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Refinancing A Car Loan? Here's What You Need to Know

Feb 05, 2021

When you want to refinance car loan terms and payments, the process involves applying for a new car loan to pay off the existing one. Most automobile loans are secured with the vehicle serving as collateral and the borrower making fixed payments over several years.

According to the online automotive experts at Edmunds, “The most common term currently is for 72 months, with an 84-month loan not too far behind. In fact, nearly 70 percent of new car loans in the first quarter of 2020 were longer than 60 months — an increase of about 29 percentage points in a decade.”

There are a wealth of reasons why refinancing a car loan might be in your best interest. As a local lender, we can help you explore pathways to lower interest rates and the best possible terms.


Why Would It Be a Good Idea to Refinance a Car Loan?

When people consider reasons to refinance a car loan, they usually have some financial incentive in mind. With money management being largely a logical process, here are a few common reasons why people refinance an auto loan.

  • Lower Monthly Payments: If this were an episode of the television game show Family Feud, “lower monthly payments” would be the number one answer. Overwhelmingly, working families look at ways to reduce monthly expenses, and car loans are often one of the big-ticket items.
  • Improve Cash Flow: Family Feud host Steve Harvey would probably be showing “Cash Flow” as the number two most popular reason to refinance car loan payments. Having more cash on hand each month allows bill-payers to engage in increased leisure activity and tuck a few more dollars away in savings or their 401(k).
  • Reduce Interest Rates: From a financial planning perspective, lowering interest rates should be the number one reason to refinance car loan rates, it just doesn’t deliver the immediate gratification of the first two. However, when borrowers are in a position to secure a lower rate, they can save quite a few dollars over the life of a car loan.
  • Pay Off Debt: When growing families decide it’s time to buy a first home or upgrade to a larger one, paying off existing debt makes a significant difference. Using products that can consolidate debt and position you to buy a home may be a reason to refinance car loan debt. In order to secure a mortgage, you will need to demonstrate you have the means to make on-time payments. Lenders generally consider a 36-percent debt-to-income ratio ideal. Peach State has an online calculator that can prove helpful.

While different motivations exist to refinance car loan terms, interest rates, and monthly payments, it’s crucial to get the timing right.



The Best Time to Refinance a Car Loan

Auto loan refinancing ranks among the more important financial decisions. Although you may be motivated by a wide range of reasons, it’s essential to know when or when not to move forward. Here are some factors to consider when deciding the best time to refinance car loan terms:

  • Interest Rates Dropped: The Federal Reserve has kept interest rates low the last few years. Some of the Fed’s cuts were motivated by incentives to grow the U.S. economy, while others were in response to national disruption. Whenever they go down, it may be in your best interest to refinance car loan terms and get a more favorable rate.
  • Credit Score Uptick: Your credit history and score are substantial factors when securing a car loan. If your credit has significantly improved since taking out the initial loan, it may be time to investigate getting a lower rate and improved terms. It’s important to keep in mind the Federal Trade Commission requires Equifax, Experian, and TransUnion to provide you with a free credit report. There are also free websites that can prove insightful such as NerdWallet and AnnualCreditReport.com, among others.
  • Cash-On-Hand: Down payments are also a factor in car loans. If you were cash-strapped when taking out the existing loan, the rates and terms might not have been optimal. When you refinance car loan terms with an increased down payment, there may be opportunities for savings.

If the timing is right to refinance car loan terms, the next step will be finding a suitable lender.


Finding the Right Lender to Refinance Your Car Loan

Finding a lender that best serves your automobile refinancing needs does not have to be a complicated process. Many borrowers start by going online to review trending interest rates and terms. You are likely to run across plenty of slick marketing and incentives. Many people also discover hidden and excessive application and processing fees.

What borrowers can genuinely rely on is the customer service of local lenders who live and work in the community. That fact means you will not be treated like another anonymous borrower. Lending to fellow community members continues to be a powerful way of doing business. As the saying goes, “A rising tide lifts all boats.” As a local lender, we can review your credit, down payment, and collateral, and guide you through the loan process.



What You Will Need to Do to Refinance Your Car Loan


Refinancing a car loan begins with some due diligence. Start by reviewing the terms of your existing car loan and determine whether there is an early repayment penalty. These can be costly, but not necessarily prohibitive.

There may also be title transfer fees. These vary by state, but keep in mind, that you may need to incur the charge when paying off the car loan at some point. After you have a full grasp of your existing responsibilities and the impact of refinancing, check the current value of the vehicle.

Resources such as the Kelley Blue Book are widely accepted value estimators. If you owe more money on your car than it is worth, you may need to put out a substantial down payment to offset the difference because the automobile serves as loan collateral. It's a good idea to gather the following items when applying for a car loan:

  • Proof of Insurance
  • Proof of Residence
  • Proof of Income
  • Valid Driver’s License
  • Current Loan Documents

The lender may also want to know the vehicle’s mileage, make, model, VIN, and year. These are generally listed on the vehicle registration. If you qualify for a loan that meets your needs, the sum will pay off the existing car loan. That leaves you with one, hopefully, lower monthly payment and reduced financial obligation.

If you are considering refinancing a car loan, review our "Car Loans 101: Car Buying Made Easy" complete guide for more time and money saving tips!

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