We’ve all been there before: you’re stuck in a car loan with an interest rate higher than what you want. Maybe you didn’t shop around before buying your car, or rates have increased since you got your loan. In any case, you don’t have to be saddled with a bad interest rate forever. You can refinance your car loan, and we’ll show you how in this article.
What is refinancing a car loan, and why would you do it?
Before diving into how to refinance a car loan, let’s first consider what it is and why you might want to do it. When you refinance a car loan, you replace your current loan with a new one.
There are a few reasons why you might want to refinance your car loan:
- Decrease your interest rate: This is the most common reason people refinance their car loans. You’ll save money in the long run if you can decrease your interest rate.
- To shorten the loan term: Another reason to refinance your car loan is to shorten the loan term. This will raise your payments, but you’ll pay less interest over the life of the loan.
- To get cash out: Some people refinance their car loans to get cash out. This can be helpful if you need money for a large purchase or unexpected expense. Just be aware that if you do this, you’ll likely end up paying more interest over the life of the loan.
How to refinance a car loan
Now that we’ve answered the question “what is refinancing a car loan,” let’s look at how to do it. Here are the steps you’ll need to take:
1. Shop around for the best interest rate
The first step in refinancing your car loan is shopping for the best interest rate. You never want to rush into a loan without doing your research first. Here are a few places to look for the best interest rates:
- Your current lender: Your current lender may be willing to lower your interest rate to keep your business. It’s always worth asking.
- Credit unions: Credit unions typically offer lower interest rates than banks. If you’re not a member of a credit union, you can usually join by meeting certain requirements – like working in a certain industry or living in a certain area, or being a part of a certain organization.
- Online lenders: Several online lenders offer competitive interest rates. It’s worth checking out a few of them to see what rates they can offer you. Don’t forget to take your time when scouting out the best interest rates. A lower interest rate can save you a lot of money in the long run, so it’s worth shopping around.
2. Compare loan terms
In addition to interest rates, you’ll also want to compare loan terms when shopping for a new car loan. Some things to consider include the following:
- The length of the loan: A longer loan term will mean lower monthly payments, but you’ll pay more interest over the life of the loan. A shorter loan term will mean higher monthly payments, but you’ll pay less interest over the life of the loan. Assess your financial situation and decide what’s best for you.
- Prepayment penalties: Some lenders charge prepayment penalties if you complete your payments early. You’ll want to avoid this, so feel free to ask about it when you’re shopping around.
- Origination fees: Origination fees are charged by some lenders to process your loan. These fees can add up, so be sure to consider them when you’re comparing loan terms.
3. Get pre-approved for a loan
Once you’ve found the best interest rate and loan terms, the next step is to get pre-approved for a loan. This will give you a good idea of how much money you’ll be able to borrow and what your monthly payments will be. Getting pre-approved for a loan is always a good idea before you start shopping for a car. Not all car loans offer pre-approval, but it’s something to look for.
4. Research the best time to buy
There are a few different times of the year when you can get a great deal on a car. For example, dealerships often have end-of-year sales and clearance events. These are usually good times to buy a car, as you can often get a lower price. You might also want to wait for a new model year, as dealerships will often discount the previous year’s models to make room for the new ones.
5. View your credit report
Before you apply for a loan, you’ll want to view your credit report. This will give you an idea of where your credit stands and whether or not you’ll be able to get a good interest rate. You can get a free copy of your credit report from AnnualCreditReport.com
6. Estimate your car’s value When you’re ready to trade in your old car, you’ll need to estimate its value. This could prevent you from being upside down on your loan – meaning you owe more than the car is worth. Popular tools like Kelley Blue Book can help you estimate your car’s value.
7. Get your paperwork in order
Once you’ve received your car’s estimated value and are ready to refinance, the next step is to get your paperwork in order. This includes your driver’s license, proof of insurance, pay stubs, W2 form, proof of residency, and car title (if you’re refinancing your existing car loan). Preparing these things before you start the process will make it much smoother.
The Bottom Line – When refinancing a car loan
Refinancing a car loan can be a great way to save money on interest and lower your monthly payments. However, it’s important to do your research, plan, and compare before you refinance.
It’s always best to know your goal, what kind of lender you want to work with, and the different offers available. With this information, you can decide which car loan refinancing option is best for your needs.