How to Refinance a Car Loan the Right Way

How to Refinance a Car Loan the Right Way
How to Refinance a Car Loan the Right Way
Education
| May 31 2022
facebook icontwitter iconlinkedin icon
back arrow iconBack to All News
Refinancing the Right Way: Our How-to Guide

Inflation is through the roof right now and everything is so expensive. Which means that saving money is more important than ever. And refinancing your car loan is a great way to start saving money! Today we are talking all about car loan refinancing–the when, what and why–and most importantly, how you can refinance your car loan the right way.


Here is how you refinance your car loan the right way.



What is car loan refinancing?

Car loan refinancing is when you pay off your existing car loan with another loan. When you refinance, you should look for a new loan that has a lower car loan APR and better terms.


What are the benefits of car loan refinancing?

There are a few reasons why refinancing your car loan might be a good idea. And most of those reasons come down to one thing: saving money. 


You can save a lot of money in the long run

By refinancing your car to a lower car loan APR, you can save a lot of money in interest (we’re talking hundreds if not thousands of dollars). You may be eligible for a lower car loan APR if your credit score has improved since your initial financing, or if market rates have decreased since your initial financing (and they probably have–rates are still incredibly low despite rising interest rates in other areas).


You can reduce your monthly payments

Your monthly payments can reduce in two different ways when you refinance. First, refinancing to a lower APR will result in lower monthly payments. But even if you don’t qualify for a drastically lower car loan APR, refinancing your car loan will allow you to repay your principal over a longer period of time, reducing the amount you have to pay every month. You will end up paying more over the length of the loan, but 


You can add or remove a co borrower

If you want to either add someone to your loan or remove someone from your loan, your best option is car refinance. When lenders determine the terms of a loan, they consider the finances of the applicant among everything else. They are ultimately trying to determine one thing: How likely is this person to repay their loan? If there are two people on a loan, they consider the credit of both applicants. So if there is going to be a change to this, lenders will want to revise the term of the loan. Maybe removing someone with not-so-good credit will score you a better car loan APR. Maybe adding someone with good credit will score you better terms. Ultimately if you change the borrowers listed on the loan you will most likely need to refinance your car loan.



How do you refinance a car loan the wrong way?

Is there a wrong way to refinance a car loan? Yes! Here are the most common mistakes when refinancing a car loan.


Waiting too long

Refinancing is all about striking while the iron is hot. Or in this case, striking while the interest rates are hot. If you are constantly pushing off your refinance, even though rates are low (and will most likely rise in the future) you might be missing out on some good deals. 


You also do not want to wait too long in terms of your current loan. Car refinancing becomes less and less rewarding as you near the end of your current loan. This is because refinancing ultimately saves you money by reducing your interest payments, so the less time you have left on your current loan the less money you can save.


Not understanding the terms of your current loan

When you refinance, it is so important to understand the terms of your current loan. This is especially important when it comes to prepayment penalties. Many lenders put prepayment penalty clauses in their contracts. This is meant to dissuade people from leaving their loan early (after all if you leave your contract early, that’s less interest you are paying to them and the less money they are making). 


So when you refinance your car loan, you have to be sure that the savings will outweigh the prepayment penalty fees. In order to be certain, always do the math to determine how much you can save and how much you will have to pay.


Not comparing your options

You should always shop around when looking for refinance rates. Experts suggest applying to four or five different lenders to get a range of car loan APRs and payment terms to pick from. While this can seem daunting, using a company that specializes in refinance, like Auto Approve, can make this process much easier. They can handle all applications and paperwork for you, so you only have to fill out your information one time. If you do not compare your options, you could be missing out on some great offers.


Not checking your credit score

Your credit score is the most important contributor to the car loan APR and terms that you are offered, so you want to be sure that it is in good standing. 



How do you refinance a car loan the right way?

So if those are the mistakes, how do you refinance a car the right way? It’s easy! Here’s our quick and easy “how to” refinance!


Step #1: Do Your Research

Being prepared is the key to anything. Research which lenders might be a good fit for you. While you will not have actual offers to compare until you actually apply, you can get a sense of who has the best rates and who offers great customer service. Talk to friends and family to see if they have trusted lenders. And make sure your car is eligible for refinance–some lenders will not refinance cars if they are over ten years or have a lot of miles on them.


Step #2: Check Your Credit 

As we said before, your credit score is incredibly important in this process. Request a credit report (which you can do once per year for free) and make sure your score is in good standing. Be sure that everything is accurate on your report. If there are any inconsistencies or errors, you can petition the credit bureau. If your score isn’t better than it was during your initial financing, it might be a good idea to put off refinancing until your score is in better standing.


Step #3: Review Your Current Contract

Look at your current loan contract and make sure you are aware of any penalties for which you may be responsible. Call your lender directly if you have any questions or want to review any of the fine print. When you compare your new rates, be sure that any savings will outweigh the prepayment penalties.


Step #4: Gather Your Documents

Gather all documents you will need for your applications. You will most likely need the following to get started:


  • A Photo ID (such as a passport or driver’s license)
  • Your vehicle’s information (may include the bill of sale, VIN number, make, model, and year of your car)
  • Proof of income and financial history (may include pay stubs, banking information, and your credit report)  
  • Proof of residence (such as a mortgage statement, lease agreement, or utility bill. Note that PO boxes are not acceptable as proof of residence)
  • Proof of insurance


Put all of your documents in one secure place. Better yet, scan them all onto your computer so you can easily upload them when you are applying.


Step #5: Apply To A Few Different Lenders and Compare Offers

Apply to the lenders that you shortlisted from below (or have Auto Approve handle that step for you). When the offers come in, start comparing. The most important thing to compare is the car loan APR, but be sure to take other factors into consideration:


  • Prepayment penalties. You can refinance your car multiple times, so keep in mind that there might be another opportunity to refinance. You don’t want to be held to your new loan if a better deal comes along.
  • Fees. Do the lenders charge additional fees? 
  • Customer service. What are their current customers saying about their customer service? Are issues quickly resolved, or do people seem unhappy?


Step #6: Sign and Start Saving Money

When you decide on the best car refinancing deal, sign on the dotted line and start seeing the benefits of refinancing immediately (and if you use AutoApprove for refinancing, we will even handle the boring DMV paperwork so you don’t have to!) The new lender should handle paying off your previous loan, but be sure there are no additional steps you are required to take.



And that’s how you refinance a car loan the right way.


There are a lot of benefits to car loan refinancing, but the main draw of refinance is saving a ton of money. And today that means more than ever. So don’t wait (remember we talked about how important timing is?)–get started today with a free quote from Auto Approve!


Resources
Education
How Can I Save Money for the Summer?
left arrow logo
Finance
9 Benefits of Refinancing Your Car Loan
left arrow logo
Education
Used vs. New Cars: Which to Buy
left arrow logo
Resources
Call Now