Did you know that refinancing is by far one of the most common strategies people adopt to address issues with their budget? The same also applies to auto loan refinancing, where you’re able to swap your old loan for a new one. This way, not only are you able to land a lower interest rate, but you’re also more likely to reduce monthly payments.
As a result, your saving goals may finally be able to see the light of day. Hence, here’s an attempt to break the process down for you. If you’re wondering how to refinance a car loan, continue reading.
Steps to Refinance an Auto loan
Step 1: Compile the Required Documents
The first step in applying for car loan refinancing involves compiling all the necessary information about:
- Your existing car loan
- Your vehicle
- Your personal details (including legal name, social security number, address, proof of insurance and employment, etc.)
Step 2: Shop for a Reliable Lender
When it comes to shopping for a lender, make sure to try your luck with several different banks (including your current one), credit unions, and other local and online lenders. By doing so, you’ll have more offers to compare.
Most importantly, be wary of the hard inquiries performed by these entities on your credit report, as they can easily cause your points to drop. To ensure the negative impact on your credit score is minimized, submit your applications within two to six weeks. This way, multiple applications will count as a single inquiry.
Step 3: Get Started on the Application Process
Lenders typically run credit checks and income verification along with car insurance checks to ensure their investment won’t go in vain. Hence, you may have to provide them with your most recent pay stub or tax return for any co-borrowers and yourself.
Step 4: Wait For the Approval
If you’ve applied with several lenders, chances are you will be approved by most of them. This means you’ll have a pool of offers with different APRs to choose from. Make sure to compare them carefully and consider the following:
- Is the term short or long?
- Are the monthly payments in line with your financial situation?
- Is the APR (Annual Percentage Rate) reasonable?
- Are there any prepayment penalties?
Once you’ve selected a suitable lender and finalized the auto loan, your new lender will most likely pay off the balance from the previous lender. However, make sure to double-check it goes through properly.
Moreover, you should also be careful about making on-time payments as falling behind could severely affect your credit score. Once your new lender has paid off the balance on your initial loan, you can start making monthly payments as per the terms of the new deal.
Remember, refinancing an auto loan is only one of the many ways to improve your financial situation. Make sure to weigh the pros and cons carefully before making a leap.