How to refinance a car

If you’re thinking about refinancing your car loan, but you’re unsure, we might be able to clear up some of the common myths. The point of refinancing is often to lower your rate and monthly payment in order to save more money in the long term. It’s definitely possible. Here are some of the common myths you don’t have to worry about.

Myth 1: Refinancing won’t save me much money.

This is totally dependent on your current loan details and the new rate after you refinance. While refinancing doesn’t always save you much money, in the right circumstances, it could save you a lot. Here’s an example of how much you could save on a $20,000 auto loan for 60 months1.

3 Myths of Refinancing Your Car Loan
  Current Loan Connexus Savings Through Refinance
APR 6.99% 4.49% 2.50%
Total Interest $3,756 $2,366 $1,390
Monthly Payment $396/month $373/month $23/month

Myth 2: Refinancing my car loan is a hassle.

Most people think the process of refinancing takes too much time and effort. But one of the great parts about refinancing with Connexus is that the application can be done online in just three steps. We make refinancing easy, so you never have to worry about a hassle.

Myth 3: There’s no extra incentive to refinance.

While that may be true at other credit unions or banks, when you refinance your auto loan at Connexus, you get way more than a loan. If you refinance with Connexus, you’re eligible for the following:

  • No payments for 90 days2
  • No prepayment penalties
  • Optional insurance discounts3

Now that those three myths have been busted, you know refinancing is an easy way to save money each month. To learn more about refinancing at Connexus, check out our Auto Loan page.

Disclosures

1 Example savings received through refinancing a 60 month, $20,000 auto loan at a fixed rate of 4.49% APR for the term of the loan. Starting rate of 6.99% APR is representative of auto loan rates refinanced at Connexus in 2016. Comparison rate of 4.49% APR is the average auto loan rate for Connexus members in 2016. 2 Interest begins accruing upon disbursal of loan. Deferred payment available upon credit approval. Some restrictions apply. Deferred payments may not exceed 90 days. 3 Insurance discount available through Liberty Mutual. Liberty Mutual discounts and savings are available where state laws and regulations allow, and may vary by state. Certain discounts apply to specific coverages only. To the extent permitted by law, applicants are individually underwritten; not all applicants may qualify. This offer does not constitute a specific endorsement of Liberty Mutual. More information can be found by calling Liberty Mutual at 800.524.9400 or visiting www.LibertyMutual.com.

6 Steps to refinance a car

  1. Get the payoff amount Call your existing lender or log in to your account to get the payoff amount, which may be different to the outstanding balance on the loan. Make a note of the monthly payment, APR and the number of months remaining on the contract, too.
  2. Check your vehicle’s value Look up the value of your vehicle with resources like Kelley Blue Book and Edmunds to see if it’s more or less than the payoff figure, and whether you’re upside down on the loan. Negative equity may put the brakes on refinancing.
  3. View your credit history Check your credit reports for errors that could limit your access to credit and the best auto refinance rates. Details of how to check your reports for free are available at the Consumer Financial Protection Bureau (CFPB) website.
  4. Shop and apply Finding the best auto refinance rates often means shopping around. Apply with a number of lenders and, if approved, compare terms. Online lenders like RoadLoans enable you to apply in minutes and get an instant decision. The CFPB recommends doing your comparison shopping in a short period of time, generally within 14 – 45 days. That way, multiple credit inquiries will only count as one inquiry and won’t harm your credit score.
  5. Estimate potential savings Use an auto refinance calculator to get an idea of what refinancing could save you. RoadLoans’ calculator lets you enter the payoff amount, monthly payment and APR of your current note along with the terms of a new loan to suggest what you may save each month and in interest charges.
  6. Make your selection Once you’ve evaluated which loan is best for your situation, complete the lender’s steps to refinance your car. Remember to keep making payments on the existing loan until the transaction is finalized.
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Get in touch

If you have a question or need assistance, we’re right here for you.

  • Call one of our highly trained loan specialists at (888) 276-7202.
  • For customer service, dial (888) 222-4227.
  • We’re also available through our online chat service.

These statements are informational suggestions only and should not be construed as legal, accounting or professional advice, nor are they intended as a substitute for legal or professional guidance.

RoadLoans is not a credit counseling service and makes no representations about the responsible use of or restoration of consumer credit.

† View disclosures and offer information.

* “Bad” or “Poor” credit generally is considered a FICO score around 600 and below by sources including the Consumer Federation of America and National Credit Reporting Association (reported by the Associated Press), Bankrate.com, Credit.com, Investopedia, NerdWallet.com and others. The Congressional Budget Office identifies a FICO score of 620 as the “cutoff” for prime loans. FICO scores are not the sole factor in lending decisions by RoadLoans.com and Santander Consumer USA.

When to Consider Refinancing a Car Loan

Before we discuss how to refinance a car loan, we should talk about when you should. It’s important to consider your circumstances and determine if refinancing a car loan is, in fact, the right decision for you.

Here are a couple of situations in which it makes sense to refinance your vehicle’s note:

Your credit score has increased. If your credit score has increased since you took out the loan on your car, you may qualify for a lower interest rate. Lowering your interest rate by even just 2% can save you a lot of money in the long run. Let’s take a look at an example.

Let’s imagine you have an existing car loan for $15, 000 for 36 months, at 5% interest. Your current monthly payment is $449.56. Now, say your credit suddenly increased and you refinanced your loan. You took out a new loan for the $15, 000 but at only 3% interest, for the same 36 months. Your new monthly payment would be $436.22.

You would save a little bit of money each month, which you could then tuck away or use to pay off the loan even sooner than 3 years. But the real savings comes in over the life of the loan.

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If you paid off the original 5% loan over the scheduled 36 months, your total payout (and therefore the total cost of the car) would be $16, 184.16. But if you refinanced at 3% interest and paid it off as scheduled? The total cost would drop to $15, 703.92. Simply lowering your interest rate by 2% would save you $480.24. Plus, if you used the monthly savings to pay extra on your loan, you’d save even more in interest over the life of the loan.

refi-car

Interest rates have decreased. If your credit score is the same but interest rates have decreased over the years, it may be worth looking into refinancing. The example above still applies. Just this time, the market is in your favor regardless if your credit score has changed.

How to Refinance a Car Loan

If you reviewed your situation and determined that refinancing is right for you, there are a few ways to go about the process.

You’ll apply for an auto refinance loan which is used to pay the existing balance on your current car loan. Your car is used as collateral for the new loan. The new car loan has a fixed interest rate with fixed monthly payments for a specific number of months.

The application process is straightforward. You’ll simply go to your bank of choice and provide three sets of information:

  • Personal – This includes things like your date of birth, home address, and other information that verifies your identity.
  • Financial – This includes things like employment status, monthly income, and other information that verifies your ability to pay the loan.
  • Auto – This includes things like the year of your vehicle, remaining loan balance, and other information that will determine the terms of your new car loan.

At the end, you’ll sign loan closing documents. You’ll also have the option to set up automatic payments from your bank account.

When should you refinance your auto loan?

Whether you should refinance your auto loan depends on several factors. It may make sense to refinance a car loan, if one of the following applies to your situation.

  • Your credit has improved. If you have a higher credit score since you bought the car, you may be able to qualify for a lower interest rate. This can mean you pay less each month and less interest over the life of the loan.
  • Interest rates have dropped. If interest rates have dropped 2% or more, you may save money by refinancing your car loan. Even if interest rates haven’t dropped, you may not have the best rate possible. This is your chance to get a better interest rate.
  • You’re having trouble making your payments. If your financial situation is currently strained, you might be able to refinance to a longer term loan. This will stretch out the payment schedule, making payments smaller and more manageable every month.

Understand your auto refinancing savings

Before you jump into an auto loan refinance, calculate your potential savings. Knowing how much you could save each month and over the life of the loan will help you determine if refinancing makes financial sense.

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Online loan refinance calculators (like this) help you make comparisons. You enter required information, including the total amount left owed on the loan and the current monthly payment amount and interest rate. The calculator provides you with alternate payoff scenarios.

If you currently owe $20,000 on your auto loan at 7% interest, and you’re paying $300 per month for the next 85 months, you’ll pay $5,401 of interest over the life of the loan. Here are interest reduction scenarios for comparison. (Keep in mind–these loan refinancing scenarios are examples and don’t include any taxes or extra fees.)

  • A reduction to 5% interest will lower the monthly payment to $280, saving you a total of  $1,702.
  • A reduction to 4% interest will lower the monthly payment to $271, saving you a total of $2,490.
  • A reduction to 3% interest will lower the monthly payment to $261, saving you a total of $3,262.

Questions to ask when refinancing an auto loan

Before you refinance your auto loan, ask the lender(s) the following questions:

  • Are there prepayment penalties? According to the Federal Deposit Insurance Corporation (FDIC), some companies charge a prepayment penalty when you refinance an auto loan before it matures. If you’ll need to pay prepayment penalties to your existing auto loan lender, you may not want to refinance. Determine how much the penalty will be. If it’s more than you’ll save refinancing, it’s not worth the trouble.
  • Does your car qualify for refinancing? Generally, if your car has fewer than 100,000 miles and is younger than seven or eight years old, it will qualify for refinancing. The vehicle must also be worth more than the loan balance. (Determine the current value of your auto by consulting KBB.com.)
  • Do you qualify? Is your credit good (+670), which will enable you to qualify for a competitive refinancing loan? (If you’ve been paying your auto loan on time, you should qualify). If you have a low credit score, consider an auto loan lender that caters to borrowers with bad credit.
  • Does your existing loan qualify for refinancing? Usually, the outstanding balance on your auto loan must be at least $10,000 to refinance.
  • What are your new loan details? What will your monthly payment, interest rate and length of the loan be? And are there any extra fees? These specifics will help you determine if refinancing is the right option for you.

Negotiate a better auto refinance interest rate

Don’t assume the lender has your best interest at heart when it comes to refinancing your auto loan.

You are your own best advocate.

Keep the following in mind during negotiations to ensure that you get the best auto refinance loan possible.

  • Know your credit score. Being aware of your credit score before seeking a new loan for your car can help during negotiations.
  • Do your homework. Go online and research the various interest rates, terms and payment amounts, so you’ll know what is fair when you receive a refinance offer.
  • Have all paperwork on hand. Information needed to refinance a car loan can include proof of income, proof of insurance and proof of identity. You will also need the car’s make and model and vehicle identification number (VIN), as well as the auto’s current mileage.
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