Shopping for a better auto loan — and refinancing your current car loan — has become quick and easy, thanks to the speed and convenience of the internet. The application process often takes less than an hour, and many lenders promise to give you a decision on your loan in a matter of minutes.
Is refinancing your current loan the right move for you? It could make sense under several scenarios. For instance, if you think your credit has improved since you bought your car, there’s a good chance you can lower your interest rate and end up with a smaller monthly payment. You might also be able to shave some time off the loan, or go the other way and extend the term of the loan if you’re having trouble making your monthly payment.
While the refinancing process can be relatively painless, you’ll get better results if you’re organized and focused in your search for a new loan. Here are the steps to take to successfully refinance your auto loan.
1. COLLECT YOUR DOCUMENTS
2. EVALUATE YOUR CREDIT HISTORY
3. APPLY
4. RUN THE NUMBERS
5. DECIDE WHETHER REFINANCING MAKES SENSE
6. EVALUATE THE TERMS OF YOUR LOAN
7. COMPLETE THE PROCESS
1. Collect your documents
Find a recent payment stub from your current auto loan and make sure you know the following:
- Your current monthly payment.
- The amount of time left to repay the loan in months, often called the loan term.
- The interest rate you’re paying.
- The customer service number of the lender in case you have questions.
Dig out your original loan contract and verify that there are no prepayment penalties. If you can’t find your contract, don’t worry. The lender’s customer service department can give you the information you need, or even email you a copy of the contract.
You’ll also need the following items to complete loan applications:
2. Evaluate your credit history
If you’ve made all your car loan payments on time for a year or more, your credit has probably improved and there’s a good chance you can benefit from a refinance.
Of course, that’s only true if you’ve also kept all your other financial commitments up to date. The proof is in the numbers, so you’ll have to find out where you stand, and you have two options for doing so.
You can pull your own credit report — that’s a history of your credit activity — for free to see if you’ve had any problems, such as late payments; there is sometimes a small charge to get your official FICO credit score. Because you are checking your own credit, this kind of research will not lower your score. However, because each of us has many credit scores, the score you get won’t necessarily tell you exactly what interest rate to expect on your new loan.
Your alternative is to simply apply for a new loan and find out how good your credit is as a result of the application. Which brings us to …
3. Apply
Apply to several car loan refinance companies so you can compare interest rates and find the best offer. The application process doesn’t cost you anything, and you will quickly learn if you qualify for a lower interest rate.
One word of warning: Make sure you submit all your loan applications within a 15-day period. Similar queries in this time period are grouped together and treated as one, which lessens the impact on your credit score — it will trigger only a small drop, about five points.
4. Run the numbers
Using an auto loan calculator, type in your balance (from your current lender) and the new interest rate you’re being offered. Set the loan term at the number of months that are remaining on your current loan. You will then see the new — and hopefully lower — loan payment.
If you’re using NerdWallet’s auto loan calculator, the right-hand column will show you the total amount of money you’ll spend over the length of the loan. To really motivate yourself, subtract this amount from the balance of your current loan. Hopefully, you’ll be saving a lot of money by refinancing your auto loan.
5. Decide whether refinancing makes sense
By now, you should be able to tell if you’ll save money by refinancing your car loan. In some cases, interest rates might also have fallen since you took out your current loan. If that happened, you’re in luck: There might be even greater savings and it’ll be very clear that refinancing is for you.
In some cases you may see only a small difference, or none at all. And if you are close to the end of your loan, an auto loan refinance may not produce enough savings to be worthwhile.
6. Evaluate the terms of your loan
If you decide to refinance, you can leave the length of your loan unchanged, or consider these options:
- Pay off the loan more quickly. If you’re used to making loan payments of a certain amount, you may be able to keep the payment about the same but shorten the length of the loan. This saves you money because you’ll pay less interest over the life of the loan.
- Take longer to pay the loan. If your budget is stretched and you want a little financial breathing room, you could extend the loan term by a few months or even a year to lower your payments. This isn’t ideal because you’ll pay more interest in the long run. However, it’s better than missing payments and damaging your credit history.
7. Complete the process
If you decide to refinance, complete the application with the lender you choose.
Follow the instructions provided by the lender. You’ll be sent the loan paperwork, and you simply respond to the lender’s requests. Here’s a quick overview of what you can expect:
- You’ll sign new loan documents.
- A new loan will be created for you, at a new interest rate, with the term length you choose.
- Your new lender, the refinance company, will pay off your old loan.
- You will begin making payments to your new lender at the lower rate.
While there are many details to take care of, the entire process can be completed in a few hours.
Philip Reed is a staff writer at NerdWallet, a personal finance website. Email: preed@nerdwallet.com.
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