Refinance Your Used Car Loan: Step by Step

If you refinance your used car loan you can save thousands of dollars over the life of the note. When you refinance your used car loan, it offers the same benefits as refinancing a home loan. The refinancing pays off the original loan, replacing it with a new loan with a lower annual percentage rate of interest. This drops your monthly payments and reduces the total amount of interest expense. Not everyone will qualify to refinance a used car loan, but it is worth the effort try. These following steps will help you through the process.

Do I Need to Refinance?

The first step in refinancing your used car loan is to determine if you need to. The interest rate you are paying drives this factor. Your interest rate may be high because rates were high in general when you borrowed and now have dropped. Even in a time of low interest rates, a bad credit score or bad credit history might have made you a bad lending risk. Lenders charge such borrowers a higher rate.

Look at the rate you are paying on your loan. If you don't know, call your lender. They will be glad to give the details of your note, the monthly payment, the interest rate, the annual percentage rate, the total interest expense and the balance left on the note. If the rate you are paying is higher than rates generally available, or if your improved credit score qualifies you for a rate lower than you now have, you should consider refinancing.

Know Your Credit Score

Don't assume that because you've been current with payments recently that your credit score has changed substantially. Any lender you approach will do a credit check on you. You need to know what they are seeing. Check your own credit report. You are entitled to a free review of it annually.

Be Prepared to Approach a Lender

You'll need the following information when approaching any lender to refinance your used car loan:

  • exact information with which you filled out your original loan so a new lender can identify it

  • the loan amount (it cannot be more than the value of your care)

  • your vehicle identification information including the make, model and Vehicle Identification Number, or VIN

  • Of course, you'll need pay stubs and tax documents to verify your income as with any borrowing.
Choosing a Lender

The Internet is a great place to begin your search for a lender offering refinancing of your used car loan. Gather all the interest rates you can and be sure that there are no early payment penalties. Also, be certain you understand the terms of the new note. It is vital that fees, points or other charges not offset the value of lowered interest rate from refinancing your used car loan.

Next Steps

Once you have refinanced your used car loan, consider using the extra money to pay down other debt, or pay the loan off early. This is one reason you want to be certain there are no early payment penalties. Done correctly, refinancing your used car loan can put you in a better financial position.

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