How to refinance your car loan – Forbes Advisor


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Debt refinancing is a common strategy for solving problems with your budget. By swapping out your old loan for a new one with lower payments or a lower interest rate, you have the option of freeing up funds in the short term or saving money in the long term.

If you have a car loan, this is a good place to start as it tends to have fewer upfront costs and fewer years than refinancing a mortgage, for example. We’ll go through everything you need to know about refinancing a car loan, including how to decide if it’s the right choice or not.

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Why refinance your auto loan?

Most borrowers choose to refinance their car loan in order to pay less interest on a monthly basis. When you refinance a car loan at a lower interest rate, you can save hundreds or even thousands of total interest over the life of the loan.

You could end up with a lower monthly payment, freeing up money that you can use to pay off other loans. A lower payment will also lower your debt-to-income ratio (DTI), which reflects your monthly debt payments divided by your monthly gross income. If you plan to apply for a mortgage at some point, a low DTI could also help you earn a better interest rate.

Conversely, some borrowers choose to refinance their car loan over a shorter period in order to be able to repay the loan more quickly. You can also refinance a longer-term car loan, which can give you leeway in your budget. Another reason to refinance could be if you first got the car loan with a co-signer and want to withdraw it from the loan.

Is a Refi the right choice for me?

If you have a high interest rate on your car loan and current market rates have gone down, you may want to consider refinancing. Interest rates are at near historic levels right now, and you may qualify for a better rate.

Borrowers whose credit has improved significantly since taking out the loan for the first time may also benefit from a better rate. For example, if you have gone bankrupt or have defaulted on your credit report, your credit score may be much higher now.

If you can refinance with a co-signer or co-borrower, then you might get better rates if you were the only borrower on the original loan.

When you shouldn’t refinance your car loan

If you are shopping around for a personal loan, mortgage, or other financing option, now is not a good time to refinance your car loan. Applying for a loan would hurt your credit score and possibly earn you a higher interest rate on all loan offers.

If your current car loan has a prepayment penalty, refinancing could result in this penalty. Depending on the penalty and your current interest rate, it may not be worth refinancing. If you are unsure whether your loan has a prepayment penalty, find the loan agreement or call the lender and ask. Some prepayment penalties only apply if you’ve recently taken out the loan, so it’s best to check over the phone or through documents.

Is my auto loan eligible for refinancing?

Auto lenders have rules about which cars are eligible for auto loan refinancing. Most lenders will not refinance a loan for a car over 100,000 miles or with a salvage title.

The lender will also assess the value of the car before approving a refinance request. If the value is too low, you will not be eligible. The lender will calculate the loan to value ratio (LTV) of the car, which usually needs to be below 125% to qualify.

Before you apply for refinancing your car loan, determine the LTV ratio. To find the car’s current value, use sites like Kelley Blue Book, Edmunds, and NADAguides. Take the average of the three sites to find a general estimate.

Calculating the LTV is straightforward. Divide the current loan balance by the value of the car: the percentage obtained is the LTV. For example, let’s say you have a balance of $ 9,000 on a car worth $ 11,000. In this case, your LTV ratio would be 82%.

But if the current balance is $ 15,000 and the car is only worth $ 10,000, your LTV would be 150%. This is much higher than what most lenders allow, so refinancing is probably not possible.

How to refinance your car loan

Here are the basic steps you will need to take to refinance your auto loan:

1. Gather your documents

To apply for a car loan refinance, you will need to provide information about your current car loan and vehicle. You will also need to provide your legal name, address, Social Security Number (SSN), proof of employment, and proof of insurance.

2. Buy a Refi lender

You should apply for car loan refinancing from several different banks and lenders, including your current bank, online lenders, and other local and national banks and credit unions. You can often take advantage of a bank’s offer with another bank to get a better rate.

When you apply for an auto loan refinance, it will immediately show up on your credit report and count as a serious investigation. A serious investigation can cause a drop of five points in your credit score, so every auto loan refinance application has consequences for your credit.

However, if you submit all requests within 14 to 45 days of each other, these multiple requests will only count as one request. If you wait too long, you might miss the showcase. In this case, each request will be treated as a separate request and will have a greater negative impact on your credit score.

3. Application process

Be aware that the lender will do their own valuation of the car. They will also perform a credit check, verify your income, and ask you for proof of auto insurance. You may need to provide a recent pay stub or income tax return for you and your co-borrowers.

The process of refinancing a car loan is generally faster than refinancing a mortgage, typically taking around two weeks from start to finish.

4. After being approved

Once you are approved by several different lenders, compare the different offers carefully. The most important factor is the annual percentage rate (APR) and the total interest paid over the life of the loan. The APR includes interest rates and all charges, including lender and title charges. A lower APR means you’ll pay less fees and interest.

You can be approved for several different interest rates and loan terms. Loans with longer repayment terms usually have higher interest rates and lower monthly payments. A short term loan means that you will have higher monthly payments and a lower interest rate.

Take a look at your budget and decide how much you can comfortably afford each month. Remember that you can also make additional payments on the loan if you choose a lender that does not charge a prepayment penalty.

After selecting the lender, you will need to finalize the car loan. The new lender is responsible for paying off the loan balance from the old lender, but it’s a good idea to check that this is going correctly. It’s also important not to fall behind on your car payments during this transfer process. Once the first lender is paid off by the new lender, they must repay any additional payments you made during this window.

Once the loan is paid off, you can start making payments to your new lender. Consider setting up automatic payments so you don’t have to worry about remembering your new due date.

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