When you plan to refinance a car, it’s important to know all the details of the new loan before you sign on the dotted line.
The process of refinancing a car can be complicated, and there are a lot of factors to consider. But if you take your time and do your research, you can find a loan that will save you money in the long run.
Does it Make Sense for Me to Refinance a Car?
First things first, let’s look at what refinancing a car entails. In simple terms, refinancing a car means taking out a new loan to pay off your existing car loan.
The new loan will have different terms than your old loan, which could include a lower interest rate, a longer loan term, or a lower monthly payment.
Refinancing a car can be a good idea if you can find a loan with better terms than your current loan.
For example, if you can find a loan with a lower interest rate, you’ll save money on interest over the life of the loan. Or, if you can find a loan with a longer-term, you may be able to lower your monthly payment.
When You Should Refinance a Car
- 60-90 Days Into the Car Loan: One of the best times to refinance your car is about 60-90 days after you’ve taken out your original loan. At this point, the lender has already received most of the interest payments from your loan, so they may be more willing to work with you on refinancing.
- At Least Six Months into the Car Loan: In general, you should only refinance a car loan if you’ve been making regular, on-time payments for at least six months. This shows lenders that you’re a responsible borrower, and it gives them more confidence that you’ll be able to make the payments on a new loan.
- With 2 Years or More Left on the Car Loan: You may also want to consider refinancing a car loan if you have two years or more left on the original loan. This is because you’ll likely be able to find a loan with a lower interest rate and better terms.
Other Things to Know Before You Refinance Your Car
You can also use the following as a rule of thumb before refinancing your car:
- Your credit score has improved since you got your original loan: If your credit score has gone up since you got your car loan, you may be eligible for a lower interest rate.
- You can find a new loan with better terms: As we mentioned, the whole point of refinancing your car is to find a loan with better terms than your current loan.
- Made on-time payments: To be eligible for refinancing, you’ll need to have a good payment history on your current loan.
- You have equity in your car: To refinance your car, you’ll need to have equity in it. Equity is the difference between what your car is worth and how much you still owe on the loan.
Risks Involved to Refinance a Car
Of course, there are also some risks to refinancing a car. For one, you’ll have to go through the process of applying for a new loan, which could include a hard credit inquiry.
A hard credit inquiry could lower your credit score, which could make it more difficult to get approved for other loans in the future.
Additionally, if you extend the term of your loan, you could end up paying more interest over the life of the loan.
And, if you have a current car loan with a low-interest rate, you could end up paying more interest over the life of the loan by refinancing into a new loan with a higher interest rate.
Now that you know the pros and cons of refinancing a car, you can make an informed decision about whether it’s the right choice for you.
If you decide to move forward with refinancing, there are a few things you should do to make sure the process goes smoothly.
Check Your Credit Score
The first step in refinancing your car is to check your credit score. This will give you an idea of what interest rates you may be eligible for. If your credit score has improved since you took out your original loan, you may be able to get a lower interest rate.
If you’re not sure what your credit score is, you can get a free credit report from several different credit reporting agencies.
Research New Lenders and Compare Rates
Once you know your credit score, you can start shopping around for new lenders. Compare rates from different lenders to see who is offering the best deal.
You may also want to compare the terms and conditions of different loans. Some loans have prepayment penalties, which means you’ll have to pay a fee if you pay off your loan early. Others have shorter terms, which could save you money in the long run.
Submit a Loan Application
When you’ve found a lender you’re happy with, it’s time to fill out a loan application. You’ll likely need to provide the following personal information:
- Your name, address, and social security number: This is so the lender can identify you and pull your credit report.
- Your employment information: The lender will want to know how much money you make and whether you have a steady job.
- The value of your vehicle: The lender will need to know how much your car is worth so they can determine how much money to lend you.
- Your loan information: The lender will need to know how much you currently owe on your car loan.
- Proof of income: You’ll need to provide the lender with proof of your income, such as a pay stub or tax return.
- Proof of insurance: You’ll need to show the lender that you have car insurance.
- The make, model, and year of your car: The lender will need this information to determine the value of your car.
- The Vehicle Identification Number (VIN): The lender will use this to identify your car and pull your credit history.
- Your driver’s license number: The lender will need this to run a credit check.
- The reason for refinancing your loan: The lender will want to know why you’re refinancing your loan.
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