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Most school curriculums don’t really teach students how credit works. Instead, we all learned stuff we’d never use again, like the Pythagorean theorem. I kid, the ability to find the perimeter of a triangle is shockingly useful as an adult… but to the broader point, most of us never got necessary real-life adulting skills from high school or even college. 

Without proper financial education, it could be easy to fall into debt, which affects credit scores and big-ticket purchases. When buying a car, for example, poor credit could lead to a high-interest car loan with crummy terms.

That doesn’t mean you’re stuck with what you have, however. With work, credit scores can improve, and so too can your financing. If your car loan is reflective of where you were, not where you are, refinancing your car loan could be a smart way to save money. Here at Car Bibles, we don’t want anybody paying more than they need to, so we’ll take on the responsibility of teaching you what you might not already know. Here’s how to refinance your car.

How To Determine If You Should Refinance Your Car Loan

Refinancing a car loan might not make sense for everyone. This list should give you some ideas to see if refinancing your car is a good idea for you.

Does your current auto loan have a prepayment penalty?

Some loans, especially high-interest loans, have clauses that are built to keep you trapped. A prepayment penalty is a fee you’d be slapped with for paying the loan off early. If your current loan has a fee like this, and you have the ability to pay more into the loan, you might want to refinance.

Has your credit score improved?

By and large, credit scores are the biggest criteria for determining interest rates and eligibility for new loans. If your credit score isn’t much better than when you originally applied for a loan, refinancing with a new loan may not yield better loan terms. If it has improved, however, you should be able to work out a better plan through refinancing.

How old is your car?

Some lenders won’t refinance a car if it is too old or has too many miles. Typically, newer cars or low-mileage cars are eligible for refinancing, so you might not even be able to refinance.

Do you need a lower monthly payment?

Typically, refinancing brings lower interest against a smaller principal (since you’ve already been paying on your original loan). These factors contribute to a lower monthly payment and allow your monthly budget to breathe a little easier. 

The Documents You’ll Need

Now that you’ve decided that refinancing your auto loan is the way to go, here are some documents you’ll need to complete the process.

  • Personal information. Your new lender will need to be able to verify your identity. A social security card and a valid driver’s license will be needed.
  • Proof of income. Paystubs, bank statements, or offer letters are often sufficient. Be sure to contact your loan officer to make sure exactly which documents are needed. 
  • Your vehicle’s identification Number (VIN). The bank needs to know which car they’re refinancing, silly!
  • Proof of auto insurance. Most car loans require full coverage (collision and comprehensive coverage) insurance. 
  • Your current loan’s rates, payoff, and terms. Your new bank and lienholder need to know exactly how much they need to pay your old lienholder, so they can assume the debt, and generate a new auto loan for you. This is often called a “10-day payoff” and can look a little different than what your balance says on your monthly loan balance statement.

How To Refinance a Car Loan

Use these steps to work your way through the process of refinancing your car loan.

1. Check your credit score. 

Knowing is half the battle, and being aware of your credit score can give you realistic expectations on what the terms of refinancing your car loan can be. 

2. Set your goals.

Before you get started, determine what you want from refinancing. Choose if you want a shorter loan, better interest rate, or a different payment, and go forward from there.

3. Do your research and shop around. 

Smaller banks or credit unions sometimes offer lower interest rates than larger banks. Some lenders will allow you to prequalify without a lengthy application and hard inquiry on your credit. Different banks will give you different terms or options, so be sure to get a full picture of what is out there.

4. Compare offers. 

Refinancing your car loan should net you better terms and lower payments. Pick the loan that works best for you. These extra comparisons will help you determine a fair rate for your situation.

5. Sign the paperwork. 

If it all looks good, sign that paperwork, and enjoy the benefits of a lower interest rate and smaller monthly payment.

How Refinancing a Car Loan Affects Your Credit

Refinancing a car loan does often require a hard inquiry on your credit report. It also establishes a new line of credit, which can cause your score to dip a bit. Still, you’d be closing another line of credit, so the effects should be minimal. Before you refinance, talk to your bank or preferred lender to see how it will affect you and your credit.

FAQs About Refinancing a Car Loan 

Q. How much does it cost to refinance a car loan? 

A. The act of refinancing a car loan doesn’t necessarily bring a charge, but there are surrounding fees you might need to be aware of. Check for any origination fees from the new lender or payoff fees from the old lender. Be sure to check with the bank.

Q. How long should you wait to refinance a car?

A. Auto loans are considered to be “front-loaded,” which means you pay more towards interest and less towards the principal at the beginning of the loan. Typically, refinancing should be done fairly early in the loan; refinancing a loan where most of the interest has been paid won’t make much of a difference.

Q. Can I refinance my car with the same lender?

A. Sometimes, yes. Keep in mind that banks are competitive, and they want those sweet, sweet interest dollars, which makes them more willing to beat your current loan’s terms. Shopping around is important.

Q. When you refinance a car, do you start over on the loan?

A. Yes and no. The new lienholder generates new loan terms based upon the value of your old loan. Whether or not that means extending your new loan’s terms compared to your old loan should be talked about with your loan officer. 

Q. How much money can you save when you refinance a car?

A. It depends. Refinancing a high-interest car loan with double-digit interest rates early in the loan’s life to a low-interest rate could save hundreds or even thousands of dollars during the length of the loan. Every situation will be different.

This Video Tutorial Explains Refinancing a Car Loan

Not everyone’s a text-based learner. Here’s a video from Honest Finance, with a great explainer on how to refinance your car loan. The presenter is easy to listen to and doesn’t make any weird moral judgments, give it a lookie-loo.

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