Auto loan refinancing can be a great way to save money while keeping your vehicle, but it’s important to understand the process and compare rates before applying. If you have good credit, refinancing is a particularly attractive option. And, if you currently have a low interest rate due to dealer financing, you can also qualify for improved rates even without great credit.
What is automatic refinancing?
Auto loan refinancing is the process of taking out a new auto loan to pay off an existing auto loan. This can help you lower interest rates, lower your monthly payments, or do both, depending on what you qualify for.
When is it a good idea to refinance your car loan?
Refinancing your auto loan is a good idea if you can get approved for more competitive rates with a new loan. If your credit score has improved since you took out your current loan, chances are you can save some money each month.
But it is important to consider where you are in the term of the loan. If you only have a few months left or your credit score is the same as when you first applied for your current auto loan, this may not help you much.
You can prequalify with lenders to see if you qualify for a lower rate or shorter term. An auto loan refinance calculator can also help you determine if refinancing will save you money.
How to save money with your auto loan refinance
There are several ways to get more money back into your pocket when you refinance your car loan.
Lower your interest rate
Refinancing your car loan could add money to your monthly budget. Depending on your credit score and your loan details, you might see a lower interest rate with a new lender. This could save you money over the life of the loan.
Reduce your monthly payments
Depending on your current loan terms and the details of the new loan, you may see an overall drop in your monthly payment. Extending the term will do this, but simply extending the term will also increase the overall cost, as you will pay more interest.
But keeping the same term – or shortening it – and getting a better interest rate will lower both your monthly payments and your overall interest paid.
How to refinance your car loan
Understanding the process of refinancing an auto loan is just as important as knowing the benefits. Here are four steps to take when refinancing a car loan.
1. Check your credit score and report
Before refinancing an auto loan, you’ll need to check your credit score and report to make sure your information is accurate and up-to-date. If your credit score is above 670, you will likely get a lower interest rate. Alternatively, if you have a lower score, it may be difficult to get a better interest rate.
2. Compare rates and shop around
Once you know your credit score, compare auto loan rates from several lenders. To make sure you’re getting the best rate possible, pre-qualify with several lenders before submitting a full application. It will also save you from taking several hits to your credit score.
3. Apply and get the auto refinance loan
Once you’ve found the best rate, you can complete the application online, over the phone, or in person, depending on the lender. Be sure to read all terms before signing.
4. Pay off your current loan
Either you will receive a check or the new lender will refund your existing check. Continue to make payments on your existing loan until you have verified that it is fully paid off.
The bottom line
Refinancing your car loan can save you money if you pay a higher rate than the current market. But only do it if it saves you money. If you need to lower your monthly payment, but that would require extending the term of your loan, you may want to consider other options.