An auto refinance can offer car owners attractive benefits, like a lower monthly payment or reduced cost of ownership.
However, there are a few things you need to know about a car refinance. First, not all lenders offer this type of refinancing. Once you find one that does, you’ll need to go through several steps to make it possible.
What is most important is to know what you want and what to expect. Next, find a lender capable and willing to help you make it happen.
What Happens When You Refinance A Car?
Car refinancing is a bit like home loan refinancing, but it tends to be a much faster and more streamlined process.
The goal is to obtain a new loan – usually from a new lender – to pay off the existing loan. It will give you new terms and could help you save money, making your car payment more affordable.
There are various factors that determine what happens when you refinance a car. Generally, it comes down to the following:
- Your credit score
- Available refinancing options
- Choosing the best auto refinance to meet your needs
4 Car Refinance Steps
1. Set Goals and Expectations
Before you can compare options and find a loan that is right for you, you need to establish your underlying goals.
Goals and expectations are important because you want to select a loan best suited to your needs.
Here are a few reasons to invest in an auto refinance. Which one fits your intentions?
Want a lower interest rate
A lower interest rate means you will pay less for the purchase.
For example, your credit may have been poor when you first obtained your loan. With better credit now, you may qualify for a more affordable loan.
If you want to save money overall, look for a lower interest rate.
Need lower monthly payments
Perhaps your budget would balance a bit easier with lower monthly payments.
To achieve this goal, you may need to extend the length of the loan. Doing so will cost you a bit more (depending on the terms), but lightens the load of monthly payments.
In this case, look for a longer term loan for your car.
Want a shorter term for your loan
If you cannot find a lower interest rate, but want to keep your costs lower, look for a lender with a shorter term offer. This can help you save money.
This is also an option when you just want a new lender.
Keep in mind any loan you obtain to refinance your car should meet your goals and be an improvement from your existing auto loan. If this is not the case, move on to another lender or skip refinancing.
Don’t refinance just to refinance — be sure it is financially beneficial to you.
2. Locate the Ideal Auto Refinance Loan
Now that you have set clear expectations, you need to find lenders with the features you desire.
By far the most important step to take here is to simply tell your lender what you are looking for in an auto refinance.
- I want a lower auto loan interest rate.
- I want a lower auto loan monthly payment.
- I want to reduce my auto loan term.
Many lenders have more than one type of car refinance loan they can offer. This enables you to get a customized auto refinance to meet your goals and objectives.
Consider the details of any refinancing offer you receive. It is important to remember not all deals or lenders offer the same features. You will need to verify the following to best compare car refinance options.
What is the interest rate on the loan?
Be sure you obtain a rate for the auto refinance y (a generic rate available online may not be accurate).
Is there a prepayment or pay off penalty?
You do not want to have to pay a penalty to pay off the loan early.
What fees or out of pocket expenses apply to the refinancing process?
If refinancing is going to save you only $1,000, and your fees are $1,100, it is not worth refinancing. Learn about all the applicable fees in advance.
What is the loan length?
Again, a lower interest rate over a longer period of time may seem like a good deal. However, it needs to remain affordable for you.
What is the new monthly payment?
Compare this to what you are paying now before making a decision.
Are there any upfront costs or down payments required?
Some auto refinance deals require you to make a down payment or pay cash for fees at the time of obtaining the refinanced loan.
Do you trust the lender?
It is equally important to choose a car refinance deal that will benefit you financially as it is to work with a lender you trust with the transaction.
3. Know Your Car’s Value
Some lenders will require an appraisal on the vehicle. This is like a “background” check on your car.
Before a lender can offer you an auto refinance, they need to learn the following:
- The make, model, and features of the car
- The current condition of the car
- Any significant damage or changes that would reduce its safety or its value
- The current value of the vehicle
- Who owns the vehicle
- The payoff amount – this is available from your current lender
4. Understand Your Credit Score and Credit History
Creditworthiness goes a long way in auto refinancing.
Lenders will need to pull a credit report and determine if you are a safe credit risk. Doing so gives the lender the ability to offer a lower interest rate or more flexible terms.
Most often, lenders will approve a car refinance for those who have a credit score over 660, though this depends significantly on the lender itself.
With your credit information, and confidence the vehicle’s value is enough to cover the loan amount, the lender will then approve the loan.
When this information checks out, the lender sends the loan to underwriting for approval. Most of the time, it can be approved fairly quickly.
Once the lender gathers all necessary information about your credit history and the car, and you approve a specific type of loan, the refinancing process takes place. You’ll verify the details, then the lender will process the loan application for you.
Understanding the Steps for What Happens When You Refinance A Car
The underlying goal throughout the car refinance process is to ensure you have established expectations and understand your options.
For the lender you choose, their primary objective is to certify you are a good risk, and in the end, offer you a competitive auto refinance product.
Although it appears several steps are involved in auto refinancing, oftentimes the process does not take long, and once complete, you will be in a new car loan.