilt vehicles are often disqualified.
- The loan amount. Lenders may have a minimum loan requirement, such as $5,000 or $10,000, and may require that you refinance your entire loan. Some lenders also set a cap on the vehicle's value.
- Your current lender. Some lenders won't refinance a loan that you initially took out with them.
- Where you live. Some lenders don't offer auto refinancing in every state.
Refinancing your auto loan could be a good idea if you think you'll qualify for a lower interest rate or need to decrease your monthly payments (which can be achieved by extending your repayment period).
Getting quotes from several lenders can help you find the best terms, but check to see if your vehicle meets the lender's requirements before taking the time to fill out an application. The process is often very simple, but you still may need to fill out a lot of information about yourself and the vehicle.
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