Tuesday, August 27, 2013

Smart Ways to Refinance Your Auto Loan

If you are considering refinancing your auto loan there are several things to consider.  You should only refinance if the process will benefit you financially.  When you refinance an auto you should get approved for an interest rate that is at least 1% lower than your current loan interest rate.  An auto refinance should take one day or less to complete. If you fill out an application online the process should take no more than a few hours provided the company has all of the required documentation.  The best way to refinance your auto loan is to shorten the term and lower the interest rate.  If you lengthen the loan term you will pay more interest over the life of the loan.

When to Refinance
1.      If interest rates have decreased since you originally bought your auto.
2.      If you leased your auto and your lease is expiring soon.
3.      If you credit score has improved. Check your credit score and credit report to be sure.
4.      If you original auto loan had a term of 5-8 years and you owe at least $10,000 on your loan.
  1. If your financial situation has gotten worse or you have experienced a financial setback.

Factors that affect Refinancing
  1. If you owe more on your auto than the auto is worth, lenders may be reluctant to do business. A lender willing to loan you enough money to pay off the existing loan will now have a loan that is only partially secured.  This is because the loan balance is higher than the auto's market value. This will prevent you from getting a lower interest rate and cause you to go further in debt.
  2. If you plan on making a big purchase such as a home, investment property or other purchase you will have to postpone refinancing your auto for at least 3-6 months because the purchase will lower your credit score.  In some cases, if you have good credit you may not be impacted.  I was able to purchase a home and 3 months later was able to purchase a new car with a good interest rate. 
  3. If you purchased a new car, your refinanced loan will now be for a used car versus a new car and may impact your interest rate.
  4. Use an auto loan refinance calculator to make sure you are saving money by refinancing.  Avoid pressure from the dealer or loan officer to lengthen the term of your loan.
  5. If your original auto loan has a prepayment penalty you will have to pay fees prior to refinancing which may eat up the money saved by the actual refinance.
  6. Some banks and finance companies have stopped offering sub-prime loans for those with bad credit.  For companies that do offer these loans they are costly and your interest rate will be higher than the current market rate. Furthermore, you may be required to pay additional fees or a security deposit.
  7. The outstanding balance on your auto loan, the condition of your auto (if you have been in any car accidents or currently have damage to your car) and the age of your auto may also affect your interest rate. Some companies will not refinance an auto if it is more than 7 years old or if the loan is less than $7,500 or greater than $30,000.

What to Do Before Refinancing
  1. Fix errors on your credit report and obtain your credit score from Equifax, Experian and TransUnion. Some companies will put you in bad deals even if you have good credit.
  2. Pay down as much debt as possible.  Credit card balances should be 20% or less of the credit limit. This will help boost your credit score.
  3. Review your current auto loan paperwork to ensure you will not be charged a prepayment penalty or other fees if you refinance or pay off your loan early.

How to Refinance
1.      Comparison shop and get at least 3 offers from banks and credit unions.  Dealer financing is the most expensive even if you have good credit. Avoid offers in the mail or other solicitations.
2.      Ask about fees charged such as loan and title fees. Ask the lender for a detailed list of all fees that will be charged for the loan.
3.      Go with your gut. If you don’t feel the offer is a good match for you then walk away.

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