guide to refinancing a car: how it works
How Refinancing a Car Works
Millions of consumers refinance their vehicles each year to obtain lower interest rates or monthly payments, or to pay off their automotive loans much faster. So how does refinancing a car work, and what can you expect from the process?
To refinance your car, you need to apply and qualify for a new loan that pays off the remaining balance on your original financing. The process is usually fairly simple and easy to complete. You can apply in person or online here at ALEC. When you receive your new loan, it will have a new (hopefully lower) interest rate, a new contract, and different terms from your original agreement.
Refinancing is a way for consumers to “upgrade” to more beneficial terms such as a lower interest, a lower monthly payment, or a shorter payoff period. Lenders benefit from offering refinancing by pulling in customers from other financial institutions and receiving interest and other fees from their clients.
Why Consider Refinancing?
Perhaps the most common reason that people refinance is to benefit from a lower interest rate. Whether this is due to dropping interest rates nationally, finding a new rate from a different lender, or qualifying for a better rate due to an improved credit score, the result is the same. You will save hundreds or even thousands of dollars over the lifetime of your loan with lower interest rates.
People also pursue automotive refinancing to lower their monthly payments. This can be done in several ways, including extending your loan agreement and locking in a new low-interest rate. If you are in an emergency situation (such as experiencing a sudden job loss) and are strapped for cash, refinancing your auto loan can be a huge weight off your shoulders.
In addition to the chance to lower your monthly payments and interest rate, you will have the opportunity to change your loan terms. This can result in either a shorter or a longer payoff period. If you are looking to pay off your loan faster, you can shorten your loan terms to help you accomplish this. On the other hand, if a lower monthly payment is more important to you at this time, you can lengthen your loan terms to get the amount you want to pay each month.
How to Refinance Your Auto Loan
There are a few steps to the quick and easy process of refinancing your auto loan.
To refinance your automotive loan, you will want to take a close look at the original terms of your financing agreement. This will help you have a better idea of what to look for. Once you have reviewed your current loan, you can begin to shop around for competitive interest rates, loans with little to no fees, and a lender you can trust. Contrary to popular belief, it will not hurt your credit score to shop around for the best rates as long as your credit inquiries all occur within a few weeks of each other.
Banks are the most common source of automotive loans, but local credit unions, like ALEC, can be a fantastic way to receive better terms and better service. Online lenders have also been increasing in popularity in recent years.
Once you have selected a few candidates, you are ready to begin applying for your new loan. Most lenders have a way to apply online, or you may need to visit your local credit union or bank branch in person. As a part of the application process, you will likely need to prove your income and employment history, as well as your address and your credit history information. The lender will run your credit and take a look at your credit score and report.
It can be beneficial for you to review your credit report a few months before beginning to apply for a new loan. This allows you to fix any mistakes or try to improve your score. If your score has not changed much since you applied for your original loan, you may want to wait a bit longer to see if your score improves before you try to get a new interest rate.
How Refinancing a Car Works With ALEC
At ALEC, our team is dedicated to lending a hand to our members to make the process of obtaining a new car loan as easy as possible. Want to learn how to find the lowest rate for your auto refinance? We are here to help.