If you’re looking to save some money on your monthly car payment, you may be looking into refinancing your auto loan.
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If you’re looking to save some money on your monthly car payment, you may be looking into refinancing your auto loan. However, as refinancing can be a long and tricky process, there are a few things you should know about it before you go through with it.
In this article, we’re going to explain five things you need to know before refinancing your auto loan. These tips will help you get a better understanding of the process and how to prepare for it. It should help things go much more smoothly than if you went in blind.
1. Compare Various Lenders
Lenders may have varying rates for refinancing, and so the first step in this process should be to shop around different lenders and check each of their rates. You may find that one lender offers substantially better auto refinance rates than most others. However, if you never check with different lenders, you would never figure this out.
The main goal of refinancing your auto loan is to lower your monthly payment and how much you pay on your car in the long run. As such, you’ll want to find the lowest rates that you can. There are also various kinds of lenders you may want to check with, including traditional credit unions and banks, online lenders, and even auto finance companies.
It's also important to note that inquiries made to different lenders will count as hard inquiries on your credit report. By applying to various lenders all at the same time, you can avoid a bunch of hits to your credit. All these hard inquiries will only count as one when pulled at the same time.
One tip would be to shop around with an auto refinance marketplace. Marketplaces, such as RateGenius, are able to shop around with various lenders at once, often reducing the number of inquiries on your credit report and can often some of the lowest interest rates.
2. Know Your Car’s Worth
Some lenders may try to shortchange you, or more accurately, upcharge you on your car. They may try to get you to believe that your car is worth more than it currently is, which would lead you to paying higher payments to the lender.
You should also keep in mind that if the value of your car is too low, many lenders will not even bother with helping you to refinance. As such, you should make sure you know exactly how much your car is worth before going through the trouble of applying.
3. Be Aware of the Costs
Building off the previous point, you should definitely be aware of all the fees and costs that come with refinancing. This is another reason why you should also make sure you know your car’s value before applying, because you wouldn’t want to have to pay a bunch of application fees for nothing, right?
One major fee to be aware of is a prepayment penalty. A prepayment penalty is a fee that some lenders include with their loans, stating that a borrower must pay a fee if they pay off part of or all of the loan ahead of schedule. You’ll want to check if your current lender has one of these in place, since the fee could eat up some of the savings you’d make by refinancing.
4. Prerequisites for Refinancing
Prerequisites for refinancing come in many different shapes and sizes. You’ll want to ask as many questions as possible during the application process so you’re aware of all the various requirements.
Some of the most common prerequisites include the amount remaining that you owe on your car, the car’s history, the loan to value ratio, and more. Take car history, for example. Many lenders will look at the age of the vehicle and the mileage to decide whether it’s worth refinancing or not. Typically the older the car the less likely they will be to refinance.
One other major factor is your credit, which we’ll take a closer look at in the next tip.
5. Prepare Your Credit
As we mentioned earlier, one of the main things any lender will look at when refinancing is your credit score. The better your credit, the more likely it is you’ll be approved for refinancing. If your credit is looking a little low due to derogatory marks like late payments or collections, then your chances of getting approved will be much lower.
However, there are a few things you can do to improve your credit score before refinancing. For example, you can use a basic credit card to make purchases, then paying off the balance every month. This will improve your credit score steadily but surely. Also keep in mind that even though you have a low credit score, you can still apply and get approved for a lower rate at times.
Refinancing an auto loan can be a long and complicated process, so it really pays to know everything you can before you go through with it. By following these five tips, you’ll be much better prepared to refinance your own auto loan.