Did you know refinancing an auto loan could help you save money over the long haul? It’s true; by reducing your interest rate, you can lower your monthly payments, which could mean you pay off your auto loan more quickly.
We’ll walk you through each of the steps to refinancing your auto loan so you can improve your financial wellness.
Step One: Decide if Refinancing is Right for You
While auto refinancing sounds enticing, it’s not right for everyone. Take stock of your financial situation and ask yourself some key questions:
- Does your current loan have a prepayment penalty? Some loans will charge a fee if you pay it off early, so double-check the terms of your current loan.
- What are the fees associated with refinancing (title transfer, registration, etc.)? These vary by state, so be sure to look into the rules where you live.
- Is your current loan balance higher than the total value of your vehicle? Some lenders will not approve a loan if this is the case.
- What is your credit score? A better credit score than when you first took out your auto loan could result in better rates. Also, be aware that a credit score that has moved in the opposite direction (towards bad credit) may not present favorable options if you try to refinance.
Understanding where you stand will help you evaluate whether refinancing will work to your benefit or not.
Step Two: Get Your Paperwork in Order
If you decide to move ahead with refinancing your auto loan, you’re going to need to provide some essential information, including the following:
- Personal information: You’ll likely have to provide your social security number, debt payments, previous addresses, and housing payments.
- Income proof: Lenders will ask you to provide a W2, paystub, or tax return to verify your income. You may also be asked to list your employment history.
- Proof of auto insurance: Lenders require auto insurance, so you’ll be asked to provide documentation of your coverage.
- Loan information: Your prospective lender may want information about the balance of your current loan. You’ll also want to have your current interest rate on hand to help you narrow down the best offers.
- Car information: Lenders will ask for the make, model, and year of your car along with the current mileage. You’ll also need to know your vehicle identification number (VIN).
Step Three: Consider Prequalification
Prequalification is a good next step if you are serious about refinancing your auto loan. Prequalification is typically conducted as a soft inquiry, meaning it won’t hurt your credit score. It’s important to remember that prequalification doesn’t guarantee that you’ll be approved.
Step Four: Apply to Refinance Your Auto Loan
This part is straightforward. Once you’ve settled on an offer you like, complete a loan application for the lender you choose. You’ll need the documents you’ve gathered to include with your application. Remember, the application will be a hard inquiry to your credit, which may cause a slight drop in your credit score.
If you’re approved, you’ll sign the paperwork and receive documentation of your new loan, including payment details and due dates.
Step Five: Pay Off Your Old Auto Loan
In many cases, your new lender will handle the transition details for you, including paying off your own loan. Just be sure to get documentation from your old lender that the loan has been paid in full.
If you’ve completed all the steps above, congrats! As, you’ve now successfully refinanced your auto loan. This allows you to focus on paying your new, lower payments until the loan is paid off.