Car Refinance: Auto Loan Rate Reduction in Six Steps

The refinance auto loan rate available to you could significantly reduce the amount of your monthly car payment or shorten the time in which you pay off your car loan. There are several steps to follow to find the best rate you can and see if refinancing an auto loan can save you money.

Comparing Interest Rates

Refinancing your auto loan will only make sense if your refinance auto loan rate is lower than the interest rate you are currently paying on your loan. Check online or with local lenders to determine what prevailing rates are. Then compare that to the interest rate spelled out in your current loan documents.

If you have an adjustable rate loan, which is common, you will need to check with the institution holding your note to determine the current interest rate.

If the prevailing rates are lower than the rate you are currently paying, refinancing might make sense.

Terms From Your Current and Future Lenders

Before taking any action on refinancing an auto loan - even if you think the refinance auto loan rate will be favorable to you - be certain that early payoff of your current loan is allowed and that there is no prepayment penalty or fee. Such fees can easily negate any benefit from refinancing.

Also be aware that lenders offering auto loan refinancing have criteria for you to meet as well, which can include:

  • minimum loan value - A loan amount of between $7,500 and $75,000 is typical.
  • maximum number of years - Since an auto refinance will always be on a used car there is typically a one to six year limit on the length of the loan.
  • age of the vehicle - Typically a car must be six years old or less to qualify for a lender to offer a refinance auto loan rate.

Your Personal Financial Status

To qualify for a lender to offer you a refinance auto loan rate you will need to document specific minimum monthly gross income. Additionally, you will need a certain credit score.

These amounts will vary with every lender. However, also with every lender, there will be a relationship between the refinance auto loan rate you are offered and your creditworthiness.

Bank or Online Lenders

The next step is to choose a lender. You should compare the rates, terms and services offered you by every lender you evaluate, whether online or in your community.

Banks often have more flexibility in adapting the refinance auto loan rate they can offer you to your particular situation. If you have a relationship with a lender, of course, that can work in your favor as well.

Online, you have the ability to let multiple lenders offer competing rates. However, there will be no flexibility. Your personal financial situation will dictate the loan terms or whether you can get a loan at all.

Make Sure it Make Sense

The purpose of refinancing your auto loan is to get a lower refinance auto loan rate and save money. If origination fees or other charges negate the impact, don't do it.

Be careful as well regarding the interest rate. The lowest rate might not always be the best if other terms or conditions make it less advantageous to you.

Capturing the Benefits

Finally, double or triple the benefits of a positive refinance auto loan rate by using the extra money in your budget to reduce other debt, particularly high-interest credit card debt.

You can also invest the extra money and put it to work for you, adding to the benefit by investing in a tax-deferred account.

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