Auto debt makes up 9.5% of American consumer debt, with the average car payment coming out to around $550 per month. If you’ve taken a loan out to finance a new, used, or leased car and are having trouble making the payments, it can sometimes make sense to refinance your auto loan.
But, refinancing always involves taking on a new loan. So, you’re not technically getting rid of your debt completely, you’re just essentially changing the terms of the loan or refinancing it in order to take advantage of a lower interest rate.
Does refinancing your auto loan make sense? And, how do you refinance an auto loan? We’ve got all of the answers for you.
What Does it Mean to Refinance an Auto Loan?
When you refinance a loan you’re taking out a new loan to pay off your existing one. The goal here is to refinance with a new loan that has better terms or a better interest rate. This means that if you’re thinking about refinancing, you’ll want to do your research on the loan terms, loan length, interest rate, and any other fees such as a prepayment penalty.
If your original auto loan was for $20,000 and had an interest rate of 7% along with a loan term of 60 months, you’ll want to figure out how much you owe on it now. Then, you can shop around for a new loan from a lender or auto financing company to get a good idea of what your options are.
It might not make sense to refinance your current loan depending on how much you still owe or if you can’t find a new loan with a better interest rate.
Who is Eligible to Refinance an Auto Loan?
You can refinance your auto loan at any point, but you might have to pay fees for paying off the original loan early. This is a prepayment penalty and you’ll have to pay some additional interest. Additionally, you might find that some lenders give out loans with pre-computed interest. If that’s the case, they’ll make you pay the entire loan amount plus the interest that you would have accrued over the term of the loan. So, you’re eligible to pay it off, but they’ll make it harder for you to do so.
What you will need in order to refinance a car loan, however, is a good credit score. If you have a poor credit score, you might not qualify for a better loan. If you’ve been paying your current auto loan payments on time each month for about a year or so, your credit score will likely reflect this. And, it’s a good reason to finance. If your credit score has gone up, you’re probably eligible for better loan terms now than you were initially.
When Does it Make Sense to Refinance an Auto Loan?
Current car loan interest rates are pretty low and they’ve been on the decline since early March. So, now is a good time to at least consider the option of refinancing your auto loan. Not sure if it makes sense for you or not? It’s a good idea if:
- Your credit score has improved since you took out your initial loan. If your credit score has gone up, you’ll likely qualify for a better loan with a lower interest rate. To qualify for the best interest rates, you need a credit score of at least 700 for most lenders.
- Interest rates have dropped. As mentioned, auto loan interest rates have been dropping for a while now, making it a good time to look into refinancing.
- You’re having trouble making payments. While lowering your monthly payments might require you to pay more over the lifetime of the loan, it can be a good solution if you’re struggling financially at the moment.
Again, it’s important to shop around and contact different lenders. Start with your current lender to talk about your options and weigh the costs and fees against the benefits.
How to Refinance Your Auto Loan
If you think refinancing your auto loan makes sense, you’ll need to gather the necessary documents to begin the refinancing process. This includes:
- Proof of income
- Auto insurance
- Your car’s VIN number
- Personal information
- Information about your current auto loan
You’ll take this information to your new lender (or existing lender if you’re going through them) and complete the loan application process. Once you’re approved and receive your new loan, you’ll then need to pay off your original loan.
Depending on your lender, they might pay it off for you, or you might have to make arrangements to pay it off yourself. Once it’s paid off, you’ll begin making monthly payments on the new loan.
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