To put it simply, refinancing consists of replacing one car loan contract with another on the same vehicle. This is usually done to save you money on your monthly payment. There is no fixed cost to refinance, but you may face fees and charges associated with your new loan. These should be minimal compared to your savings if you play your cards right.
Car refinance steps. To refinance your car, you must first qualify, which means knowing where you stand in terms of credit. You will also want to gather the information you need about your car and your loan. Refinancing is usually reserved for borrowers with good credit, so if your credit score isn’t great, you should check that it’s at least higher than when you originally took out your loan.
Then contact your current lender and get your loan repayment amount. You usually receive what is called a 10-day refund, which includes your loan amount and 10 days of interest charges. You need this information to apply to a new refinance lender. You also need to know the year, make and model of your vehicle, its mileage, and whether or not there is equity in your vehicle. If you are in a negative equity position, you are not eligible to refinance your car.
Finally, it’s time to shop around for the best rates and terms you can find. You can do this by applying for refinancing with several lenders to see which offer is best for you. This is called tariff shopping. When you make multiple inquiries for the same type of credit within a two-week period, a single serious inquiry should impact your credit score, even if they all appear on your credit report.
Is refinancing a good idea? Before embarking on refinancing, it is important to ask yourself why you are choosing this option. Has your credit score improved enough to qualify for a better interest rate? Have aggregate national interest rates fallen? Maybe your financial situation has changed? Maybe you need to add or remove a co-signer or co-borrower?
Whatever your reason, the primary goal of refinancing should be to lower your monthly car loan payment. You can do this by qualifying for a lower interest rate, longer loan term, or both. If you simply extend the term of your loan, you can still lower your payment, but without a lower interest rate, you end up paying more overall.
Does refinancing a car save money? Suppose a borrower takes out a loan for $20,000, with bad credit, and qualifies for an interest rate of 12% for 60 months. This borrower is paying $444.89 per month, for a grand total of $26,693 with interest.
Now imagine it’s been 18 months and the borrower has already paid $8,008.02 but needs to reduce their monthly payment. The borrower requests a refinance on the remaining balance of his loan, which is just under $12,000. At this point, the borrower still has 42 months left on the original loan.
Assuming borrower qualifies for $12,000 at 10% interest, for 48 months. They both extend the term of their loan and qualify for a lower interest rate, which is a good way to keep your monthly costs as low as possible. The new loan gives them monthly payments of $304.35, for a total of $14,609. Even with the interest, they’re saving nearly $140 per month and over $4,000 in total from refinancing.
Our catch. Refinancing can be a great way to save money on your monthly car loan costs. If you’re not sure where to turn to start your refinancing process, we want to help. Simply fill out our fast and free auto loan refinance application form to get started today.