For many borrowers, refinancing a mortgage is something they will do some time during the life of the loan. What many people never consider is refinancing an auto loan, even though the car refinance application process is much faster and easier than the typical home refinance application. In addition, borrowers can save thousands over the life of a refinanced auto loan. There are three possible ways a consumer might have ended up with an interest rate higher than what they can refinance for.
1. He or she financed a new car or truck purchase at the dealership. Almost 80% of all auto loans originate at the dealer. Dealers typically charge higher interest rates on their loans. The interest rates are higher because the dealership brokers the auto loan, and they tack on a service fee. It is not unusual for an auto loan financed at a dealership to have an interest rate of 11%, while rates available from banks and online lenders are as low as 5%. Refinancing at this new rate will save you over $1,000 a year on a $20,000 loan.
2. He or she was unaware of what was on their credit report and/or what their credit score was when seeking financing. Not knowing what the lender knows gives the lender a huge advantage when the terms of the loan are being arranged. If you know your credit report and credit score before you begin negotiating loan terms you will know what interest rate you deserve. You might even find an error in your credit history that is artificially lowering your credit score.
3. The financial situation of the consumer may have improved. A 2 point improvement in a borrower’s credit score could lead to as much as a 5.5% decrease in the borrower’s interest rate. Of course, the lenders will not actively seek out borrowers to inform them they can secure a better rate. Rather, borrowers need to be aware of improvements in their credit scores, and then refinance their loans. Monitoring your credit score can lead to big savings.
The amount of paperwork necessary to complete an auto loan refinance is negligible. You can expect to provide a limited power of attorney; a legal document that allows your new lender to transfer the title of your vehicle from your old lender. An authorization for payoff; a statement that authorizes the payoff of your current auto loan. It generally lists the current payoff amount and gives your old lender your authorization to forward the title to the new lender upon receiving the payoff. An odometer statement certifying that the odometer reading of your car or truck is correct. And authorization to debit account; a form allowing your new lender to debit your bank account for your monthly car payment. Many lenders will offer a discount on the interest rate if you agree to this authorization.
Refinancing an auto loan is a great way to save money. The application process is much faster and easier than a typical home loan refinance, closing costs are minimal, and the savings can be huge. By reducing your interest rate by even 1 or 2% you will save yourself thousands of dollars over the life of the loan. That money can then be used to pay down other debt, invest in the future of your children, or help fund your retirement.