Is Auto Loan Refinancing Right for Me? Q&A
So, you currently have a loan that allows you to purchase or lease a vehicle, but your monthly payments or term are not what you’d like them to be. Refinancing your auto loan would replace your existing loan with one that can meet your desired monthly payment amount and preferred term length. When you refinance, you could save hundreds or more dollars in interest over the loan’s term.
When comparing potential auto loan lenders to refinance with, the main factors to consider are the loan amount (how much money you’re borrowing), the annual percentage rate (or APR, the interest rate on the loan), and the loan term (time to pay back the loan in full).
We know refinancing a loan can be a bit daunting—that’s why we answered some of the most common questions buyers have when it comes to deciding when and how to refinance your auto loan.
How does auto loan refinancing work?
The process of car buying or leasing a new or used vehicle with an auto loan varies from person to person. Depending on the manufacturer, car dealer, and its partners, your options as a borrower change. When you accepted your existing auto loan, you may not have had as much control over your lender, the loan’s APR, or the terms and conditions of the loan.
Luckily, auto loan refinancing means that the loan that you purchased or leased your vehicle with does not necessarily have to be the loan you keep until the vehicle is paid in full. If you decide to refinance your auto loan, your new loan will ideally provide opportunities for you to save money with lower interest payments or the ability to switch to new loan terms.
It’s important to note that every lender is different and will have its own criteria that will decide if you’re eligible for loan refinancing. Lenders will most likely require a minimum loan amount, credit score, maximum vehicle mileage or age, and will want to evaluate your financial history. Fortunately, there’s plenty of lenders to choose from, including American Heritage, so do your research on these requirements to aid in your approval.
Refinancing is not a necessity, but it can offer you freedom of change. You don’t need to refinance a loan if it already suits your financial situation. However, you should always reevaluate any loan over the course of its term to see if you could be saving yourself money.
When is the best time to refinance?
There are three key times you may want to consider refinancing your car loan: when you have a better credit score than you did when you opened the loan, when your monthly budget is being weighed down by your loan, or when you find yourself consistently making higher monthly payments toward your loan.
It's always a good idea to routinely check your credit report for improvements that lead to new opportunities, like better loan rates. If your credit score has improved since you got your original loan, you may qualify for a new, lower rate that could lower your monthly car payments. A lower interest rate can save you hundreds of dollars or more over the course of your loan. Tools like an auto loan calculator can help you crunch the numbers and see for yourself the differences between certain interest rates and term lengths.
To stay on top of your credit score, you can receive one free copy of your entire credit report once per twelve months from each of the three major credit bureaus (Equifax, Experian, and Transunion), meaning you can receive a report every 4 months if you space them properly. Checking your credit report is a healthy financial habit to get into. It not only allows you to see your improvement, but also means you may catch errors or fraud sooner.
If you’ve experienced a recent change in your spending habits, budget, or income, auto loan refinancing may help free some previously strapped down cash. In times of financial stress, high-cost necessities like vehicles may be essential in our daily lives, but they can also be expensive and take a toll on our finances. If loan payments are occupying a large portion of the monthly budget, reassess its terms and consider refinancing. For example, a longer loan term may lower monthly payments.
Be wary of promotions that claim “0% interest” that may only apply to a shortened term. After the promotional period of the loan is up, deferred high-rate interest may be tacked onto the loan, costing much more than anticipated. Extra fees like prepayment penalties can also add to the overall cost of the loan, too.
If your monthly payments are not an issue and you tend to pay more than the minimum each month, refinancing to a shorter term with a higher monthly payment can help save you money on interest in the long term. While making smaller payments over a longer period of time is gentler on the monthly budget, making larger payments over a shorter period of time means that more of your money is going directly to the principal rather than the accruing interest.
What do I need to refinance my auto loan?
Before you refinance, you’ll need to gather paperwork related to both the vehicle and the loan. If you choose to apply online, these documents will provide an easy point of reference as you fill out the application.
Here are a sample of some of the documents you may be asked for during the refinancing process:
- Your 17-character Vehicle Identification Number (VIN), year, make, model, found on the vehicle’s registration
- Proof of employment and income (W-2, 1099, etc.)
- Proof of residence (driver’s license, loan statements, bills, or others)
- Proof of insurance (ID card or recent statement)
- Current loan details including the loan number, lender name, and contact information
There is always the possibility that your particular situation may require more or fewer documents like these, so be sure to keep relevant information on hand during the entire process.
How do I apply for refinancing?
American Heritage provides several convenient ways start your refinancing process today. To get started, you can apply online, give us a call at 215.969.0777, or apply in person at any of our branch locations. We look forward to answering any questions you have and helping you in your financial journey.