What is auto loan refinancing?

If you have owned your car for a year or more, you may have noticed that lenders advertise better interest rates than you are paying. Lower interest rates allow you to save money on your monthly payments. To get a lower rate, you need to refinance your car loan or, in other words, get a new car loan.

Before refinancing an auto loan, it is important to understand the process and compare rates before applying. If you have good credit, especially if your credit has improved since your first loan, refinancing may be a good option. If you have a negative interest rate because of initial financing with a dealer, you may also be able to get better rates, even if you do not have very good credit.

What is car refinancing?

When you refinance your car, you take out a new loan to pay off the previous one. This allows you to reduce your interest rate, lower your monthly payments and pay off your debt more quickly. It all depends on your creditworthiness and the amount and interest rate you can access.

How can you save money by refinancing your car loan?

There are several ways you can save money by refinancing your car loan.

Reduce the interest rate

Depending on your credit rating and the equity in your vehicle, you may be able to get a lower interest rate from a new lender. With a lower interest rate, the cost of the loan will be lower throughout its term. This could save you hundreds or even thousands.

Lower monthly payments

Refinancing your car loan can reduce your monthly payments. You can reduce payments through a better interest rate or by extending the term of the loan. However, if you extend the term of the loan, the total cost of the loan may increase because you will pay more interest.

When is it appropriate to refinance an auto loan?

Refinancing your car loan may be a good idea if your credit rating has improved since you took out your current loan. If the loan is only a few months away from maturity, it may not be worth refinancing. On the other hand, if it is still several years away from maturity, refinancing your car loan could save you a lot of money.

You can get pre-qualified with lenders to see if you can get a lower rate or a shorter term. Before you begin the pre-qualification process, a car loan refinance calculator can help you determine whether refinancing will save you money and how much you could save.

What might prevent you from refinancing your car loan?

Certain circumstances may prevent you from refinancing an auto loan or indicate that it is not the best option. It is advisable not to do so if

• The car's mileage exceeds 100,000 km or the vehicle is more than 10 years old.
• You no longer have any leeway on your auto loan.
• If you repay the loan early, you may face early repayment penalties.
• You are almost finished repaying the loan and a refinance means paying more interest.
• You have already refinanced your auto loan recently.
• Your credit rating is too low to qualify for a refinance.
• Refinancing means a higher rate because of rising market rates or other factors.

Make sure that the fees you will be charged when you repay the old loan and take out a new one do not exceed your savings. The fees you may have to pay are as follows:

• Early repayment fees. The early repayment fee is a penalty associated with fixed-term loans that are repaid early.
• Transaction fees. Both the current creditor and the new creditor may charge a transaction fee when refinancing the current auto loan. Try to obtain a waiver of these fees.
• Registration fees. Registration fees are imposed by the state as a regulatory measure to cover the cost of maintaining state roads. Some states may require re-registration after refinancing.
• Title transfer fees. You must pay this fee when you transfer title to a car from one lender or owner to another. The cost can range from $5 to $165, depending on the state and county where the vehicle is registered and other factors, such as the model year.

How do you refinance an auto loan?

Understanding the process of refinancing an auto loan is as important as knowing its benefits. Here are the four steps in refinancing an auto loan.

• Check your credit rating and credit report. The auto loan rate you get will depend on your credit rating. Ideally, you should have a credit rating above 670.
• Compare rates and apply to different lenders in advance to avoid affecting your credit several times.
• Apply online, by phone or in person and check the terms and conditions before signing.
• Use the funds from the new car loan to pay off the existing loan, but keep paying it off until you have verified that it is completely paid off.

Refinancing your car loan can help you save money over the life of the loan. This option is worth considering if interest rates are lower or your credit has improved. However, if you need to extend the term of your loan to reduce your monthly payments through refinancing, it is best to consider other options.