There is so much talk lately about loan refinancing. The market rates are low, yet they are expected to rise throughout the year, so the time to refinance is prime. But what do you need to refinance your car loan? What are the requirements, and if you meet the requirements, how do you go about refinancing your vehicle?
If you are interested in refinancing your car, it will depend on three major factors: your credit, your car, and your current loan.
Your ability to refinance your car will depend heavily on your current credit score. Credit scores are designed to rate your likeliness of paying back a loan. Lenders are in the business of making money, so the last thing they want to do is give a loan out to someone who will not pay them back.
Making sure you have a good credit score is incredibly important when it comes to refinancing your car loan. Credit scores take five main categories into account:
The most important categories of your credit score are the payment history and the accounts owed. Together they make up 65% of your score. Focusing on improving these areas can help boost your credit score. And you definitely want to make sure your credit score is as high as it can be before you apply to refinance your car. Here are our top tips for increasing your credit score:
If your credit score has dropped drastically since your initial financing, you may not qualify for refinancing. If your score has dropped a little since your initial financing, you may qualify, but not qualify for a good APR.
Because of this, you want to make sure that your credit score is in the best shape possible before you apply for car loan refinancing.
Lenders almost always have requirements on the condition of your car when you want to refinance. If your car is more than ten years old or has more than 100,000 miles on it, lenders may think it is too risky to refinance. The older your car is and the more miles it has on it, the more likely it is to have something major go wrong.
Depreciation is a major concern for many lenders. If your loan is underwater, meaning that you owe more on the car than the car is worth, you will most likely not be able to refinance your car. Keep an eye on depreciation throughout the life of your car loan to ensure that you are not in this situation.
There are a few terms in your current loan that will dictate whether or not you are able to refinance your car loan: the time left on your loan, your current payments, and prepayment penalties.
New lenders often have requirements about how much time is left on your current loan. If there is less than a year left on your loan, lenders may not choose to approve you. Car loans are front-loaded amortized loans, meaning that the majority of the interest is paid in the beginning of the loan. This means that as the loan nears the end, you are paying less and less in interest and more and more in principal. At a certain point it is not worthwhile for a lender to refinance you, as they will not really be making any money off of you. But keep in mind that at that point it probably won’t make sense for you either, as you won’t really be saving any money.
Your current loan may have prepayment penalties that may make refinancing your car difficult. Check your current contract closely to see if there are any penalties. If it’s unclear, then call your lender and ask them outright. If the prepayment penalties outweigh any savings from refinancing, it will probably not make sense to refinance even if you do qualify.
Staying current on payments matters for your credit score, but it is also something that new lenders will check specifically. They want to ensure that you are up to date on payments with your current lender. If you are not paying your current lender in full with consistency, it’s probably not in their best interest to refinance your car loan.
If your credit score is good or has improved, your car qualifies for refinancing, and your current car loan meets the above criteria, then you are probably wondering “how do you refinance a car loan?” The good news is it’s actually really simple!
Look around for a few different lenders that have good reviews. Look for a mix of traditional banks, credit unions, and online lenders. You will have to actually apply to get terms and rates for comparison, but you can do some of the legwork ahead of time and make sure their current customers are happy. If you want to save yourself a lot of hassle (and a lot of money!) contact Auto Approve and we can get the process started for you. We have relationships with hundreds of lenders across the country and can help get you the best offers.
The application process is similar to your original car loan application. You will need the following to get started:
(Just think: if you use Auto Approve, we can handle all of these tedious applications for you!)
After all of your applications are submitted, you should start hearing back with different car loan APRs and terms. Compare all of the terms and see what offer is the best for you.
Once you have picked the best car refinancing option, sign on the dotted line and start seeing the benefits of refinancing immediately. (And if you use Auto Approve for your car loan refinancing, we even handle the boring DMV paperwork!)
So don’t wait any longer; get started with Auto Approve today and pay less monthly when you refinance your car loan!