If you're not happy with the terms of your current auto loan or if you need to lower your monthly car payment, it's a good idea to learn how to refinance a car loan. This skill may help you save money, and it will also help you stay in control of your budget.
Reasons to Refinance
There are several reasons you may need or want to refinance your auto loan:
- You cannot comfortably afford your monthly car payment, and you have already paid off part of your loan.
- You feel that your interest rate is too high and think you would qualify for a better rate.
- You do not like the terms of your current auto loan.
- You are hoping to consolidate your debt.
Interest Rate is Important
One of the most popular reasons for refinancing an auto loan is an interest rate that is simply too high. If you had past credit problems or little credit history at the time you purchased your car, you may have received a high interest rate. That interest rate is costing you money every moment that you have a loan.For example, imagine you purchased a reasonably priced new or used car. You paid $18,000 for the vehicle, but you put $1,500 down. This means you financed $16,500. If your loan term is five years, which is typical of many auto loans, and your interest rate is 21%, you'll be paying almost $450 per month. However, if you refinance your loan at 6%, you'll pay only about $320 per month.
How to Refinance a Car Loan
If you've decided you'd like to explore refinancing your loan, you'll need to do a little research. You'll want to compare similar loans to determine the best deal, and you'll need to know some information about your current situation and the possible solutions to your problem.
Here's what you need to know:
- Your credit score
- Your current loan terms and interest rate
- Payoff or maturity date for you current loan
- Any payoff penalties and fees
- The terms and interest rates of new loans
What to Do
- Start by making sure your current loan is in good shape. You should have no delinquent payments and no black marks on your record with the company.
- Use an auto loan amortization calculator to determine how much you're paying in interest over the life of the loan. You can use this number to compare your current situation against other loans.
- Find out your credit score. You can get one free credit report per year from AnnualCreditReport.com. Beware of credit report sites that ask for your credit card information.
- Next, begin applying for loans. Consider your local bank or credit union, as well as national chains. If you have a good credit score, many institutions will be eager for your business. Do not accept the first loan offer you receive.
- Compare rates for all of the loan offers. Use an amortization schedule to determine the savings over your current loan. Also be sure to ask about fees and payoff penalties.
- When you've chosen a loan, read all the documentation very carefully. Ask the representative about anything you don't understand.
Now that you know how to refinance a car loan, keep the following tips in mind:
- Stay informed about your credit score. This number is very important and can have a dramatic effect on your loan terms and interest rate.
- Clean up your credit as much as possible before applying for a new loan. Close old accounts, and make sure all your loans are current.
- Always read documentation very carefully. Loan documents are legally binding, which means once you're signed, you're stuck.
- Good luck! You're on your way to a more affordable car payment.