If you have an auto loan and you're paying higher rates than you'd like, are struggling to make payments, or your credit has improved since you took on your original loan, you may want to consider refinancing.
Refinancing involves replacing your old loan with a new one that generally has improved terms and conditions (such as a lower interest rate or a lower monthly payment).
An auto loan refinance can be a great way to save money without drastically changing your spending habits.
Why refinance your auto loan?
If you're able to refinance your loan at a lower interest rate, you could potentially save hundreds, even thousands of dollars, on your loan over time. You may qualify for these better rates if, for example, you have a better credit score today than you did when you applied for your original loan.
If you're having trouble making your payments, you may want to consider refinancing to try to increase the length of your loan and lower your monthly payments. However, refinancing to increase the period of your loan (without also significantly reducing your interest rate) usually means you'll end up paying more in total interest over the life of the loan, so you may want to only consider this option if you're worried about your current monthly payment amounts.
If you're considering refinancing your auto loan, here are three steps to take to prepare.
Step 1: Check your credit.
If you have credit that needs work, you may need to work on building up your score before you can qualify for refinancing or the rates you want. However, if your score has improved since you took out your original auto loan, you might be able to refinance at a better interest rate right away.
You can check your TransUnion and Equifax credit reports and scores each week with Credit Karma to see where you stand.
Step 2: Shop around.
When you're ready to refinance, a good place to start is asking your current lender if you can get a better interest rate. However, while your lender may agree to refinance your loan, it may not offer the best rate, so it can also be worth the hard inquiry to shop around.
Auto loan refinancing options include banks and auto finance companies, such as RateGenius and CapitalOne, both marketing partners of Credit Karma. You also might be able to refinance at your local credit union if you're a current member or decide to join.
When choosing a lender, it's important to review any servicing fees, early repayment fees or penalties for missed or late payments that may apply.
Step 3: Prepare the necessary documents.
When applying for an auto refinance loan, your lender will typically ask you for the following documents:
- Information about the vehicle, including the vehicle identification number (VIN), mileage, make, model and year.
- Information about your current loan, including the balance, lender name, and co-applicant information (if applicable).
- Your address, employment information and Social Security number.
You may be able to apply for an auto loan refinance loan online, which can take just a few minutes to find out if you qualify (it may take longer to fully process your loan, if approved). Depending on the lender, you may even be able to complete the process without leaving your house.
What if you get declined?
If you get declined, try to figure out why and see if there's an action you can take to remedy the situation. Do you have a high balance on one of your credit cards that is negatively impacting your credit score? If so, paying it down could help improve your credit health and chances of being approved in the future. Does your car have high mileage on it? Is your car more than eight years old? If so, you may be out of luck -- these factors could reduce your likelihood of being approved, as the collateral for the loan is typically the car itself.
You could also continue to shop around. Not all financial institutions have the same standards, so even if you're declined by one lender, you could be approved by another. But beware that completing a loan application usually results in a hard inquiry, which can lower your credit score.
Refinancing your auto loan can be a good idea for a number of reasons. If you're able to get a lower interest rate, you could decrease the amount of time it'll take to pay off your loans and maybe even save some money.
You may also be able to lower your monthly payments, which can help if you're having trouble making payments or just give you more flexibility in your budget. Just make sure you understand the terms and conditions of your refinanced loan before you sign your name on the dotted line.
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