Most people associate refinancing with home loans, but some banks also allow auto loan refinancing. If you're not satisfied with the terms of your current auto loan, even if you've had the car for years, it may be possible to refinance that loan today.
Refinancing an Auto Loan
Refinancing a car loan is similar to refinancing a home loan. The lender pays off your existing car loan and initiates a new loan for the existing balance. In some cases, you may also take cash out, depending on the lender and the value of the car.
Why Refinance?
The main purpose for refinancing a car loan is to reduce your interest rate. If you had a poor credit score at the time of securing your initial loan but have made improvements, you may qualify for a better interest rate now. Another reason for refinancing is to lower your payment. Some borrowers feel trapped into expensive car payments with no relief for years. The lender can extend the term of the remaining loan balance due, which effectively reduces the monthly payment amount. However, in some cases you will pay more interest over time by extending the loan term.
Credit Requirements
To refinance an auto loan, you must have a solid credit score. The minimum varies by lender, but in general a score of 720 or above is safe territory for getting a new loan approval at a favorable rate. Some lenders may extend a refinancing offer if you have a low credit score, but you may not achieve a better interest rate than your current loan. Lenders also look at your payment history and your debt-to-income ratio -- total monthly debt payments divided by gross monthly income -- when deciding whether you qualify for refinancing.
Applying
Contact your bank or a reputable online lending website to apply for a refinanced car loan. If you pass a credit check, the next step for the lender is to evaluate the car' value. You must provide the vehicle identification number, make, model and year, as well as the initial purchase price and amount of any down payment. You must have a steady and verifiable source of income. The lender may require you to pay additional closing costs and paperwork processing fees, which the bank commonly adds to the new loan balance.
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