How to Get the Most out of Refinancing a Car Loan

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If you can get a better interest rate or you need to lower your payments, refinancing your car loan may be the right move.

You’ll need to reapply for auto loan refinancing with a new lender. The process is similar to applying for a new or used car loan. Not every lender offers refinancing, but if you have a good payment history with your current lender, you may be able to get them to change the terms of your loan to lower the payments or get a lower interest rate.

If that isn’t possible, you’ll have to gather the same types of documents that you presented with your original auto loan. You’ll need proof of income, including recent paystubs or your latest tax return to show that you can repay the loan. The new lender will also need your car’s VIN number as well as its mileage, year, make, and model.

Get your payoff amount and account number from your current lender. If you are approved, your new lender will send the money to pay off your previous loan so they can get the car’s title.

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1. Can you refinance a car?

If you need to refinance a car with bad credit and late payments on your credit report, you may find the process challenging. However, if you have a steady source of income that you can prove with paystubs or tax returns and you don’t have repossessions or judgements on your credit report, you may be able to find online lenders that can help.

Credit unions and banks may also offer programs that help credit-challenged customers refinance automobiles. Be aware that they may have strict guidelines about the age or mileage of the vehicle, however.

If refinancing your car will make the payments lower, make sure you aren’t stretching out the term of the loan too long. Use an online loan calculator to help you understand the total amount of money you’ll pay over the life of the loan if you refinance for a longer period of time.

2. When should I refinance my car?

In some circumstances, it’s worth the time and trouble to research your auto loan refinance options. For example, if you currently have a cosigner and would like to release them from your loan, refinancing under your name only is the best way to do it before the car loan is paid in full.

If your credit scores have improved since you got your car loan, it may save money over the life of the loan to refinance. When you make every payment on every account on time, your credit score rises. Making as few as 12 months worth of payments on time could bump your FICO score up enough to qualify for a lower interest rate.

Many lenders will conduct a soft credit pull to prequalify applicants. This doesn’t hurt your FICO credit score, and it’s a fast way to find out if you may qualify for a lower interest rate than your current loan offers. Online lenders are especially competitive.

3. How to choose a new lender

When it’s time to refinance your auto loan, you should check with your credit union or bank, first. They may have special rates for long-standing account holders. Often, you can find an even better refinance deal from an online lender. Checking rates doesn’t affect your credit score.

If you need to refinance your car with bad credit and late payments, you may have a tougher time finding options with terms that meet your needs. Having cash on hand when you refinance your car loan may help you get better terms, even if you have bad credit.

If you have a cosigner with good credit, you may be able to qualify for better terms than you would if you applied on your own. Remember that applying for any type of credit with a cosigner means they are also legally responsible for repaying the loan. So, if you default, the lender can attempt to get their money from you and your cosigner. If you make late payments, it will hurt your credit as well as your cosigner’s credit.

How to get bad credit auto refinancing if you owe more than your car is worth

The best place to refinance an auto loan with bad credit is the one offering terms that allow you pay less over the life of your loan. Lower payments are attractive because they help reduce monthly bills, but if the term of the loan is longer, you may end up paying more for the loan. This could leave you owing more for the car than it’s worth. Lenders call this being “upside down” on a loan.

You must make every car payment on time to prevent damaging your credit, even if the car is in need of expensive repairs. When you purchase a car without a warranty and it breaks down, you may face a big bill from your mechanic. Owing more money on your car than it’s worth increases the chances that the car will reach the end of its life or require major work before you pay it off.

When you want to trade in your vehicle, if you still owe money on the loan, the dealership may not be able to offer you enough money for your trade to cover the outstanding balance. So, you’ll have to write a check to the finance company for the difference or try to finance the difference between your loan balance and the trade-in value with your new car’s loan with an unsecured loan.

4. How to transition from one lender to another

During the refinancing process, stay in contact with both lenders. Your new lender will tell you what information they need to complete the process.

Make sure you understand exactly when your last payment with your previous lender is due and when your first payment with your new lender is due. Delays in the process of transferring a title and moving a loan are common, and late payments hurt your credit.

After refinancing your auto loan, watch your credit files closely to make sure your previous lender reported the loan paid in full and verify that your new lender is reporting the correct information about your new loan to the credit bureaus.