Although local lenders offer auto loan refinancing, only about 12 percent of borrowers take advantage of the option. That’s largely because average car buyers are unaware such programs exist or don’t know how to apply. By understanding what auto loan refinancing is and its potential benefits, borrowers can make informed decisions about their financial health and well-being.
What is Auto Loan Refinancing?
Replacing a car, truck, or SUV involves changes to your financing. It’s not unusual to purchase a new vehicle before paying off an auto loan. This strategy typically involves maximizing the trade-in value.
Refinancing a car loan can also be used as a strategy to accomplish financial goals. Regardless of why you want to redo an auto loan, it remains a relatively simple process to secure a new auto loan that pays off the balance of an existing one.
4 Circumstances When Auto Loan Refinancing Is a Good Option
If you're making monthly installments on an auto loan, there are sometimes benefits to refinancing. Depending on the interest rate and terms of your current auto loan, here are some common reasons why people often explore refinancing an auto loan.
1. Interest Rates Have Dropped
The total cost of your new or pre-owned vehicle is largely determined by how much you pay over the life of the auto loan. Anytime interest rates drop, it triggers an opportunity to potentially save money. By either leveraging the equity you built up or refinancing at a lower principal amount, a more favorable interest rate can save thousands over the life of the auto loan.
2. Your Credit Score Has Improved
Making consistent monthly payments on an auto loan helps improve your FICO score. Higher scores open opportunities to access lower interest rates and terms. By putting your new credit score to work, refinancing a car loan can save you money.
3. You Want to Lower Monthly Auto loan Payments
The desire to reconfigure and reduce monthly expenses is a common reason to refinance an auto loan. Whether driven by an unexpected change in your budget, loss or lowering of income or simply wanting to allocate resources differently, refinancing can lower your monthly expenses. This can be accomplished by leveraging a higher credit score, equity in the vehicle, refinancing at a lower principal, or extending the repayment period.
4. You Need Cash
Cash-out refinancing is a popular option for people who require money in hand. This option comes into play under a number of circumstances. Equity in the vehicle may be used because the original loan has been paid down or the vehicle has appreciated in value. The difference between what is owed on the auto loan and fair market value can be pulled out in cash through the refinancing process.
Steps to Start the Auto Loan Refinancing Process
You don’t have to be a financial wizard to navigate car loan refinancing. It’s just a matter of knowing what to do and following through. These are the steps to consider if you want to refinance your auto loan.
1. Review Your Current Loan
There are two essential things you need to know about an existing auto loan when considering refinancing. The first involves the total repayment amount. The second is whether you have met the minimum threshold to qualify for refinancing. After determining those two items, contact a credit union loan professional and find out if refinancing is an option for you.
2. Check Your Credit Score
Consider requesting a free copy of your credit report from all three major bureaus — Experian, Equifax, and TransUnion. Check the document for errors and correct any that you find. You can also take proactive measures to raise your score, such as reducing credit card debt and improving utilization.
3. Estimate the Value of Your Car
The Kelly Blue Book, among others, offers a user-friendly platform to determine car, truck, and SUV values. By inputting the year, make, model, mileage, and condition of your vehicle, you can find out the fair market value in your area.
4. Shop Around for the Best Refinancing Rates
It’s important not to be tempted by refinancing promotions that appear to be too good to be true. Take your time and shop around for the lowest rates, fewest fees, and most favorable repayment terms.
During their market research, many often discover that credit unions offer low-interest rates and favorable auto loan terms. Credit unions are often able to give their members great deals because their guiding philosophy is to help people improve their financial well-being.
5. Get Your Paperwork in Order
Before scheduling an appointment with a local auto loan specialist, gather all the necessary information. This will save you time and energy, and avoid the need to reschedule or send documents later. These are things you'll want to have ready when it's time to apply for the loan.
- Proof of Income
- Bank Statement
- Driver’s License or State-Issued ID
- Proof of Insurance
- Existing Auto loan Documents
- Vehicle Information
By conducting due diligence, shopping for competitive interest rates, and having your documents in order, refinancing an auto loan can be a stress-free process, and help you accomplish your financial goals faster.
Peach State is Here to Help!
If you feel like auto loan refinancing might be a good fit for your current financial goals, contact Peach State today to discuss the next steps. If you have questions, we're happy to work with you to determine if auto loan refinancing is the right move and guide you through the process.