Are you paying too much for your auto loan? If so, you may not have to wait out the rest of your loan agreement. There’s a chance you can find a lender who will refinance your existing loan at a better rate. Not only that, you can find out whether you qualify for a better deal from the comfort of your home.
The U.S. Department of Treasury, in its Opportunities and Challenges in Online Marketplace Lending report, says online marketplace lending is a fast-growing sector of the market, with loan originations expected to total $90 billion by 2020. This volume gives consumers more choices of online sources when considering loans such as auto refinancing.
Interested in finding out what deal you can get? Here are the basics you should know about refinancing your auto loan.
What is auto loan refinancing?
When an auto loan is refinanced, it means the original loan is replaced with a new loan. This is done by agreeing to new terms and using the new loan to pay off the old loan. Your payments are then made to the new lender.
Benefits of refinancing an auto loan
The largest potential benefit is paying less for your car. The main goals are to lower the overall amount you pay for the loan while keeping monthly payments within your budget. You need to be sure to look at both when choosing a lender. Some companies offer to lower the payments but extend the loan, which ends up costing you more in the long run. Another benefit of refinancing is you may be able to arrange the terms to pay off your loan in a shorter amount of time.
When to refinance your auto loan
It’s a good time to refinance your loan when you can get a better deal from a new lender and you don’t have prepayment penalties that offset the value. The following circumstances help you get better rates.
If your credit has improved since you took out your auto loan. Check your credit report to see how your score changed since initiating your loan. If you have made your payments on time, it has likely improved. If so, this can help you qualify for a lower interest rate.
If your current lender didn’t offer a competitive interest rate. In this case, it is probable a new lender will provide a better rate. You may be in this boat if you got dealer financing because one rate was given to you and you hadn’t shopped around to compare multiple rate offers.
If interest rates have fallen. When interest rates drop, it’s a good time to shop around and see whether you qualify for a lower rate.
If you don’t get a better interest rate but can’t make your current payment, you might still want to consider refinancing. You may at least be able to extend the loan length to lower your payments. While this costs you more in the long run, as mentioned above, it may save you from losing your car and having a bad mark on your credit report. Although this is far from ideal, it may be the best solution for this particular situation.
How to refinance your auto loan
Here are the steps to follow when looking to refinance your auto loan.
Evaluate your current loan
Look at the current monthly payments, the loan term, how many months you have left to pay and the interest rate applied to the loan. Add up the total amount owed. Also, see whether there are any penalties if the loan is paid off early. This allows you to compare the total amount of your current loan to the total amount you would pay on a new loan.
Look at your current credit rating
Find out whether your credit has improved since you got your auto loan. You can do so by checking your free annual credit report.
Don’t jump at the first loan that you see. There are many options out there and if you take your time to look around, you can find the one that best suits your situation.
Once you have found the best fit or shortlisted a few lenders, apply and see what you get. This might require some documents, such as proof of income, proof of insurance, proof of residence, the vehicle registration information and your driver’s license. Most applications take a few minutes and can be done online.
Review and accept the offer
When you receive the offer, review it very carefully. Make sure the loan you choose benefits you the most financially. If you need to, use an auto loan calculator to help you. Then complete any outstanding paperwork, get the money, pay off the old loan and start to pay toward the new loan each month.
What to look for in a refinance company
- A refinance offer that reduces the overall cost of your loan.
- No fees or penalties of any kind.
- Better interest rates than you currently pay.
- Lower monthly payments.
- Good reviews from past customers.
- A quick and easy approval process (preferably online).
- Excellent customer service.
Recommended refinance companies
We reviewed and compared dozens of auto refinance companies, and Lightstream, MyAutoLoan and USAA are our top picks.
- Lightstream is flexible with the vehicles it approves while offering low-interest rates and extending high loan amounts.
- MyAutoLoan provides you with offers from four lenders so you can look at options and pick the best fit.
- USAA offers low-interest rates along with several perks. However, you do need to qualify for membership, which is only available to military personnel and their families.
Learn more about our more recommended auto refinance companies here.
Review and compare auto refinance lenders
If you think you’re paying too much interest or want better terms on your auto loan, shop around to find out what is available. If you’d like to review a wide range of auto loan companies in one place, head over to our auto loans review page. You can compare lenders and read reviews from past customers. Find the right lender for your situation and enjoy the satisfaction of keeping more money in your pocket.
Jessica Walrack is a personal finance writer at SuperMoney, The Simple Dollar, Interest.com, Commonbond, Bankrate, NextAdvisor, Guardian, Personalloans.org and many others. She specializes in taking personal finance topics like loans, credit cards, and budgeting, and making them accessible and fun.