How to refinance an auto loan, and when it makes sense to do it
- Refinancing your auto loan could get you a lower interest rate or allow you to remove a cosigner from your loan, especially if your credit score has recently improved.
- Before applying for an auto loan refinance, you'll want to make sure that you aren't underwater on your loan and that it doesn't have a prepayment penalty.
- Next, you'll need to gather your necessary documents before getting quotes from multiple lenders.
- LendingClub can help you refinance your auto loan today. See how much you can save »
Most of us have heard of mortgage refinancing. But did you know that auto loans can be refinanced as well?
And not only is it possible to refinance an auto loan, but it's usually a much simpler process than a home loan refinance. Auto loan refinancing will very rarely require an appraisal, and there aren't typically origination fees either.If your credit has improved since you took out your original loan, refinancing could save you a lot of money or make it possible for you to remove a cosigner.
If you're considering an auto loan refinance, you may not know where to start. This step-by-step guide will show you how to refinance an auto loan.
How to refinance an auto loan
1. Check your credit
In order to qualify for the best interest rates, you'll need a good credit score. A score over 660 is a great start but shoot for a score above 740 if you want the very best rates.
Before you try to refinance your auto loan, you'll want to check your credit score. You also want to make sure there aren't any errors on your credit report.
There are several ways you can check your credit score. Your bank or credit card issuer may provide your credit scores for free. You can also use a credit scoring site like Credit Karma or Credit Sesame. And you can get your credit score from the three major credit bureaus as well.
If you want to review your credit report, you can do so for free once every 12 months at AnnualCreditReport.com. You can also buy your credit report at any time from the major credit bureaus.
2. Estimate your car's loan-to-value ratioBecause of depreciation, some car owners will find that they're "underwater" on their car loans. In other words, they owe more on their car than it's worth. If you're underwater on your auto loan, you may have a difficult time qualifying for refinancing.
To find out where you stand, start by taking a look at your last auto loan bill to see how much you still owe. Then, use an online tool like Kelley Blue Book or Edmunds to estimate your car's fair market value.
If your car is worth more than you owe, refinancing may be a viable option. Otherwise, you may want to wait until you've built up some equity.
3. Look out for prepayment penalties
A prepayment penalty is a fee that some lenders charge if you pay off your loan earlier than the agreed payment schedule.
Check your loan documentation or call up your lender to find out if there is a prepayment penalty on your loan. In most cases, there won't be. But you'll want to make sure before moving forward.
4. Consider the time remaining on your loan
How far along are you in your car loan repayment schedule? If you only have a year or two left, you may be better off just sticking with your original loan.
Extending your loan repayment period can lower your monthly payments. But when you add in the extra money you'll pay in interest charges, you may end up paying a lot more overall.
On the other hand, refinancing into a shorter repayment term could be a really good idea. Shorter terms tend to unlock lower interest rates. Your monthly payment will probably go up with a shorter term, but if you qualify for a much better interest rate than what you have now, it may not rise as much as you'd think. And you could save a ton of money overall.
5. Gather the necessary documentsIf you decide that refinancing your auto loan is right for you, you'll want to start collecting the documents that lenders will need. Here are the types of documents that you'll probably need to track down.
- Personal information like your social security number and driver's license
- Income information like your last few pay stubs and tax forms from the last two to three years
- Car information like the title, registration, proof of insurance, VIN number, and mileage
- Loan information like the lender's name and your current balance
Once you've gathered the necessary documents, it's time to start the loan-shopping process.
6. Shop for the best deal
With any type of loan, it's important to get quotes from multiple lenders. You can start by getting quotes from online lenders like LendingClub and CarsDirect. But you may want to check with small local banks and credit unions as well.
In general, you shouldn't worry about multiple inquiries showing up on your credit report. In many cases, auto loan lenders can use a soft inquiry to give you a rate quote and wait to perform a hard inquiry until you actually apply for a loan.
And even multiple hard pulls will usually be viewed as one hard credit inquiry as long as they take place within a 14-day span.
7. Apply for your new loan
Once you've found an auto loan refinancing deal that you like, you can move forward with filling out an official application. If you're approved, your lender will pay off your old loan and you'll make payments to your new lender moving forward.
Your car title will also need to be transferred to your new lender. In many cases, the lender will take care of this themselves.
You should receive paperwork from your new lender that includes all the terms and conditions of your new loan. Make sure to store your loan paperwork in a safe, accessible place.
The bottom lineRefinancing your auto loan could help you nab a lower interest rate and/or a lower monthly payment. That could make it a great decision, especially if your credit or financial situation has recently improved. But make sure you consider all your options and do your research to decide whether refinancing is right for you.
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