Knowing how to refinance a car is becoming more important as interest rates continue to rise.
Car owners can get a lower interest rate by refinancing car loans, saving money.
The purpose of an auto loan refinancing is to replace the current car loan with a new one and, typically, with a different lender to improve the loan agreement. In the new loan, the vehicle acts as collateral, as in the original loan, but the conditions of the loan are different.
You should be familiar with the process of refinancing a car to lower monthly payments, get a reduced interest rate, and modify the total length of the loan.
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Benefits of Refinancing a Car
Before discussing the specific steps of refinancing a car loan, let us look at the benefits of auto loan refinancing.
Lower Interest Rate
Your credit may have improved since you first bought your car. However, external conditions can also cause the market interest rate to decrease over time. Therefore, refinancing your car helps you get a lower interest rate.
According to RateGenius, a leading vehicle refinance platform in the U.S., the average interest rate on the original car loan was 14%. In comparison, the rate after refinancing halved down to 7%. That shows that vehicle owners can get a significantly reduced interest rate through refinancing.
Lower Monthly Payments
A lower interest rate means lower monthly payments on the same repayment conditions. You can reduce monthly payments even more by choosing a longer repayment term.
However, keep in mind that a longer repayment term can result in higher charges over the total duration of the loan, so you should consider your monthly budget to make a smart decision.
Pay Off Debt Faster
With a lower interest rate, you'll have the option to make higher monthly payments. Making higher payments allows you to pay off the debt faster and help grow your net worth. People with less debt tend to lead less stressful lives.
Studies show that refinancing your car loans can help you save a significant amount of money. The savings from auto refinancing is rising yearly as more people realize its importance over time. RateGenius reports that those who refinanced their car loans saved an average of $1,158 in 2021.
Seven Steps to Refinance a Car Loan
Follow these seven steps to refinance your car.
1. Determine if you should refinance the car loan
First, you must make sure that refinancing a car loan is the right choice for you. Generally, people opt to refinance a loan to get a better rate or when they are struggling to make payments.
Refinancing makes sense if interest rates have fallen since you took out the loan.
Whereas, if you have a limited monthly budget and cannot keep up with the current payment schedule, you should refinance the car loan for a more extended period. The monthly payments will significantly decrease when you extend the repayment term.
2. Examine the Current Loan
When considering refinancing options, you must be familiar with the terms and conditions of the current loan, especially the payoff amount. If the payoff amount is less than the amount the lender will lend, you will not qualify for auto loan refinancing.
Other loan conditions, such as the interest rate, monthly payment, and total cost, also affect the new refinancing conditions.
3. Calculate the Estimated Value of Your Car
Be sure you have a good idea about your car's worth, along with the cost of the loan. For example, if your car is relatively new and has low mileage, refinancing can save you money and keep you on the right track to repay the entire loan.
However, if the car's value is less than what you owe, refinancing might not be a good option.
4. Check Your Credit Score
Your financial history and current credit score are important factors for refinancing. If you have been making payments on time and paying the credit card debt, there is a chance that your credit score might have improved since the time you took out the first car loan.
You can get better rates and deals on car loan refinancing with an improved credit score.
5. Consider Your Savings
Once you have checked your credit score and calculated the loan cost, you should determine how much you can save by refinancing a car loan. Make sure you add various charges the lending bank imposes to get an accurate figure.
Some lenders also charge a prepayment penalty that can make refinancing more expensive, so get familiar with the specific terms and conditions.
6. Determine Car Refinancing Options
Explore various refinancing options to get the best deal. Some financial institutions provide discounted interest rates to loyal customers. Compare rates between multiple lenders. You can also apply for preapproval offers at the top three lenders to choose the best option.
However, keep in mind that applying for multiple lenders within a few weeks can negatively affect your credit score.
7. Complete the Formalities
Once you have selected a suitable lender and completed the preapproval, the next step is to complete the documentation and legal formalities. This includes providing proof of income, proof of insurance, and various other documents relevant to the current loan.
You might also be required to submit utility bills, W-2s, insurance cards, and other documents. Generally, preparing and organizing the paperwork in advance is a good idea so you can get through this step quickly and efficiently.
Carefully read the terms and conditions of the agreement before signing it. Check the fine print of the agreements, including the car refinancing contract, to ensure you know what you are getting yourself into.
After completing all of the formalities related to refinancing a car loan and signing the agreement with your chosen lender, you still have to keep track of your credit score, interest rate, and monthly payments.
Experts recommend setting up automatic payments to ensure you are paying monthly payments on time. This way, you will be consistent and not let delayed payments negatively impact your credit score. In addition, it becomes even easier to set up automatic payments if you have a checking account and a refinanced car loan in the same bank or financial institution.
Overall, refinancing a car loan is an essential process through which you can save a significant amount of money.
This article originally appeared on Wealth of Geeks.