Auto loans typically have higher interest rates than other types of property. This is due to the rapid depreciation in value of an automobile. Consumers with a high interest rate auto loan may be able to save significantly by refinancing their auto loan to a lower rate. Before starting the process to refinance an auto loan, borrowers should understand how the process works and how to improve the odds of successfully refinancing their auto loan.
Refinance Process
As with any refinance, an auto loan refinance begins with a borrower applying for a loan. The lender then gathers information on the property. Lenders will determine the value of the vehicle by using a price guide based upon the make, model, mileage and other factors. The lender will also look at the borrower's ability to repay the loan by examining the borrower's credit score and other financial obligations. Lenders will base the approval of the loan and the interest rate offered upon the perceived risk of loan default.
Locating Lenders
Borrowers may contact local banks and credit unions to determine whether or not these institutions write auto refinance loans and what terms they may offer. Another option is to use online loan services. These services gather information on the vehicle and the borrower and offer the loan to a number of lenders. The service then gathers loan offers and presents them to the borrower. The borrower chooses the lender they are interested in working with and contacts them to complete the refinance process.
Vehicle Equity
Lenders are more likely to approve loans for borrowers who have equity in their vehicles. Many borrowers are upside down in their auto loan, meaning they owe more than the vehicle is worth. This makes refinancing the loan difficult or impossible. Various sources, such as Kelley Blue Book and NADA, publish price guides that consumers can use to determine the fair value of their vehicle. Borrowers may need to pay down the auto loan balance before being able to refinance to a lower interest rate with a new lender.
Credit Worthiness
As with any loan, the borrower's credit score, debt levels and income all play a role in the loan approval process. Before seeking to refinance an auto loan, borrowers should request a copy of their credit report and review it for inaccuracies. Borrowers that find problems should follow the credit reporting agency's procedure for making corrections. Borrowers should also take steps to reduce their debt level, increase their income and pay all bills on time to increase their attractiveness to lenders.
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