When you take out a car loan, you’re agreeing to terms, including an interest rate and monthly payment amount, that you’ll have to pay for years. But sometimes, situations change. You might have gotten a better-paying job and can handle larger monthly payments, or your credit score might have improved, making you eligible for a better interest rate.
Refinancing your car loan gives you a chance to take out a loan with different terms that work better for your current situation. You can work with a new lender, like a credit union, and might find that refinancing an auto loan could save you significant money across the life of the loan.
But before you refinance, it’s important to make sure that it’s the right decision for your situation. Read on to learn about the ins and outs of refinancing your car loan, and when it might be a good idea.
What Is Refinancing An Auto Loan?
When you refinance an auto loan, you will take out a new loan that pays off the balance of your first loan. By taking out that new loan, you may be eligible for a lower interest rate and different terms, meaning you could pay off your car faster to save money or take out a longer term to make your monthly payments smaller and more manageable. Refinancing an auto loan also means you might choose a new lender to work with, which can be helpful if you’re not happy with your current lender.
Determining The Ideal Time To Refinance Your Car Loan
Everyone’s situation is different, so be prepared to do some math and weigh the pros and cons to determine when it’s an ideal time to refinance your car loan. The following situations may indicate that it’s a good time to refinance your loan:
- Your credit score has improved. With a better credit score, you may qualify for a lower interest rate and save money by refinancing.
- You want to change the loan term. If you’re having a hard time making your monthly payments, extending the loan term by refinancing can help you to more comfortably make those payments. You could also shorten your loan term, saving you money in interest.
- Loan rates have decreased. If auto loan rates have decreased since you closed on your first loan, refinancing could help you to qualify for lower interest rates.
- You want to change lenders. If your current lender provides poor customer service or if you’ve run into issues with their recordkeeping, refinancing could give you the chance to choose a different lender.
- You got your first loan from an auto dealer. If you didn’t shop around when you first got your auto loan, you might be able to get a better deal by refinancing. This is particularly true if you got your loan through a car dealer since loans from auto dealers often have higher-than-average interest rates.
Reasons Where Refinancing Your Auto Loan Doesn’t Make Sense
There are also some situations where it doesn’t make sense to refinance your auto loan:
- You’re close to paying off your loan. Refinancing when you’ve almost paid off your loan is unlikely to save you money.
- You owe more on your vehicle than it’s currently worth. Lenders typically won’t approve you for a refinance in this situation.
- Your car is older or has high mileage. Many lenders won’t approve you for a refinance if your vehicle is more than 10 years old or has more than 100,000 miles.
- Interest rates have increased since you took out your loan. If interest rates are currently higher than they were when you took out the loan, you won’t qualify for a lower rate, and you won’t save any money – you could end up paying more.
- Your credit hasn’t improved or has decreased. Unless your credit score has improved, you will probably only get an interest rate equal to or less than your current interest rate.
- You bought your car just a month or two ago. Most lenders won’t let you refinance for at least 60 to 90 days, and it’s often best to wait at least 12 months before your refinance.
- Your loan has prepayment penalties. If your current loan has prepayment penalties, those penalties may negate any money you would save by refinancing. You’ll need to do some matches to see if that’s the case.
How To Refinance An Auto Loan
If you’re ready to refinance an auto loan, these five steps will guide you through the process.
1. Check credit score and report
Your credit score plays a significant role in determining your refinancing rates. Before you decide to refinance an auto loan, check your current credit score. You can get a free annual credit report by visiting AnnualCreditReport.com or by calling 877-322-8228.
To make refinancing worthwhile, your current credit score should be significantly higher than it was when you initially applied for your auto loan. If your current credit score isn’t strong enough, then you may want to take some time to work on improving your credit before your refinance.
2. Get prequalified for an auto refinance
Getting prequalified for an auto refinance can help you to decide if refinancing is worth it. Many lenders offer prequalification with a soft credit inquiry, so getting prequalified won’t impact your credit score.
Once you’re prequalified, you’ll have an idea of the potential interest rates and monthly payment options that you could qualify for. From there, you can decide which lender and which refinance option is best for you.
3. Compare rates from various lenders
Lenders use different formulas to calculate your rate, so it can pay off to shop around and compare rates from different lenders. Get prequalified with multiple lenders, including large banks, credit unions, and online lenders to determine which lender offers you the best rates.
In addition to considering rates, it’s important to find a lender that’s an overall good fit for you. Look for loan terms that allow you to comfortably make payments. Consider whether a lender will allow you to pay off your loan early, and look for other fees, like origination fees and transaction fees, which may eat into the money you would save by refinancing.
4. Apply for an auto refinance loan
Once you’ve determined which lender and refinance loan is right for you, it’s time to officially apply for the loan. To apply, most lenders will require that you can prove that you have a steady income. You will also need to provide proof of residence, information about your vehicle like its make, model, year, and vehicle identification number, and your loan’s current balance and terms.
When you apply to refinance your auto loan, the lender will perform a hard credit inquiry, which can lower your credit score by a few points. Because of this, it’s important to take your time and decide on the lender that is right for you before you apply to refinance.
5. Start making payments on the new loan
Once you’re approved for an auto loan refinance, you will receive documentation outlining your new loan terms, including your payment amounts and when your first payment is due. Once you’ve signed the loan documents, your new loan terms will take effect. You will need to start making payments on your new loan, and will no longer make payments on your old loan.
Auto Refinancing FAQs
We’ve answered some common questions about refinancing an auto loan.
1. How long should you wait to refinance a car?
You will typically need to wait at least 90 days after you’ve signed your auto loan to refinance that loan. In many cases, it’s best to wait at least 12 months, which gives you time to improve your credit score so you can qualify for a lower interest rate.
2. How long does it take to refinance a car?
The length of the refinancing process depends on the lender. Some lenders may be able to complete the process within two to four weeks.
3. What do you need to refinance a car?
To refinance a car, you should be prepared with several documents and some key information:
- Remaining time and balance of your auto loan, and contact information for your current lender
- Make, model, age, and mileage of your car
- Proof of income, like pay stubs
- Proof of car insurance
- Driver’s license
- Proof of residence
- Vehicle’s registration
Ready To Refinance Your Auto Loan? Apply Today!
By refinancing your auto loan, you may qualify for lower interest rates and lower payments. Refinancing might make it easier to pay down your loan, and it can potentially help you to save money. If you’re considering refinancing your car loan, Arizona Central Credit Union can help. Visit our Auto Refinancing page for more information, and please contact us if you have any questions.
