When you first take out an auto loan, it might be just right for your budget. But as time passes and circumstances change, an auto loan that was once perfect have better options available, such as a lower rate or more suitable term to meeting your current needs.
In these cases and others, it could make sense to refinance your auto loan. If you’ve never refinanced your car before and you’re wondering if it’s a good idea, keep reading – we’ll explore what auto refinancing is, how an auto refinance works so that you can decide when and if it’s the right choice for you.
What is Auto Refinancing?
Auto refinancing involves replacing your current auto loan with a new one, whether it be from the same lender or a different one.
When you an auto loan is refinanced, that loan is paid off with the proceeds from the new loan. After this point, you continue making payments toward your new loan with a new rate and/or term.
How Does Refinancing a Car Work?
Here’s an example of a car refinance:
- You have an auto loan with a balance of $20,000 and an interest rate of 6%.
- You learn that another lender can offer you an auto loan with a rate of 5%, meaning you’d pay less for that loan over its lifespan.
- When you refinance the loan, you pay off the remaining $20,000 with the new loan’s total.
- Each month after that, you make payments toward the new $20,000 loan with a 5% interest rate.
While there are many reasons why car owners might want to refinance their loans, the overall process is the same.
What Do You Need to Refinance Your Car Loan?
Refinancing a car loan is similar to applying for any other loan. Meaning you will need the same documents when you apply. These documents can include:
- Your driver’s license or ID
- Proof of car insurance
- Proof of income, like pay stubs
- Your Social Security number
Since an auto loan refinance is used to first pay off an existing loan’s balance, you’ll also need a copy of your loan contract or a payoff statement. These documents include important loan information, such as an outstanding balance and where to send a check or wire transfer, which are crucial to completing your refinance. You can get this from your current lender if you don’t have it in your personal files. You may need additional items depending on the state you live in, such as your title documents.
Does Auto Refinancing Impact Your Credit?
Your credit score (also called FICO score) is impacted by a variety of different factors, including how much debt you currently owe, the number of open lines of credit in your name, and whether you make bill payments on time. Whenever you take out a new loan or open a new line of credit, your credit score will update to reflect the new accounts.
So, when you refinance your auto loan, it may cause your credit score to dip below its current level.
Depending on your situation and what your other financial goals are, this potential impact to your credit score may make the option to refinance less attractive.
What to Look for in an Auto Loan Refinance
Just like other loans, an auto refinance loan should have the terms and rates that are best for you and your situation. With that in mind, here’s what to keep an eye out for when you refinance your car:
- A lower or comparable rate to your current interest rate.
- Low or no origination fees
- Few or no prepayment penalties. Prepayment penalties make you pay a fee if you try to pay off your loan ahead of schedule.
- An agreeable term. The loan’s term is how long you’ll be expected to make payments toward the balance. Make sure that your refinanced auto loan’s term is long or short enough for your needs.
Ultimately, an auto loan refinance might be a smart move, depending on the specifics of your situation. Just be sure to consider your options carefully!
The information and materials provided on this website are intended for informational purposes only and should not be treated as an offer or solicitation of credit or any other product or service of Regional Finance or any other company. This website may contain links to websites controlled or offered by third parties. The inclusion of any third-party link does not imply any endorsement by Regional Finance of the linked third party, its website, or its product or services.
Sources:
https://www.experian.com/blogs/ask-experian/will-refinancing-my-auto-loan-hurt-my-credit-score/
https://www.bankrate.com/loans/auto-loans/what-is-auto-loan-refinancing/
https://www.nerdwallet.com/article/loans/auto-loans/how-to-refinance-your-car-loan
