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How to refinance your car

What if we told you that refinancing your car could save you money each month, and help you pay off your loan sooner?


If you’re like most people, you probably think of refinancing your car as a last resort. Something to do only when you can’t make the payments any other way or when you’re desperate to get a lower interest rate.

However, there are many other reasons as to why someone might refinance their car. This guide shows how to refinance your car in six easy steps.

1. Assess your current situation

First, you need to assess your current situation. How much do you owe on your car? What is the current interest rate and repayment terms?  Check if there are any prepayment penalties associated with your loan. Knowing this information will help you decide whether refinancing makes sense for you.

2. Shop around for interest rates

Next, it’s time to shop around for a better interest rate. Start by researching local banks and credit unions in your area, as well as online lenders. Compare rates, terms, and fees to find the deal that best suits your needs.

3. Contact your lender

Once you’ve secured a new loan offer, contact your current lender to request a payoff statement or letter of discharge. This document outlines the amount due so that you can pay off the loan. Make sure to get this in writing before you proceed with the refinancing process.

4. Apply for the new loan

Now it’s time to apply for a new car loan. Fill out the paperwork and submit all required documents, such as proof of income, credit score, and insurance information. Once approved, you’ll be able to sign the new loan agreement.

5. Make a payment on your existing loan

The next step is to make a payment on your existing loan using the payoff statement or letter of discharge that you received from your current lender. This will ensure that your old loan is paid off and closed before proceeding with the refinancing process 

6. Complete the refinance application

Finally, once you’ve made your final payment on the old loan and finalised the new loan agreement, your car refinance is complete!

Refinancing your car can be a great way to save money each month and pay off the balance of your loan sooner. By following these steps, you can ensure that the process goes smoothly.

What are the benefits of refinancing? 

Refinancing your car can be a great way to save money in the long run, as it allows you to get a better interest rate and/or monthly payment. Not only that, but refinancing can also help you build your credit rating by showing lenders that you are able to make payments on time. Other benefits of refinancing include:

1. Lowering Your Monthly Payments: Refinancing can lower your monthly payments, allowing you to have more money available each month for other expenses or investments 

2. Reducing Interest Rates: Refinancing may be able to reduce the amount of interest you pay over the course of your loan, saving you money in the long run.

3. Shortening Loan Terms: Refinancing can also help you shorten the length of your loan, allowing you to pay off the car quicker and save money on interest.

4. Improving Credit Score: Making timely payments on a refinanced loan can help improve your credit score, which can make it easier to get approved for loans in the future 

Overall, refinancing your car has many benefits that can help save you money and improve your credit rating over time. Make sure to weigh all of your options before deciding if refinancing is right for you.

What are the risks of refinancing?

Refinancing a car loan can be a great way to save money, but there are some risks involved. 

1. Vehicle Loss: Most notably, if you don’t make the payments on your new loan, you risk losing your vehicle and any collateral used to secure the loan.

2. Added Fees: It’s also important to pay close attention to any fees associated with refinancing, as they can add up quickly and result in higher monthly payments that could put you at financial risk. If rates rise after refinancing, it can also leave borrowers paying more for their car than before.

Be sure to thoroughly read through all terms and conditions of your refinance agreement before signing anything so that you’re well aware of what you’re getting into. 

3. Impact On Credit Score: Additionally, it’s important to remember that even though you’re refinancing, your credit score will still be affected if you don’t make payments on time. Therefore, it’s important to have a plan in place to ensure that all loan payments are made on time and the loan is repaid in full.

Overall, while refinancing can be a great way to save money, it’s important that you weigh the pros and cons before making any decisions. Be sure to thoroughly research potential lenders, read through all contracts carefully, and only refinance when absolutely necessary.

With careful consideration of the risks involved and thorough research into what is available to you, refinancing can be an effective strategy for improving your financial situation.

What is the minimum credit score required for refinancing?

The minimum credit score required for refinancing your car loan varies depending on the lender. Generally, most lenders require a score of at least 620 to qualify for a refinance, although some may set a higher threshold.

The higher your credit score is, the more likely you are to get approved and have access to better terms and lower interest rates. It’s important to check your credit score before applying for any type of loan in order to determine if you meet the lender’s minimum requirements.

Additionally, it’s wise to shop around and compare different lenders’ offers in order to find one that best meets both your financial needs and budget.

How much can I save by refinancing?

The amount of money you can save by refinancing your car loan depends on the interest rate you are able to secure with a new lender. Generally speaking, if you are able to lower your interest rate by 1%-2%, then it can be worth it to refinance. It’s important to consider more than just the savings when making this decision though; other factors like fees and length of term should also be taken into account.

Additionally, keep in mind that not all lenders offer auto refinancing so you may need to shop around for a lender who offers competitive rates and terms. Ultimately, refinancing your car loan is an individual decision that requires careful evaluation of your options.

Examples of refinancing done right

Example 1: Lower monthly payments

John had a car loan with an interest rate of 6.5%. By refinancing his loan after two years, he managed to secure a new interest rate of 4.0%, which reduced his monthly payments by £50. Over the remaining term of his loan, this saved him £1,200.

Example 2: Shortening loan term

Sarah had three years left on her car loan, but she wanted to pay it off sooner. By refinancing, she was able to shorten her loan term to two years and only slightly increase her monthly payment. This move saved her a considerable amount in interest.

Remember: Refinancing your car loan could help you save money in the long run, but it’s important to do your research and make sure you understand all the terms involved before signing on the dotted line.

Frequently asked questions

Can I refinance my car loan with bad credit?

Yes, but your options may be limited, and you might face higher interest rates. It’s advisable to improve your credit score before refinancing if possible.

How soon can I refinance my car loan?

Generally, you can refinance as soon as you have built some equity in the car and your credit score has improved. Some lenders may have specific requirements.

Will refinancing extend the term of my loan?

Not necessarily. You can choose a loan term that suits your needs, whether it’s shorter, the same, or longer than your current term.

How does refinancing affect my credit score?

Refinancing may cause a temporary dip in your credit score due to the hard inquiry. However, timely payments on the new loan can improve your score over time.

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