Tips for Refinancing Your Auto Loan to Lower the Payment[yoast-breadcrumb]
Tips for Refinancing Your Auto Loan to Lower the Payment
Refinancing your auto loan can be a great way to lower your monthly payment or interest rate. But before you jump in, it’s important to understand the pros and cons to decide if it’s the right move for you. This article will walk you through everything you need to know about refinancing your car loan, from how it works to tips for getting the best deal.
How Does Refinancing a Car Loan Work?
When you refinance your auto loan, you take out a new loan to pay off your existing one. This new loan could have a lower interest rate, longer repayment term, or both – which would result in a lower monthly payment.
To refinance, you’ll need to apply and get approved for the new loan. The lender will pay off your old loan, and you’ll now owe payments to the new lender instead. Your old loan is closed out and replaced entirely by the refinanced loan.
Refinancing can reset the clock on your loan term. For example, if you had 3 years left on your original 6-year loan, refinancing could give you a brand new 6-year loan term. This is how refinancing can lower your payment – by stretching out the loan length.
The catch is you’ll likely end up paying more interest over the life of the longer loan. But if cash flow is tight, the lower monthly payment might be worth it.
When Does Refinancing Make Sense?
There are a few common scenarios where refinancing your auto loan can pay off:
- You can get a lower interest rate – If your credit score has improved since you took out your original loan, you may now qualify for a lower rate. Even a small decrease in your rate can add up to big savings over the life of your loan.
- Extend the loan term – Stretching out your loan length lowers the monthly payment by spreading it out over more time. This may be helpful if money is tight. Just be aware you’ll likely pay more interest in the long run.
- Remove a co-signer – If you originally needed a co-signer but now qualify on your own, refinancing can allow you to release the co-signer from liability.
- Cash out equity – If you owe less than your car is worth, some lenders may let you take cash out during a refinance. This turns your car equity into usable cash.
- Get out of an upside down loan – If you owe more than your car’s value, refinancing could potentially help you get out from being underwater on the loan.
As long as the savings outweigh any fees, refinancing can be a smart move. Use an auto loan refinance calculator to estimate your new payment and see if it makes sense for your situation.
6 Tips for Refinancing Your Auto Loan
If you’ve decided refinancing could benefit you, here are some tips to make sure you get the best deal:
1. Check your credit score
Your credit score plays a big role in determining your interest rate, so check your score before applying to refinance. Sites like Credit Karma let you check for free. If your score has improved since you got your original loan, you’re more likely to qualify for better refinance rates.
2. Research current auto loan rates
Rates fluctuate frequently, so research current average rates before applying. That way you’ll know a good rate when you see one. Bankrate and NerdWallet both publish current auto refinance rate trends.
3. Get prequalified
Prequalification lets you see what rates lenders may offer before you actually apply. It’s a soft credit check that won’t hurt your score. Prequalifying with multiple lenders can help you compare options.
4. Evaluate the costs
Make sure to factor in any fees involved when determining if refinancing is cost effective. Watch out for charges like origination fees. Also ask if your current loan has a prepayment penalty for paying it off early.
5. Compare loan terms
The best deal involves more than just the interest rate. Compare loan lengths, monthly payments, and total interest costs between your current and potential new loan. Crunch the numbers to see which nets the most savings.
6. Check for discounts
Many lenders offer interest rate discounts for existing customers or setting up autopay. Ask lenders what discounts may apply to you before accepting a refinance offer. Even small discounts can make a difference over the life of your loan.
Refinancing Your Car Loan With Your Current Lender
One option to consider is refinancing your auto loan with your current lender. Here are some potential benefits of staying put:
- May offer loyalty discounts to existing customers
- Already have your information on file
- No need to change autopay or account details
- Could waive some fees or underwriting requirements
Reach out to your current financing institution to see if they can beat your rate or improve your loan terms. This may be an easier place to start before shopping around more broadly.
Where to Find the Best Auto Loan Refinance Rates
While checking with your current lender is easy, it pays to shop around. Compare rates from these top places to refinance your car loan:
- Banks and credit unions – Local banks and credit unions may offer competitive refinance rates, especially for existing customers. They also provide a personal touch.
- Online lenders – Online lending companies like LendingTree, Lightstream, and PenFed specialize in auto refinancing. They provide fast approvals and loan processing.
- Auto manufacturers – Brands like Ford, GM, and Toyota have financing arms offering loan incentives, like Toyota Financial Services.
- Your dealership – The dealer you bought from may offer manufacturer incentives if you refinance with them.
Cast a wide net and apply with multiple lenders to find your best option. Comparing prequalified rates can save you money.
How to Apply for an Auto Refinance Loan
Ready to move forward with refinancing your car loan? Here are some tips for a smooth application process:
- Have your information ready – This includes personal details, employment history, income documentation, and your car’s make, model, year, and mileage.
- Know your car’s value – Lenders will check your loan-to-value ratio. Get a free estimate of your car’s value from Kelley Blue Book or Edmunds to be prepared.
- Read loan documents carefully – Be sure to understand the full terms and conditions before signing anything. Ask questions if you’re unsure.
- Consider a cosigner – Adding a cosigner with good credit may help you qualify for better rates if your credit needs a boost.
- Check for prepayment penalties – Make sure refinancing won’t trigger any expensive fees from your existing lender.
- Set up autopay – Enrolling in autopay from your new lender can score you a nice interest rate reduction.
With the right preparation, you can smoothly navigate the application process. Send in your strongest application to maximize your chances of approval.
Alternatives to Refinancing Your Auto Loan
While refinancing is one of the most effective ways to secure a lower car payment, it’s not your only option. Here are a few other potential strategies:
- Renegotiate your current loan – Ask your current lender if they can modify your rate or term. This avoids refinancing costs.
- Make extra payments – Paying a little extra each month saves on interest charges and pays your loan off faster.
- Adjust your budget – Free up room in your budget for a higher car payment by cutting expenses elsewhere.
- Sell your car – Trading in your car for a less expensive used car can significantly slash your payment.
- Defer payments – In hardship situations, lenders may allow 1-2 month payment deferrals while you get back on your feet.
Look at your full financial situation to come up with the best game plan for lowering your payment to a manageable level.
Is Refinancing Your Auto Loan a Good Idea?
At the end of the day, deciding if refinancing your car loan is smart comes down to the numbers.
Use an auto loan refinancing calculator to compare your current loan to potential new ones. As long as you can secure a lower monthly payment or interest rate that saves you money over the life of the loan, refinancing can be a savvy move.
Just be sure to weigh the savings against any fees. And know that extending your loan length reduces your payment but increases the total interest paid.
Refinancing is easiest within the first few years of your loan when you still have plenty of payments left. Check your credit score, research current rates, and evaluate your budget to determine if refinancing could benefit your finances.
With the right loan terms and lender, you can put more money in your pocket each month and make your auto loan more affordable.