How to Prepare for an Auto Refinance

Refinancing auto loans are a great way to save money. If the terms of your original loan are no longer financially practical, you should definitely explore your options for an auto refinance to help make your life easier. While it may not be for everyone, if there is a way to cut down the interest rate you’re currently paying on your car loan and save a few thousand dollars a year, you should do your best to exercise it.

With consumer spending stalling and the auto industry having problems getting vehicles off the lot, car loan rates are at some of the most competitive levels consumers have seen in years. Use that to your advantage to refinance your car loan. Before you do, however, make sure you have all your ducks in a row. The last thing you want is to go through the trouble of applying for an auto refinance, only to be denied and have your credit harmed.

Before You Apply For an Auto Refinance

Getting a loan refinanced is the same whether you’re talking about a mortgage, car or other kind of debt consolidation. The basic principle is that you’re applying for a new loan in which the lender pays off your old loan. Understanding that, you should make a checklist of things you need to take care of before you apply. Here are a few important ones:

  • Credit Score: Anytime you’re talking about a loan or a refinance, you need to make sure your credit score is as high as it can be. The higher your score is, the better position you are in to negotiate a lower rate and more favorable terms. Applying for an auto loan refinance with bad credit can backfire and hurt your chances of approval.
  • Credit Report: To get your credit score where you want it to be, you’ll have to look over your credit reports. Go through it with a fine-toothed comb for errors, inaccuracies or anything out of the ordinary. If you find any reports that shouldn’t be there, file a dispute with the credit bureau before you visit a lender. You don’t want to hold up the refinance process if you can take care of it beforehand.
  • Shop Around: Loan rates come in all shapes and sizes, so don’t think that one lender’s terms are as good as everyone else’s. Visit multiple lenders to see which one offers you the best auto refinance rate for your financial needs. You can even try to leverage different lender’s terms to better position yourself.
  • Define Your Needs: Ask yourself why you’re seeking a car loan refinance in the first place. If it’s to pay lower interest rates, you can also think about shortening the overall length of the loan. This helps to reduce the total cost you’re paying for the loan. If it’s to lower monthly payments, you can see if the lender will extend the term to a longer period. This, however, means you’re paying more in the long run.
  • Pay Down Debt: A good credit score is what most people talk about when applying for loans, but your debt-to-income ratio is just as important. Lenders need to know how much of your income is available to pay off the loan they’re issuing you. So if you have other outstanding debt, the more you reduce it, the more comfortable lenders will feel about your debt level.

Do You Need an Auto Refinance?

Depending on what your current rate is on your auto loan, a refinance may or may not make sense. Maybe you got a great deal with your original purchase. If your auto loan has a rate below that of what’s currently available on the market, you’re better off leaving it alone.

However, if you’ve got a loan at a high rate, cutting it down by just a few percentage points can make a huge difference over the life of the loan. Do the calculations yourself to see how much you can save and if it’s worth it for you.

This guest post was written by Henry Truc from Go Banking Rates, a website that brings you informative personal finance content and helpful tools, as well as the best interest rates on financial services nationwide. Follow them on Twitter at @GoBankingRates.

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