Tips for Refinancing Your Auto Loan for a Lower Interest Rate

Tips for Refinancing Your Auto Loan for a Lower Interest Rate

If you took out an auto loan a few years ago when interest rates were higher, refinancing your loan at today’s lower rates could save you a nice chunk of change. But before you jump in, make sure you understand the ins and outs of the process – when it makes sense to refinance, how to find the best rate, and what the costs involved are.

Here are some tips to help you navigate refinancing your auto loan:

1. Check your credit score

Your credit score plays a big role in determining the interest rate you’ll be offered when refinancing your auto loan. So before applying for a refi, it’s important to check your credit score and address any issues that may be dragging it down.

You can get your credit score for free from sites like Credit Karma. If your score is below 700, work on improving it by paying down balances, disputing errors on your credit reports, or becoming an authorized user on someone else’s account.

A higher credit score means you’re more likely to qualify for the best refinance rates. Shoot for a score over 740 before applying.

2. Calculate your potential savings

Use an auto loan refinance calculator to get an estimate of how much you might save by refinancing. Input details like:

• Your current balance
• Remaining loan term
• Current interest rate
• Estimated new interest rate

The calculator will show your new monthly payment and total interest costs if you refinance. Only proceed if the savings are significant enough to be worth your time and effort.

3. Decide your goals

Before applying to refinance, think about what your priorities are. Do you want to:

• Lower your monthly payment?
• Shorten your loan term?
• Reduce your interest rate as much as possible?

Knowing what’s most important to you will help you evaluate refinance offers.

4. Research current auto loan rates

Rates fluctuate frequently, so research current average interest rates before applying. Compare rates from banks, credit unions and online lenders. Focus on the rates offered to borrowers with excellent credit.

Online lenders like LendingTree and MyAutoLoan may offer lower rates than banks, but compare all the costs involved.

5. Get pre-qualified

Before formally applying, go through the pre-qualification process with several lenders. This involves a soft credit check that won’t affect your score.

Pre-qualification will show what rates and terms lenders are likely to offer you without a hard inquiry on your credit report.

6. Submit loan applications

Once you’ve pre-qualified, formally apply with the lenders that offered the best deals. Try to submit all applications within a short window of time so the hard inquiries won’t significantly ding your credit.

Compare the offers side-by-side and make sure you understand all the fees involved before choosing a lender.

7. Review the loan agreement

Scrutinize the loan agreement from your chosen lender before signing. Make sure it reflects the interest rate, term length and fees you agreed to. Also verify:

• There are no prepayment penalties
• The loan is simple interest, not precomputed interest

Simple interest saves you money if you pay off the loan early. Don’t sign anything until you’re satisfied.

8. Submit final paperwork

Once you accept the offer, the lender will walk you through the paperwork and final steps. This includes submitting proof of insurance and income, signing the agreement, and authorizing payoff of your old loan.

Read all paperwork carefully and hold onto it for your records. It takes about 10-14 days to receive your new loan funds and pay off the old loan.

9. Make your first payment

Double check that your old loan shows a $0 balance and is marked “paid in full.” Then make your first payment on the refinanced loan to get things kicked off.

Going forward, you’ll send payments to the new lender. Just update any autopay you have set up.

10. Watch for changes

Keep an eye on your new loan balance and monthly statements. Make sure payments are being applied correctly and that the interest rate and term match what you agreed to.

Log in to your lender account periodically to check your payoff date. Contact the lender right away if you notice any discrepancies.

Should you refinance your auto loan?

Refinancing isn’t right for everyone. Here are some things to consider:

• How much longer do you have on the loan? Refinancing works best when you have at least a year left.
• Is your credit score higher now? Big score improvements can mean better rate offers.
• Have rates dropped significantly since you took out your loan?
• Are you happy with your current lender? If not, refinancing lets you switch.
• Can you afford closing costs like application fees?

In general, aim for at least a 2% lower rate to make refinancing worth it. Use a refinance calculator to run the numbers and see if you’ll save enough to justify the costs.

Where to get the best auto loan refinance rates

Shop around with different types of lenders to give yourself the best shot at scoring a low rate:

• Banks and credit unions: Established lenders may offer special discounts for existing customers.
• Online lenders: Options like LendingTree let you easily compare personalized loan offers.
• Auto manufacturers: Brands like Toyota Financial Services may run special financing promotions.
• Credit cards: Some cards let you transfer a balance from an auto loan.

Pre-qualify with several lenders to compare. Credit unions and online lenders often offer the most competitive rates.

What fees are involved?

Closing an auto refinance loan comes with some fees. Common ones include:

• Application fee – $10-$100
• Origination fee – up to 2% of loan balance
• Title fee – $25-$150
• Registration fees – $20-$60

Ask lenders to give you a full breakdown of all fees in writing. Select a lender that doesn’t charge prepayment penalties in case you pay off the loan early.

Will refinancing extend your loan term?

When shopping for a refi, lenders may offer you a lower monthly payment by extending your repayment period. But this means you’ll pay more interest over the life of the loan.

To avoid this, opt for a refinanced loan with the same or shorter term length as your current one whenever possible.

How does refinancing affect your car insurance?

In most states, you’re required to have continuous auto insurance coverage throughout the refinancing process. There’s usually no need to change policies when refinancing, but do notify your insurer about the new lienholder.

Refinancing could alter your insurance premiums if it significantly lowers your loan balance. Discuss any changes with your agent.

Can you refinance with your current lender?

It’s an option, but not always the best one. Your existing lender may make the process easy by waiving certain fees or paperwork. But you could get better offers by shopping around.

At minimum, check rates from one or two other lenders for comparison before deciding.

How does refinancing affect taxes?

Interest paid on an auto loan is not tax deductible at the federal level and in most states. So refinancing likely won’t impact your taxes.

If you itemize deductions, consolidating auto loan interest with a deductible mortgage could affect your write-offs. Always consult a tax pro first.

Can you get cash back when refinancing?

Some lenders let you take out a larger loan amount when you refinance and get the difference in cash. But this raises your principal and interest charges.

It’s smarter to just refinance your current balance into a new loan with better terms. Avoid tacking on extra cash unless absolutely needed.

How long does it take to refinance a car loan?

The refinancing process typically takes 30-60 days from start to finish. It includes steps like:

• Applying and getting approved – 1-7 days
• Verifying paperwork – 7-14 days
• Paying off old loan – 7-15 days
• Receiving new loan funds – 1-2 weeks

Having all your financial documents ready can help speed things along. Be patient as the lender works through technicalities behind the scenes.

Is it easier to refinance with the same lender?

Refinancing with your existing auto loan provider can be simpler since they already have a lot of your information on file. But it’s not always the best move.

Take the time to compare offers from at least 2-3 other lenders before deciding. This ensures you get the top rate and terms.

Are auto loan refinance rates higher now?

Interest rates fluctuate frequently based on economic factors. Recently, the Federal Reserve has increased benchmark rates, leading to a general rise in auto refinance rates.

That said, average refi rates are still relatively low in a historical context. Shopping around can help you find competitive offers in the current market.

Can you get approved with bad credit?

It’s tough but not impossible to refinance an auto loan with bad credit (FICO scores below 620). Some lenders specialize in borrowers with credit challenges.

Expect to pay higher interest rates and fees compared to good credit. Weigh the costs before deciding if it’s worthwhile.

Is it smart to refinance for a longer term?

It may be tempting to refinance into a longer loan term to lower your monthly payment. But this causes you to pay more interest over the full repayment period.

A better approach is getting a new loan with the same or shorter term length as your existing one. Resist offers to stretch out your payments.

Can you get approved to refinance with no income?

Most lenders require you to document steady income to qualify for an auto refinance loan. Those who are self-employed, retired, or unemployed have a harder time getting approved.

Look for lenders that consider factors besides income, or find a well-qualified co-signer to improve your chances.

Options for the self-employed

If you’re self-employed, you have a few options to prove income when applying to refinance:

• Submit your recent tax returns showing revenue and expenses.
• Provide bank statements illustrating cash flow.
• Show signed contracts or invoices for ongoing projects.

Some lenders like RateGenius specialize in working with self-employed borrowers. Be prepared to provide more documentation than salaried applicants.

Alternatives for the unemployed

Without current income from a job, you’ll need to demonstrate other sources of funds to qualify for a refinance:

• Tap into retirement accounts or savings.
• Use spousal income if married.
• Rent out property you own.
• Find a co-signer with strong income.

A larger down payment or excellent credit can also help offset unemployment. Shop around to compare options from lenders open to non-traditional situations.

Tips for retirees

Retirees can prove income for a refinance in a few ways:

• Document retirement account distributions.
• Show Social Security award letters.
• Provide pension payment records.
• Verify annuity or investment income.

Having substantial assets or a co-signer may help retirees with limited fixed incomes. Lead with your strongest source of recurring income when applying.

The key is demonstrating you still have steady funds coming in each month, even if you’re no longer working. This reassures lenders you can repay the refinanced loan.