Many people wonder whether or not it is beneficial to refinance my car loan. The simple answer is yes. Refinancing can save you hundreds, maybe even thousands over the life of your auto loan. The point of refinancing is so that you can get a better interest rate on your loan.
Lowering your interest rate by even one single percentage point can result in huge savings. Remember, car loans are normally more than three to six years in term length and all those months of interest add up. Here is the process you should follow to go about refinancing your car.
You should first get all of your necessary paperwork together. This includes your insurance, title papers, and any information regarding the car.
Next, you should meet with your current lender to talk about your loan. Don’t start discussing better rates with them—instead, talk about the amount you need to pay off your loan completely. It probably won’t be the same as the total amount you owe. It can be less for paying it off early however there may be prepayment penalties.
Getting a better refinance rate is all about your credit score. Chances are, if you are paying a higher interest rate than the current market, it was because your credit score was less than stellar initially. You should check your credit score using sites such as Experian or TransUnion. You can have one free check per year that will not deduct points from your score. If your credit score is better than it was when you signed the loan, refinancing will definitely get you a better rate.
When you start the refinancing, it adds and subtracts what is called a trade line from your credit. Whenever a loan is refinanced, there is one lender that is being paid off in full and then another one comes into the picture with a new hold on the car. This change is noted on your credit, but it has no negative impact. All credit lines on your credit report will be updated on a monthly basis. This gives the rating agencies an idea on how you might be taking care of your debt load.
Another reason you may want to refinance your car is raise yourself above other forms of credit. Once you have equity in your car, you can structure a new loan so the finance company will give you a check to use to pay off credit cards or make an extra payment or two on your house. Since interest rates on credit cards are so much higher than on car loans, it is very advantageous eliminate credit card debt as quickly as possible.
Sometimes lenders offer other types of incentives for opening a new loan with them. This can be an offer to make a payment for you or allowing you to skip a payment, without falling behind in your payments. This can be very helpful when you have a need to make repairs to your house or another car. You could even apply the money you save to the loan and have one less month to make payments or use the money towards a vacation or back to school needs.
If the new company fails to pay off the entire amount of the old loan then your credit is at risk. Though widely uncommon, if you are not aware of this and the old loan is neglected, it will go into default and your credit will suffer accordingly.
Of course, the biggest effect on your credit is if you fail to pay the new loan and default on it. This will always have an adverse effect on your credit and immediately lower your credit score with rating agencies.
Next, you should shop around for various vendors to find any better rates. You can use an auto loan refinance calculator to also help you figure out what your new loans would be fairly quickly. Other quotes will break it down for you and can usually be done online and within an hour. These quotes are sometimes inaccurate, so it helps to talk to a lender or even have an appointment with one. You will then need to transfer the title to the new lender and pay the small transfer fee.
In summary, refinancing your car loan is a great idea. Refinancing allows you to trade in your current loan for a new loan with another lender, but with a lower interest rate. This can save you lots of money over the life of the loan.