If your financial circumstances have changed or interest rates have gone down since you bought your car, you may want to consider refinancing your car loan to decrease your monthly payment or save money on interest.
People who have never refinanced a car loan may not be sure where to start. At Addition Financial, we work with our members to ensure they understand the refinancing process. We answer their questions and provide them with the guidance they need. With that in mind, here are five steps that explain how to refinance a car loan.
#1: Collect the Necessary Documents
It might seem strange to start with documentation, but it’s important to have some key information in hand before you move forward with refinancing. Here are the things you’ll need:
The payoff amount on your current car loan
The Kelley Blue Book value of your car
Proof of employment and income
Proof of residence
Proof of insurance
Your car’s VIN number, year, make, model and current mileage
In addition, it's always a good idea to check your credit score before you begin shopping for any type of loan. Knowledge is power when it comes to negotiating loan terms.
Collecting this information will help you decide if it makes sense to refinance your car. As a rule of thumb, you can expect to get a favorable interest rate if your credit score is 661 or higher. If it’s lower than that, you may want to take steps to increase it before you apply for a new loan.
#2: Comparison Shop
The next step is to fill out loan applications for refinancing with three to five lenders. The reason we suggest this approach is that you can’t be sure you’re getting the best possible deal if you only apply with one lender. Keep in mind that all applications should be submitted within a two-week period. That’s because similar queries made within the same 14-day period are considered a single transaction for the purposes of calculating your FICO score.
Once you have quotes from your chosen lenders, here are the things to compare:
The annual percentage rate – As a rule, the lower the interest rate, the more favorable the loan, but there are exceptions.
The term of the loan – A longer loan term usually results in higher interest payments overall even if the monthly payment is lower than other options.
The fees and penalties – These may include an origination fee, a funding fee, a title fee, a document fee and a prepayment penalty on the current loan.
To get the best idea of what you’ll be paying, compare the total cost of each loan. It’s also a good idea to calculate how your monthly payment will fit into your budget.
#3: Decide on a Lender
Once you have quotes from multiple lenders and have compared them, you should choose the loan that best suits your needs. It’s always a good idea to get the contract ahead of time so you can read the fine print. If you prefer, you can pay a lawyer to evaluate the contract for you – a good idea if you have a difficult time reading legal language and understanding it.
One thing to be aware of is that if you choose a long loan term, you might end up being upside-down on the value of your car – meaning that you could owe more for the car than its Kelley Blue Book value. That’s not a good idea because it means you’ll have no equity in the car.
The lender will provide you with a list of requirements to close the loan. This list will typically include a check for any fees associated with the loan closing, a formal payoff letter from your current lender and other documentation.
#4: Pay Off Your Old Loan
The fourth step is to pay off your old loan. In most cases, your new lender will wire the money directly to the prior lender. The information about the amount due and where to wire the payoff should be included in the official payoff letter. (It is typical for payoff letters to have an expiration date, so make sure that you get a payoff amount that is good through the day of your closing.)
Once the loan is paid off, the prior lender will transfer the title of your car to the new lender, who will hold it until your new loan has been paid off.
#5: Make Payments
The final step, of course, is to begin making payments on your new car loan. If you have confirmed there is no penalty for repaying your loan early and you can afford to do it, you may want to consider adding a little extra money to each monthly payment. By doing that consistently, you can save a significant amount on interest over the lifetime of your loan.
Refinancing a car loan doesn’t need to be complicated if you follow these five simple steps. Remember that you always have the right to ask questions. A reputable lender will always answer them.
To learn how Addition Financial can refinance your car loan, please click here.