There are a lot of good reasons to look into auto loan refinancing. Maybe your payments are just too much for you to handle right now. Or maybe the market has changed drastically from when you first got your car and you think your car payments should be lower.
No matter the reason behind your decision to refinance, it’s important to understand how it works – and more importantly – how to make it work for you.
What is Loan Refinancing?
Simply put, loan refinancing is a way to save yourself thousands of dollars in interest that you don’t actually need to be paying. You can also refinance your mortgage or other larger loans, but auto loan refinancing tends to be one of the most common types.
Who Should Refinance?
While there’s no set parameters for who should look into refinancing and who shouldn’t, typically the people for whom it’s the best option fall into one of these categories:
- You purchased your car several years ago and interest rates have dropped since
- Your credit score has improved since you purchased your car
- You purchased through your dealer and/or did not get the best rate when you purchased
- Your financial situation is not as optimal as it used to be and you can no longer swing your monthly payments
- You leased your car and now want to purchase it after the agreement expires
Understand Your Current Loan
Before you do anything, you need to familiarize yourself with the terms of your original loan. Check your current interest rate, how many months you have left on the loan, how much you’re currently paying a month, and whether or not you’ll be penalized for prepayment (a clause in your contract that says you will be given a penalty if your loan is prepaid within a certain time period. The penalty is typically based on a portion of the remaining balance or the equivalent of a certain number of months worth of interest).
If your loan does have a prepayment penalty, ask yourself if the money you’ll save by refinancing is worth the bulk sum you’ll have to pay for breaking the agreement. This is why it’s important to understand absolutely everything about the terms of your current loan and any new ones you might be considering.
It’s also best to reconsider refinancing if doing so will stretch out the duration of your loan (meaning you’re locked into your contract for even longer than you were before and are almost guaranteed to be paying more in the long run).
Ensure Your Car Qualifies
Next you have to make sure your car qualifies for refinancing. Although each bank has its own list of requirements, there’s typically some things they all have in common.
Generally speaking, a bank will not refinance a vehicle that has less than $7500 on the loan, is older than 7 years, has too many kilometers on it (ranging from 70,000 to 100,000 and up), is used for commercial purposes or has salvage title branding (meaning the car has been damaged and is seen as a write off to insurance companies because the cost of repair exceeds its value).
You’ll also be hard pressed to refinance a motorcycle or RV.
Do your research and compare the rates available to you. It’s best to start by informing your current lender (be it the dealer or a bank) that you’re planning on refinancing and trying to find a better deal; They may be willing to refinance your existing loan, saving you the hassle of switching to a new lender (but don’t pin all your hopes on this working).
Ask the banks you’re considering switching to what fees you’ll be expected to pay. There will be a small fee to transfer the title from your old bank to your new one, and you will have to re-register the vehicle, but there may be other hidden charges (like a processing fee).
Don’t forget to go by used car interest rates (even if you’re currently paying for a new auto loan/the car was new when you bought it) because the value of the car has decreased and it technically is no longer new.