Car refinancing is basically getting a new loan to pay an existing loan. The car is used as collateral for the new loan. If you default on the new loan, the lender will repossess your car to recover the loss. The main advantage of refinancing is that it will lower your monthly payments or your total debt.
Just like any new loans, car refinancing will initially have a negative effect on your credit standing, but it may help improve your credit score in the long run as it will lower your total debt. It may be a good idea to defer refinancing your car loan for at least 6 months or until your credit standing improves.
How Soon Can You Refinance a Car Loan After Purchase?
While you can find lenders that would be willing to extend car loan refinancing any time, other lenders require a car loan to be at least 6 months old before they consider refinancing it.
Is It Easy to Refinance a Car Loan?
Compared to a mortgage that is secured by a personal property, a loan is easier to refinance. Some lenders don’t charge fees for the refinancing, only the interest for the new loan. However, some lenders may charge a small fee for the title transfer, depending on the rules set forth by the local DMV. At any rate, refinancing a car loan allows you to save. You save more the earlier you do it.
What Information Is Required in Car Refinancing?
Before applying for car loan refinancing, make sure to have the required documents ready. These include proofs of your income (payslip or tax returns), residence, and car insurance, as well as your driver’s license, car registration documents, and details about your car (make, model, and VIN).
Your prospective lender for the refinancing may require information about the lender of your existing loan, the remaining balance, and your car’s odometer reading. You may also need to sign a power of attorney allowing the lender to modify the title, and assume the role of a lien holder.
5 Steps: How to Refinance a Car Loan
Getting a car refinanced is a bit more complicated than getting a first loan.
Having said that, following is a step-by-step guide on how to refinance a car loan to help you understand the process:
Step 1 - Decide if car refinancing is a viable option for you.
If you are having difficulties meeting your current loan obligations, and getting the loan refinanced can make things easier for you, then go for it. This is usually the case when you obtained your original loan at a time when interest rates were high.
Likewise, if you feel that the current amortizations are eating up your budget for other important items, refinancing for a longer term can help. This way, you get lower monthly payments.
Step 2 - Prepare the required documentation.
Know the required documents, and prepare them early to avoid delays, and everything goes smoothly once you apply for refinancing. Ask prospective lenders what documents you need to prepare such as proof of income, car insurance, and driver’s license, among others.
Step 3 - Find out how you can get prequalification offers..
A prequalification offer is your guaranty that the lender is willing to refinance your car loan. Try to prequalify with various lenders within a span of 2 weeks. This way, all inquiries about your credit rating will only count as 1, which will have little impact on your credit score.
Step 4 - Apply for the best car refinancing option.
When weighing your application, lenders assess your credit history, score, and loan eligibility in various ways. When shopping for the best refinancing rates, start with credit unions and banking institutions that usually offer lower rates compared to car dealerships.
Banks may likewise offer discounts and preferential rates to their existing account holders. Be vigilant when searching. Go for the one that you think offers the best terms at reasonable rates.
Step 5 - Settle your old car loan, and focus on making timely payments for your new loan.
Your first order of business upon getting a new loan is to completely settle your old car loan. Nothing can be more burdensome than paying monthly installments for 2 loans. With your old loan out of the way, you can focus on paying the car refinancing loan with better and more affordable terms.
Things to Consider Before Refinancing Your Car
The approval of your car refinancing application will depend on several factors, including your car’s model, make, features, age, and mileage, among others. These factors help determine the car’s current value, and lenders want to make sure that they are not extending a loan that is worth more than the car’s market value.
Is It Worth Refinancing a Car Loan?
By refinancing your existing car loan, you can get better interest rates and/or longer payment terms, either of which can lower your monthly payments. Take note, however, that a longer term may increase your total due. A lower interest rate, on the other hand, may lower both your monthly dues and overall debt.
If you find a loan that offers lower interest and better payment terms, then it is a great time to refinance your car loan. Otherwise, if you’re offered for the same and even higher terms, then ignore it and wait for better opportunities.
Banks that Offer Car Refinancing
Following are some of the banks where you can get your car loan refinanced:
- Capital One – A part of a reputable and established bank, Capital One is highly rated for extending car refinancing loan amounts.
- Ally Financial – Aside from car refinancing, Ally Financial also offers buyouts of leased cars through Ally Clearlane, an affiliated company.
- GM Financial – Through Mode, GM financial offers an easy way to apply for loan refinancing online or via an app.
Other institutions that offer car loan refinancing are Bank of America, US Bank, Navy Federal Credit Union, LendingClub, PenFed Credit Union, LightStream, and Digital Federal Credit Union.
Final Verdict
Refinancing your car loan can help make your monthly payments easier to bear with lower interest and/or monthly payments. The tips provided in this post will help guide you in your search for the best car refinancing loan providers.
If you found this post helpful, please feel free to leave a comment below.