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Auto Loan Refinancing Guide

The choice to refinance your auto loan is one that requires research and preparation. Part of that research includes determining if your goal is to walk away with better rates and terms or lower your monthly payment. Regardless, refinancing simply replaces your current loan with a new one. This guide outlines the ins and outs of refinancing your vehicle loan, from the nitty-gritty of the steps to take, the benefits and drawbacks and the basic requirements.

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The auto refinance process

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The first step when refinancing your auto loan requires you to determine if the process is the right financial move. The main two scenarios that refinance might be a good idea are: if you can walk away with a better rate or if you are having trouble making payments. 

In order to decide if it is the right choice you must take the time to review your current loan. It’s best to use a calculator and compare potential savings against what you pay for your existing financing. Finally take stock of your credit score to ensure that you can ultimately walk away with an improved loan. Remember: If your score is at the same spot as when you signed — or worse, lower — refi might not benefit you.  

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The refinance application process is likely going to be fairly similar to what you did when you applied for your initial loan. After shopping around at three or more lenders you can apply with the one that best fits your needs. Most lenders allow for an online application, but you will likely have a hard credit pull before acceptance — which can lower your score slightly. 

Pay close attention to the specific requirements that the lender carries when it comes to mileage, vehicle type, time you've had the loan and remaining loan balance. On top of this, it is a good idea to get your paperwork in order ahead of applying. This includes details about your vehicle — and information about your existing loan that you wouldn’t have needed for your first loan application.

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Finally, you will receive your new auto loan. You can now pay off your old loan and start making payments on your new one. The process varies depending on the lender, but you will either receive payment or it will be sent directly to the previous lender. 

Either way, it is wise to confirm this process was done before halting payments on your old loan so you don't wind up with late fees or other charges.

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Advantages and disadvantages of auto refinancing 

Before hitting reset on your auto loan it is important to weigh the benefits and drawbacks of signing off on a brand-new loan. 

PROS

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    Less expensive monthly payments

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    Ability to pay off the loan sooner

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    Lower interest rates

CONS

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    Potential fees

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    More paperwork

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    Could extend loan

Is auto refinancing right for you?

Auto refinance is the right choice if you can save money — specifically on incurred interest — or you need relief and can't get your loan modified. But as interest rates continue to rise due to high inflation, determining if it is right for you requires extra consideration.  

Reasons to consider refinancing your auto loan

  • Your credit has improved 
    Credit score serves as the primary goal post for the rates lenders will offer you. If your credit has improved since you initially signed off on your loan, it could be worth your while to refinance and receive more competitive rates. 
  • To lower your monthly payment
    If your current loan is straining your finances and you're at risk of missing a payment, refinancing may be a good option. Pay close attention to the amount you extend your loan term though, the longer it is the more interest you pay over the lifetime of the loan.
  • Interest rates have dropped
    While this not the case currently due to the Federal Reserve’s moves to quell inflation, refinancing is a good idea if interest rates have declined. Keep up with current interest rates to determine if refinancing is a good move. 
  • You have dealer financing
    If you initially agreed to dealer financing terms, it is likely that you did not get the most competitive terms. Shop around with direct lenders to lock in more competitive rates. 

Requirements to refinance an auto loan 

Each lender carries its own eligibility criteria when it comes to auto refinance loans. But there are the common requirements you will likely run into. 

It is best to take advantage of an auto refinance calculator that will do the heavy lifting for you. Once you have a handle on how much you could potentially save you begin your refinance process.

How to calculate auto refinance savings 

To determine potential savings from refinancing your auto loan you'll need to compare your current loan with the new one. This is not as simple as looking at the two monthly payment numbers, instead, you must factor in how total interest comes into play. 

How to refinance your auto loan

1

Shop around and prequalify for 3 loans

After reviewing your current loan, compare a few different types of lenders. Pay close attention to available interest rates and requirements as they vary by lender.
2

Gather relevant documents

Following preapproval it is best to get your documents in order before moving on to fully apply. Be ready to provide information on your vehicle, your finances and the initial loan.
3

Apply for the best offer

The lender you choose will have a step by step process you can follow to submit your application. Depending on the lender, you could hear back in as soon as a few minutes.

Auto refinance basics

What to consider after refinancing your car?

While you can now take a deep breath with a new and improved loan in hand, there is still some important work to be done. These considerations will ensure you stay on top of your new loan. 

Finish up payments on your previous loan. 

Until you get the go ahead from your previous lender it is important to continue making payments on your loan. If an issue arises and you overpay, the lender can likely credit the amount back to you. Once you receive the new loan either you or your lender will handle the final loan payment. Check with your lender to avoid any additional charges. 

Start paying your new loan. 

Payment schedules vary by lender but generally, you will be expected to begin making payments 30 days after accepting the loan. It is wise to set up automatic payments if it is available to prevent any missed payments. Along with this, do not put off any payments in order to avoid any building interest. If you feel yourself heading into a precarious spot contact your lender and explain the situation before it gets too late.

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700

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