A car payment can represent a pretty big chunk of your monthly expenses, but with most auto loans featuring relatively low interest rates and terms of only 5-6 years at the most, chances are you've never considered refinancing. You might not even know if it's possible, or how to go about it.
The good news is, you can refi just about any loan. The question is, should you? Do you stand to gain or lose by refinancing your auto loan? Here's what you should know.
To Refi or Not
Let's just start by saying that not all auto loans are created equal. Several factors go into loan approval, including current prime rates, your personal finances, and of course, your credit score. One or all of these factors could contribute to a higher than average interest rate when you get your auto loan.
That said, circumstances can always improve. If the prime drops, taking interest rates with it, you pay down a chunk of your personal debt, or you work hard over the course of a year to clean up your credit score, you may be able to considerably lower your interest rate for the remaining months of your auto loan, knocking some money off monthly and overall payments.
You need to read the fine print on your current loan, however, to make sure there aren't hitches like a prepayment penalty. You should also retain the current loan term (you don't want to extend payments for a longer term, since this could cost you more in the long run).
If you're worried about fees, don't fret. This isn't a mortgage loan, where fees could add up to thousands of dollars. You'll typically pay only transfer of lien holder and state re-registration fees, which will probably come in under $100 (although fees vary by state).
How to Refinance
If you're thinking of refinancing, you need to start with proper preparation. Collect loan documents or a recent bill that shows your current balance, your monthly payment, the interest rate, and the expected completion date (or the months remaining on the loan). You may also need a form of ID (driver's license), your SSN, your car's VIN, and a pay stub or other proof of employment. It's a good idea to check your credit rating before you apply, as well.
Next, make appointments with trusted banking institutions or car loan refi companies so you can see who offers the best rates. Don't forget to check local credit unions, as they often have very good rates for members. Plan to apply and complete the loan process within a couple of weeks—waiting longer when making so many credit inquiries could impact your credit score.
If you're a good candidate to refinance your auto loan and comparison shopping yields incredible interest rates and substantial savings over the remaining life of the loan, there's no reason not to move forward with a refi.