You signed the loan documents for your vehicle, but that doesn’t necessarily mean you’re stuck in the agreement with no alternative payment options. Just like a home mortgage, you can refinance your car loan to secure lower monthly payments and potentially lower costs over the life of the loan.
How to refinance a car loan: 6 steps
If you secured your original auto loan through the dealership, you may not have received the most favorable interest rate. And falling rates might make your current rate seem like even more of a bad deal.
Here’s a step-by-step guide to evaluate your current loan and submit an application to refinance your car.
1. Review your current loan
A third of Americans don’t know the APR on their auto loan, according to a 2019 survey conducted by Harris Poll conducted for Lending Club. Don’t make the mistake of not knowing yours.
Instead, educate yourself on your existing loan to understand exactly how much you’ve been paying in interest, what your monthly payment is and what the total cost of the loan will be if you finish the entire term.
Refinancing at a lower rate could save you money, but you won’t know for sure if you don’t know your current rate.
2. Check your credit score
Do you remember what your credit score was when you secured your original auto loan? If you’ve made smart money decisions since that time – paying down your credit card debt and making on-time payments, for example – your credit score may have improved.
If your credit has improved, lenders will likely view you as a better borrower with a lower risk of defaulting on a loan. As a result, the lender may offer you a lower rate on a refinance.
Take these steps to improve your credit score.
3. Estimate the value of your car
The cost of your loan isn’t the only factor to consider when thinking about whether to refinance. You’ll also want to get a sense of what your car is worth.
If your car is newer with low mileage and a sizable balance that will still take years to pay off, you may be a good candidate to refinance. If it’s worth less than what you owe, you may be out of luck. If your vehicle is almost paid off, it makes less sense to refinance because interest will make up a small portion of your remaining payments.
You can use a resource like Kelley Blue Book to get an idea of what your car is worth.
4. Shop around for the best refinancing rates
Interest rates vary widely, so compare deals at a number of banks and credit unions.
Start with the bank you use for other services, such as your checking and saving account. Some financial institutions offer discounts on interest rates for existing customers.
Additionally, compare auto loan rates online to get a clearer view of what top lenders are offering.
5. Determine how much you’d save by refinancing
After you’ve shopped around for rates and understand what you may be able to qualify for, do the math to see how much you’d save by refinancing your car loan.
Use Bankrate’s auto loan refinance calculator to see how much money a new rate could save you on interest, monthly payments and possibly even both.
6. Get your paperwork in order
Before you submit an application to refinance your car, make sure you have all the appropriate documentation the lender will need to review.
Here’s what you’ll need to provide:
- Proof of income.
- Proof of insurance.
- Details on your existing loan, such as your current interest rate, remaining balance and payoff amount.
When should you refinance your car loan?
There are two main reasons that an auto loan refinance can be a smart financial move:
- If your credit score has improved, you can benefit from your improved financial standing with a refinanced loan at a lower interest rate.
- If you’re feeling like you’re stretching your monthly budget with your current payment, you can refinance your car loan to a longer term. By dividing your payments over an extended period of time, you’ll have a lower monthly bill that can lower your financial stress. But keep in mind that you might incur additional interest charges by extending your existing loan with four years remaining to, say, a five- or six-year loan.
Refinancing your car loan can make a big difference in your personal finances. The current interest rate environment is a great time to compare auto loan rates and consider your refinancing options.