Your Auto Refinancing Guide

Your Auto Refinancing Guide

You’re curious about refinancing your vehicle and want to know if it’s the best auto financing choice for you. Whether you want to reduce your payment, potentially lower your interest rate or adjust your term, refinancing can be a helpful option.

Much like refinancing a home mortgage, when you refinance a vehicle, your old financing agreement is paid off and you begin making payments on a new one. This process has several steps. Following these steps, and asking yourself questions along the way, can boost your confidence throughout the journey.

Prepare and prequalify

1. Evaluate your situation.
   Before you decide if refinancing is right for you, review your current financing agreement and the condition of your vehicle. A few questions to ask yourself are:
   
   • How long do you have left on your current loan? Most auto finance companies require at least 12 months left on the contract to refinance. If you have less, you’re likely better off paying off your current financing agreement.
   • Do the companies you're considering have prepayment penalties or fees? These could add to the overall cost of a new financing agreement.
   • What is the age of your vehicle and how much do you still owe? A high-mileage vehicle has less resale value. If you owe more on your vehicle than its current market value (negative equity) it can be challenging to refinance.
   • What is the value of my vehicle? Check the value at a site like Kelley Blue Book.
2. Use prequalification tools.
   Once you determine that you may be a good candidate for refinancing, see if you prequalify. Most finance companies have an online savings calculator  to determine how much you could potentially save (with no hard inquiry to your credit report).
   

Get your final numbers

3. Submit a credit application.
   Once you’re prequalified, it’s time to prepare to submit a credit application. This process does result in a hard inquiry to your credit report, so submit as few of these applications as possible. Hard inquiries can lower your credit score.
   
   A few things you may want to do before submitting a credit application:
   
   • Check your FICO score. You can get this information free from most credit card companies. You can also get a free full credit report (with your complete credit history) annually from AnnualCreditReport.com. It’s a good idea to check it for inaccuracies and correct any with the three major credit reporting bureaus — TransUnion, Equifax and Experian — before making a major purchase.
   • Review your debt-to-income ratio. This refers to how much debt you have in relation to your income. Another way to look at it is your monthly debt payments divided by your monthly gross income. This is one item auto finance companies look at when evaluating your application. Others are:
     • Monthly income
     • On-time payment history
     • In some cases, at least two years’ credit history
4. Prepare documents, such as:
   • W-2s, pay stubs, tax returns or other proof of income
   • Recent utility bill, lease agreement or other proof of residency
   • Proof of insurance on the vehicle
   • Details of your existing loan
   • Details about the vehicle: year, model, mileage and vehicle identification number (VIN)
5. Consider loan length and rate.
   Always consider the length of a potential refinance loan. A longer term means you may pay more in interest in the long run. If you can lower the interest rate on your loan by 1% or more, you might be able to save enough in interest over the life of the financing agreement to make refinancing worthwhile.
6. Follow through once you’re approved.
   If you’re approved and you receive a check, make sure you or the new financing company applies it to the new financing agreement. If they're paying off the old financing directly, follow up to make sure that transaction is completed on time to avoid late payment fees.
   
   If you are denied financing, the financing company must tell you why. Understanding why may help you improve your credit rating and chances of being approved in the future.

Know the drawbacks

Be aware that refinancing a vehicle can come with potential risks, which include:

• Increased total cost — Refinancing your vehicle can extend the repayment term, resulting in additional interest payments over time. This can increase the total cost of the auto financing.
• Prepayment penalties — Some auto finance companies may charge prepayment penalties if you pay off your original loan early. These fees can offset any potential savings from refinancing.
• Negative equity — If you owe more on your vehicle than its current market value (negative equity) it can be challenging to refinance. Companies may be hesitant to approve a loan that exceeds the vehicle's worth.
• Credit score impact — Applying for new auto financing and having a hard inquiry on your credit report can temporarily lower your credit score. This could affect your ability to secure favorable terms for future loans.
• Potential hidden fees — It's crucial to carefully review the terms and conditions of a refinancing offer. Some finance companies may have hidden fees or charges that can increase the overall cost of the financing.

Refinancing your auto loan comes with great potential benefits. It can be a helpful option if you want to lower your payment, adjust your term or potentially lower your interest rate. Of course, it's important to carefully assess your unique circumstances and the potential risks involved. This gives you a balanced picture of your situation, helping you make an informed decision.

By Erin White, GM Financial

Erin White is a writer passionate about digital accessibility. She reads about personal finance whenever she can, loves a good book about typography and is always game for Scrabble.