To refinance an auto, you must apply to a different lender to transfer your loan balance. Your new loan provider pays off the previous loan balance and becomes the new lien holder. Reasons for pursuing an auto refinance vary, but most borrowers refinance to save money or to obtain a lower interest rate.
Benefits of Refinancing
You can lower your interest rate by refinancing your current loan and save money over the term of your loan. If interest rates drop, refinancing offers an opportunity to take advantage of lower rates. Or, if your credit has improved since you originally took out your loan, you may qualify for a better rate. You can also refinance to extend your car loan or put money down toward the loan amount to ultimately lower your monthly payment.
Determine Your Finances
Before you apply for a refinance, determine your financial goals so that you can shop and apply accordingly. Use an auto loan calculator (see Resources) to view different loan options and which lending scenario saves you money or lowers your payment. Calculate your total payback amount, monthly payments with a new rate or extended term, or how much you can save if you put money down.
Refinance Requirements
Refinancing requires good to excellent credit. If you owe more than your vehicle is worth, you may not obtain an approval for the requested loan amount unless you have money to put down. Or, if your credit has suffered since the time you originally borrowed, you might not obtain a better interest rate. Banks determine loan amounts by reviewing your credit information and the vehicle's value. Depending on your credit standing, you may be approved for 60 percent to 120 percent of your vehicle's value.
Refinance Process
Search used-car rates offered by different lenders. Call to find out the rates; used-car offers aren't always advertised. Once you find a suitable lender, you can expect to provide the same information as you did for your original loan. You must fill out a credit application and provide detailed vehicle information, such as year, make, model, level, options and VIN (vehicle identification number). Once approved, your new bank pays off your old loan. Expect to sign a new contract, as well.
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