Most car loans are somewhere between 48 to
72 months, with the median term being 69 months. The average car loan size is $23,438,
but that is not all you are paying. There are interest costs that accumulate
during the whole term, and if your credit score is below 720, there is a good
chance it is costing you more than you think in interest. If your car payment makes you sweat more than hot curry, there might be relief. It may be possible to give yourself some breathing space by learning how to refinance your car loan.
Why You Might Want to Refinance
Refinancing a car loan can be a good call
for a few different scenarios:
If your interest rate is in
double digits, refinancing can help. The amount
applied to the principal loan amount could be peanuts compared to the interest
charges. For example, on a $25,000-loan with $500 monthly payments, the principal
portion at 8% is about $333 — two thirds. At 20% interest on the same loan, only
$83 goes toward the principal loan!
If the loan term you chose is
stretching you thin, a refinance can loosen the noose. Maybe you thought paying down your loan in 36 months was a good idea. If you lost your job or your rent was jacked up, that might no longer
work, but a 72-month term would be fine.
If you have a co-signer, you
can build credit faster. When you bought your car,
you might have needed a co-signer. But you will improve your credit faster on your
own. Or maybe you and your co-signer had a falling-out. In any case, you can
remove or change co-signers when you refinance.
What You’ll Need to Get It Done
It’s on you to prove you should get refinanced — not the bank or anyone else. When it comes to how to refinance your car loan, you will need a few things to convince a bank that they should give you what you need.
Better Credit Rating
Odds are pretty good that you are refinancing because of a high interest rate. To lower it on a refinance, you better have a better credit rating than you did before. That means making payments on time every time and paying down outstanding debt.
Supporting Income
Whether you are trying to lower your payment
or remove a co-signer, you need to prove to the lender that you are able to make
the payments on your own. Have proof of steady income for at least three months,
although at least proof of two years of income is best.
A Co-Signer
A family member or friend could be your golden goose here. If someone you know is willing to co-sign for you to get better car loan terms, it can make a huge difference in your payment.
Steps to Refinancing Your Car Loan
In general, refinancing an auto loan
requires the same process for everyone, although lenders might do things slightly
different.
Step 1: Check With Your Current Lender
The first place to start with your
refinancing plight is the current bank, credit union or lender who has your car
loan. On their website, you will find contact information for a customer service
department. Jump through the hoops to talk to a real person. Ask if they
refinance car loans for current customers. If they do, ask to be pre-approved immediately.
They’ll walk you through it, but don’t sign up for it quite yet.
If your current loan is through a captive lender — that is, a lender like Toyota Financial Services, GM Financial or Ford Credit — you won’t be able to refinance directly with them.
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Step 2: Check With Other Lenders
Occasionally, the first lender you talk to
is the best rate. Often, is not. Lenders make fistfuls of cash on the money
you borrow from them, so they compete to get your business. It’s common for
lenders other than your current one to undercut rates and terms to snag your
business.
Check with a loan rep at the bank branch that holds your checking account. You’ll also want to get a couple of quotes from other lenders. Cast a wide net, and pick a credit union, a bank and a specialty lender for auto loans to compare rates.
Step 3: Consider a HELOC an Option
If you have equity in your home, whether
you own it outright or have a mortgage, you can use that to your advantage. A HELOC,
or home equity line of credit, can be your ticket to a low-interest loan.
Depending on your mortgage lender, the interest rates offered are usually only
a percentage or two above your mortgage rate. For example, if your mortgage
rate is 4%, a HELOC could be 5% or 6%. You’ll still need to qualify, but the
lender has your home as collateral, so it is a relatively safe bet for them.
Additional Things to Keep in Mind
It can’t be emphasized enough that your credit rating has to be better than it was when you first got the loan. There’s no reason to expect a lender to help you out if you haven’t helped yourself first.
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Also, lenders will only approve you for a loan if you have a minimum amount owing, usually around $7,500. If you have less than that, you better be off looking for a small personal loan.
There might be refinancing fees tacked on or your car might be too old to get a car loan. Financially, it doesn’t always work out to lower your interest or payment on your current car when it comes to how to refinance your car loan. You might need to explore the option of buying a new car, or at least a new-to-you car instead.
