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When you take out a loan to buy a car, you agree to make payments at a specific interest rate. If you’re able to refinance the loan for one with a lower interest rate, you’ll make lower monthly payments. That could save you money in the long run. Once you decide to refinance, prepare ahead just like you did when you applied for your initial loan. If you want the best rates, get your finances in order to earn the best credit score possible. Read on for tips on how to refinance your loan.
How Refinancing Works
When you refinance, your goal is to get a new loan with a lower interest rate to replace your old loan. Just like with your original car loan, the interest rate you pay if you refinance is based largely on your credit score. The higher your credit score, the lower your interest rate is likely to be. If your credit score has improved since you originally got your loan, you’ll likely get a lower rate.
The Refinancing Process
Think of refinancing as simply applying for a new loan. You’ll need to provide anything that will show the financial institution you’re a low-risk borrower. Start by gathering your pay stubs or other proof of income. Prepare to grant permission for the lender to check your credit. Information about your current loan (such as the monthly payment and remaining balance) will also be required, along with information about the car (such as the VIN, mileage, make and model). While solid financials might get you into a lower-rate loan, if your income and credit score are too low, you might not qualify to refinance. If this is the case, spend a couple months improving your credit score before you try again.
Benefits & Considerations
The biggest benefit of refinancing a car loan is saving money. If you can reduce your interest rate even by a small margin, you could save a substantial amount in the long run. For example, let's say the interest rate on your original 5-year loan is 4.5 percent and you’re able to reduce it to 3 percent through refinancing. Your monthly payment has dropped from $373 to $359. You might shrug at a monthly savings of just $14, but you'd end up saving about $840 over the 5-year life of your loan.
But be cautious. Your lender might try to get you into a more costly loan. For example, a lender might offer a loan with a much lower monthly payment, but with a 7- or 9-year term to pay off the loan. You'd end up paying much more in the long run. Lenders might also try to tack on additional fees. Always ask what fees are involved and double-check your refinancing contract before signing it.
If you’re considering refinancing your car loan, Navy Federal is a good option with low rates and low monthly payments. It’s easy to apply for an auto loan online, at a branch or by calling us at 1-888-842-6328. The application process may take only a few minutes.