Americans are facing unparalleled challenges in the fallout from COVID-19. In an effort to protect the economy, the Federal Reserve recently lowered interest rates. For consumers, this means better loan options – and many are shoring up their budgets by refinancing their homes and cars.
Refinancing can be an excellent way to save money each month, by getting a loan with a lower monthly payment, lower interest rate, or both. This can ultimately add up to thousands of dollars saved over the course of the loan.
Let’s dive into how auto loan refinancing works and what to consider:
How does auto refinancing work?
Many people are familiar with refinancing a mortgage, but you can also refinance your auto loan to save on your monthly payment and on interest. This is possible because when you refinance, you’ll get a loan with more favorable terms.
When you start the loan refinance process, you’ll want to look for a loan with a new lender. This new lender will pay off the loan with your old lender and your monthly payments will go to your new lender until you’ve paid off the loan. Essentially, you’re replacing your old loan with a new loan.
Generally, refinancing your auto loan is a quicker and more straightforward process than mortgage refinancing, because of the size of the loan and the type of collateral (your car).
Refinancing your auto loan also requires less paperwork and the fees are minimal. The best part of refinancing: there are services that can manage the refinancing process for you.
Why would I want to refinance my auto loan?
If you financed your car through a dealership, you may not have gotten the best loan terms. Refinancing is a great way to find a loan that better suits you, often with a better interest rate, term and monthly payment. Here are some of the common reasons to consider refinancing:
- The Federal Reserve lowered interest rates, and you may qualify for a lower APR
- Your credit score improved
- You are struggling to pay your current monthly payment
- You want more money in your monthly budget
- You are preparing for a large financial purchase (like a house) and want to minimize your debt-to-income ratio
- You want to pay off your loan faster
- You want to add or remove a co-signer (like a parent, child or spouse)
What are my options?
One of the perks of refinancing is you can choose a bank or credit union that you’re more familiar with. You can also consider using a refinancing service that pairs you with a lender and facilitates the refinance, which could mean more loan options and less paperwork. There are pros and cons to both. It’s up to you to determine what best fits your needs.
What information is needed to check my rates?
When checking your rates, you’ll need to provide a few pieces of information. This typically includes:
- Some personal information: This commonly includes your name, contact information, address and date of birth.
- Details about your car: Your car’s make, model and trim, as well as information about your car’s mileage and VIN (vehicle identification number).
- Financial information: This can include information about your car loan, as well as income statements and other documents.
Where should I start?
Start by doing your research to determine if refinancing is right for your situation. If interest rates are lower or your credit has improved, it might be worth shopping for a loan with better terms.
You can easily check your rates online with Motorefi without your credit getting dinged and without needing to provide a social security number. Just remember that if you didn’t get the best rates on your original auto loan, that doesn’t mean you have to stay locked-in, you’re entitled to a do-over.
Annemarie Belda is the senior marketing manager for Intuit’s financial health platforms, Mint and Turbo. She is passionate about helping readers achieve their financial goals from starting a savings account to financial freedom.