From aux cords to air fresheners, you can buy tons of accessories that make car ownership a more pleasant experience. But did you know you can also take out a new auto loan to benefit your wallet as well? From lowering your interest rate to decreasing your monthly payment, refinancing your car can make paying it off more manageable and potentially save you money over time. Sound good? Read on to learn how to refinance your car and when doing so might make sense for you.
Step by Step: How to Refinance Your Car
Similar to a mortgage refi, refinancing your car basically means you are replacing your original financing package with financing that may have more favorable terms. If you’re interested in refinancing, it’s typically a simple process.
To begin, you may want to start by requesting pre-qualification. This initial evaluation gives you an idea of how much a financial institution (like a bank or credit union) is willing to lend you. Pre-qualification only requires a “soft” inquiry, meaning your credit score will not be affected, so it can be a good idea to obtain pre-qualification from multiple lenders.
Next, as you move forward with the refinancing process, you will need to gather some documentation to apply for credit. Some of the information you’ll need will include:
- Information about your existing financing (like your current monthly payment, remaining balance, length of term, and interest rate)
- The VIN (aka, your Vehicle Identification Number) along with the make, model, and year of your car
- Proof of income (such as paystubs)
- Your driver’s license
- Your Social Security number
Depending on the lender, you may be able to complete the majority of the refinancing process digitally. With Ally Clearlane, you could easily be pre-qualified in minutes and submit an application for approval online.
How can refinancing save money?
Does saving hundreds of dollars pique your interest? (Pun intended.) Refinancing to a lower interest rate can save you cash over time — however, that’s only if you don’t extend the term of your loan. If you receive a better interest rate but you decide to go with a longer term, it may reduce the amount of your monthly payment but it can end up costing you more in total.
Here’s an example. Let’s say you have a five-year, $20,000 auto financing package that charges an 8% interest rate. Each month, your car payment is around $406. Refinance to a 4% interest rate and your monthly payment will drop to $368 — saving you almost $2,300 over the course of the term.
You might also be able to reduce your monthly bill by refinancing to extend the length of your term (from 36 to 48 months, for example). If cash flow is running a little tight and your current car payment has become a stressor on your budget, this could be a good option to explore.
Take that same $20,000 financing with an 8% interest rate above. If your term is 36 months, you owe about $627 each month. Refinance and increase your term to 48 months and your monthly payment will drop by more than $100, to around $488.
Just keep in mind: a longer term may end up costing you more in total. So, if you take this route, you might want to increase your monthly payments later on if you’re financially able, to pay off your principle balance sooner and reduce the amount of interest you’ll have to pay over the life of your loan.
Is refinancing your car right for you?
Before filling out a refinance application, you’ll want to consider whether you can score a lower interest rate. If national interest rates have decreased since you took out your original financing, it could be a good time to shop around.
You’ll also want to think about your own credit. Financial institutions examine your credit score to determine how much of a credit risk you are. The higher your score, the less of a risk you are. Thus, if you’ve boosted your credit score since you took out your initial financing, you may qualify for a lower rate.
Finally, you’ll also need to consider what type of financial institution you are working with (whether it’s a bank, online bank, credit union, or another form of lender) and determine if switching to another institution would yield you a better interest rate.
When might refinancing not make sense?
Interest rates aside, if you’ve almost paid off your balance, you may want to ride out your financing to the end of your term. While you could potentially save a little each month, it may not be worth it to refinance depending on the work and cost associated. Some institutions charge a pretty sizeable application or documentation fee, but it varies by lender or institution.
Lenders are also less likely to offer refinancing options if you owe more than the car is worth. This can happen when your car loses value at a faster rate than you’ve been paying down the balance. This is usually the result of having a low monthly payment because of a longer term.
You also might want to hold off on refinancing your car if you’re planning on making any major purchases in the near future, like another car, a house, or anything that would require applying for credit, to avoid any potential changes to your qualifying credentials.
And you might want to skip out on refinancing completely if your existing auto finance package has prepayment penalties. While uncommon, some lenders do impose a fee when the car is paid off ahead of schedule — which could make refinancing cost more than it’s worth.
Ready to refinance?
While you love taking your car out for a spin, you might not be a fan of your monthly auto payment. Refinancing your car can help. It has the potential to provide a lower rate or better terms, improving your finances, and giving you the ability to drive off into the sunset feeling financially stable
Get pre-qualified to refinance through Ally Clearlane in minutes.