You’ve heard the term “refinance” quite a lot. Maybe it was referring to your mortgage, your car, or your student loans–but what exactly does refinancing mean? Does refinancing your car mean starting over?
Let’s talk about what car refinance is and how you can benefit from it.
What happens when you refinance your car?
When you refinance your car, you are starting your loan over. You are getting a new car loan that will pay off your existing loan. This new loan will have a different car loan APR, a different repayment plan, and may or may not be with a different lender.
Refinancing your car loan can help you in a few ways. If you can refinance to a lower car loan APR, you can not only reduce your monthly payments, but you can reduce the amount of money you will pay overall for the life of the loan. Refinancing can also help you add or remove a cosigner, change your repayment plan, and get out of a bad relationship with a lender.
Is it easy to refinance a car?
Applying for car loan refinancing is very easy, especially when you use a company that specializes in car loan refinance. But it does require a little preparation and research.
Step 1: Prepare your finances
When you refinance, your main goal is to get a lower car loan APR. This is how you will actually save money. And the biggest factor that you can control as to what APR you will be offered are your finances. Your credit score is the primary indicator that a lender has as to whether or not you are a good candidate for a loan. Because of this, you want to ensure that your credit score is as healthy as possible. There are a few steps you can take to help increase your credit score prior to applying for a car loan refinance:
Be sure you are consistently making full, on time payments
Consider signing up for autopay when possible
Pay down any accounts that have a high credit utilization ratio (the amount of money you have taken out compared to the credit limit)
Request higher credit limits
Avoid applying for any additional lines of credit
Taking little steps to improve your credit score can pay off big in the long run. Additionally you should go through your finances to determine what car payment you can afford every month. Experts recommend paying no more than 10-15% of your monthly income on your car payments, and no more than 20% of your monthly income on your total transportation costs (gas, repairs, parking, tolls, etc). Making sure you have a detailed budget can help you stay within your means and avoid getting in over your head.
Step 2: Research lenders
You cannot compare actual offers and rates until you apply, but you can do some research to determine where might be the best place to apply for refinancing. Be sure to consider traditional banks, online lenders, and credit unions. Read reviews and talk to friends to get the inside scoop on these lenders. Consider their advertised car loan APRs, their customer satisfaction ratings, and any reviews on hidden fees and penalties. Using a company that specializes in car loan refinance can eliminate this step for you, as they have relationships with lenders and can help curate a list of lenders for you.
Step 3: Apply
You want to apply with 3-5 different lenders. When you apply, you will need some paperwork. A Photo ID, your vehicle’s information, proof of income and financial history, proof of residence, and proof of insurance may all be required.
Step 4: Compare
When the offers start coming in, be sure to compare the APR, the repayment periods, the fees, the customer reviews, and the prepayment penalty fees. There is no limit to the amount of times that you can refinance your car, so you may want to refinance again in the future (and the last thing you want is a huge prepayment penalty fee standing in your way.) Be sure to read all of the fine print when deciding which loan is the best for you.
Step 5: Sign and Save
Once you determine which lender is right for you, you can sign and start saving. You will need to notify your insurance company and the DMV, but once that paperwork is complete you can start saving immediately. Your new loan will pay off your old loan and you will start over with your new lender.
What is a good reason to refinance a car?
There are a number of reasons as to why you may want to refinance your car loan. The top reason is the most obvious: to save money. Refinancing your car loan can help you to secure a new car loan APR, a lower one that will reduce the amount of overall interest you are paying.
You may qualify for a lower car loan APR if any of the following apply to you:
Your credit score has improved since your initial financing
Your credit utilization score decreased since your initial financing
The market rates have decreased since your initial financing
Your debt to income ratio has improved since your initial financing
Changes to any of these could make a huge difference as to what car loan APR you will be offered. And even a small decrease on your APR percentage could mean savings of a lot of money.
But aside from securing a lower APR, there are a few more reasons why refinancing your car loan makes good sense.
You can lower your monthly payments, even if your APR isn’t lower.
When you refinance, you can change your repayment schedule. If you lengthen your repayment period you can lower your monthly payments (since you will be paying off the principal over an extended period of time). If you are struggling to pay all of your bills every month, this is a great way to give yourself some breathing room. Take note that you will be paying more in the long run, but that might be worth it for you if you are struggling with your monthly budget.
You can add a cosigner.
You cannot simply add a cosigner to your existing loan, but if you refinance, you can add one to your new loan. There are a few reasons why you might want to add a cosigner to your loan:
You would like to help a loved one build credit
They have a great credit score that could help you qualify for a better car loan APR
You want to shoulder the responsibility of the loan with a loved one
Whatever your reason is, refinancing your car loan is the best way to get a cosigner on your loan.
You can remove a cosigner.
On the other hand, your existing loan may have a cosigner that you would like to get rid of. Maybe there was a breakup or a divorce, or maybe you just don’t need someone’s help anymore. Again, refinancing your car loan is the best way to remove a cosigner.
You can get out of business with your current lender.
Refinancing also gives you the chance to get out of a bad relationship with your lender. If you have been unhappy with your lender for any reason, this is your chance to ditch them and get a better lender. According to Consumer Financial Protection Bureau, there are quite a few complaints with lenders that may warrant a breakup:
Communication issues in regarding forbearance (forbearance is a temporary pause in payments)
Repayment options for forbearance
Delays from lender in regards to loan modification
Overcollection of funds for taxes and insurance
Confusion with account notices
Putting overpayments into an unallocated fund rather than applying them to the loan’s principal
If these complaints sound familiar, it might be time to find a new lender and start fresh. There are thousands of lenders across the country that deal with refinancing, so you don’t need to stay in a relationship with one that you are unhappy with.
Refinancing a car means getting a fresh start with a new loan (which can save you a lot of money!)
Refinancing a car can sound daunting, but it really is an easy process with a very large payoff. By taking the time to apply now, you could save hundreds, if not thousands, over the life of your car loan.
At Auto Approve, we strive to make refinancing as simple and rewarding as possible. Our experts can help guide you through the application process and pick which offer is the best for you. But you don’t have to just take our word on it. We have a 4.7 out of 5 star rating on TrustPilot (with nearly 6,000 reviews!) and an A+ rating from the Better Business Bureau. On top of that, we have a 96% would-recommend rating on LendingTree. With Auto Approve, you know you are in good hands. So don’t wait to start saving money: contact Auto Approve today for your free quote!