Refinancing is moving from one lender to another to replace an existing loan. Most consumers will use it to lower monthly payments by purchasing a cheaper rate or extending the loan term.

Refinancing is a smart option if you save on interest over the life of your loan. However, it's not for everyone, so take your time before applying.

What You Should Know Before Refinancing Your Auto Loan

Refinancing can reduce your monthly payments, saving you significant interest. If you take the time to compare lenders and find the right deal, you can save some money in the long run.

Crazy shopping

You should research the best terms and rates before applying to a lender. Getting multiple quotes from different lenders is important because each lender has a different algorithm to determine your interest rate.

In most cases, you can get pre-approval and an interest rate estimate without affecting your credit score by doing a mild credit check before submitting your full application. After you have been pre-approved, the refinancing process can begin.

If pre-approval is not possible, please submit your application as soon as possible. If you have consecutive questions about your credit history within 14 days, you will get a lower credit score.

Consider the cost

Before refinancing, consider whether fees will reduce your savings. Some vehicle loans may incur a prepayment penalty, which makes prepayment more expensive than the interest cost savings. Refinancing your car loan is not an advantage in this situation.

Some refinancing lenders charge high fees, which can drain your savings, making refinancing more burdensome than staying with your current lender.

Impact on your credit rating.

Almost every loan application will lower your credit score. When you create a new credit account, your credit score may decrease.

However, your credit score is more affected by payment history than these variables, so making payments on time can help improve your credit score. So if you've recently applied for another loan or have a short credit history, refinancing won't make much of a difference.

Consider other lenders as well.

When you originally took out a loan to buy a car, you probably used dealer-arranged financing. On the other hand, many banks, online lenders, and credit unions offer direct financing to anyone who wants to buy or already owns a car. Check that your car and loan meet the lender's criteria. Most lenders have minimum borrowing requirements, such as: B. Age and mileage limits, plus the maximum amount that can be borrowed.

Always start with a lender you've already worked with. If you already have a relationship with a bank or credit union, you may be eligible for a loyalty discount.

Even if the conditions are good, be sure to check the rates offered by various banks and lenders before making a final decision.