Have you ever just sat at the petrol station, stared at the dashboard of your car and wondered, “why the fuck did I buy this this piece of sh*t? The petrol cost more than my wife’s hair extensions”.
Or maybe walked back to your car, only to find a yellow square of death (parking ticket) slapped on your windscreen by a professional ninja set out to make your life a living hell.
Another £70 that you just cannot afford.
Dog, car, children, wife…one of them has to go, and yep the order was intentional, screw her and her extensions made of gold!
But do they? There is another way, have you ever thought about refinancing a car loan?
Refinancing a Car Loan Table of Contents
What is Refinancing a Car Loan?
If you’ve found yourself swimming in debt and dodging a bailiff called Mr Jones, who always seems to conveniently knock on your door every time you have a zoom meeting. You’ll know that trying to juggle a high interest car loan is just one step too far.
Rather than burning yourself to the ground working all the overtime shifts available. Or jumping into a Toyota Prius and spending the time you should be making another baby driving around entitled Gen Z babies, have a think about refinancing your car loan.
It might be a little lifesaver.
The aim of refinancing a car loan is to reduce the amount of money you pay at the end of each month, by lowering the total interest rate on your car loan. Saving you money by using a bit of financial magic. The same financial magic that makes the rich richer. F**ck the rich.
How Does Refinancing a Car Loan Work?
So refinancing a car loan is pretty simple, there are a few key steps to refinancing an auto loan. We’ll take you through the usual application process:
Decide Whether Refinancing A Car Loan Is Right For You
Has your credit score improved so you get a lower rate loan? Does your original car loan have no or a low origination fee?
These are two questions you need to ask yourself before you go looking to refinance a car loan, or you may end up with a higher interest rate loan or higher monthly payments.
Get Together All The Key Documents for Your Car Loan Refinancing Application
Your new credit lender might ask for the following documents to complete your car loan financing application:
- Proof of vehicle ownership
- A copy of your driving licence
- Proof of insurance
- Proof of address
- Proof of employment
Compare Refinancing Car Loan Offers
Make sure you shop around for the best refinancing car loan for you. There are so many offers on the market at the minute, don’t just jump at the first offer handed to you on a plate.
Some credit lenders will even pre-qualify you for your new refinanced car loan.
When you compare auto refinancing offers, make sure you look at the interest rates they are offering you, the fees involved and the smaller repayment terms in the fine print.
These all make a big difference and could turn a good refinancing car loan into a bad refinancing car loan.
Apply For Your New Car Loan Refinancing Team
Submit your refinancing application with the credit lender of your choice. Most financial institutions allow you to submit your application online using your mobile phone, laptop or computer.
I would normally stay away from car loan refinancing offers that ask you to phone or apply in person…it’s not 2001 son, tell your grandad to get an iPhone.
Review The Terms Offered to Refinance Your Car Loan
Always double check the final terms and small print on the final credit agreement from your credit lender.
Once you are comfortable, your credit lender will ask you to sign the agreement. They will then usually get your new loan in place and contact your old lender within the next 24 to 38 hours.
What Are The Benefits of Refinancing a Car Loan?
I feel like we should have put the disadvantages of refinancing a car loan first.
It’s important you consider both the benefits and disadvantages of refinancing an auto loan, before you make your decision.
Anywho…let’s get into the benefits of refinancing a car loan!
Lower Monthly Payments
Refinancing your car loan can reduce the amount of money you have to pay towards your car loan every month. Now who wouldn’t love a lower monthly payment?
If the length of your car loan (term of loan) is exactly the same when you refinance and you manage to lower the interest rate on your new loan, you will probably end up paying lower monthly payments every month. It’s as simple as that.
Imagine saving an extra £100 a month, £1,200 a year, what would you spend it on?
Lower Interest Rates
If you’ve made half decent financial decisions since you first bought your car, your credit score has probably gone up and your credit report now looks like the shiny school report of that beautiful front-row nerd you used to fancy back in Year 11.
With your new fancy credit score you will probably be able to get a lower interest rate on a new refinanced car loan. Who doesn’t love a better interest rate?
You Can Pay Off The Debt Sooner
If you’ve managed to hustle a lower interest rate because of your new credit score, you could refinance your car loan to pay off the total debt even sooner than you expected.
This is because the monthly payments on your refinanced car loan will be lower than the monthly payments of your original car loan / current loan.
Sometimes it’s easy to forget how much of an important factor our credit score is when it comes to borrowing money from a financial institution.
You Could Get a Cash Lump Sum
Some auto car lenders offer to refinance your current auto loan AND give you some extra cash to pay for “other” expenses.
If you have made quite a few payments on your existing loan you might have built up some equity in your car.
The lender can use this equity to give you a bundle of cash that you’ll probably spend on an escape to Ibiza
What Are The Disadvantages of Refinancing a Car Loan?
Minimum Credit Score Requirements
You need a half decent credit score for refinancing a car loan to work for you. This is as with a higher credit score it’s unlikely you’ll be able to get better terms on your new loan, the interest rate will usually be higher.
If your credit score hasn’t improved since you got your new car loan, you’ll only be offered higher interest rates by credit lenders.
Car Refinancing Origination Fee
When you refinance your car loan, some credit lenders may charge you an upfront fee for the opportunity, this is called an origination fee, sometimes they also call these application fees on your new loan amount.
Make sure you always check what the origination fee a lender is charging before you decide to agree to a new auto refinancing loan. You could end up paying more in the long run (longer term) with your new lender if you are not careful, especially with cash lump sum (equity release) offers.
What looks like a better deal or a good idea isn’t always the case with hidden higher rates from a different lender.
Extended Loan Repayment Periods
If you end up taking out a car refinancing loan, double check you don’t extend the loan repayment period as this could actually end up with you paying more interest over the life of the loan(loan term) when compared with your original car loan.
In this situation, everything looks good in the short term with a lower payment every month, but you usually have higher car payments in the long term for the total loan amount.
It’s always best to double check the terms of your original car loan, as some lenders will charge you a fee if you pay off your loan earlier than you’ve agreed to. This is usually called an early repayment penalty or prepayment penalty.
You’ll need to double check the prepayment penalty doesn’t make refinancing your car loan pointless.
What Happens to The Original Loan?
Wondering what happens to your original auto loan when you refinance your car loan? This really depends on how the credit lender you refinanced your new car loan works. All financial institutions have their own processes.
Some auto lenders will pay your existing car loan for you without you lifting a finger, they settle your old debt for you.
Others will send you the money for your new loan and leave you to pay the original loan off yourself.
Make sure you read the loan agreement terms (always read the fine print) before you sign for the new loan to refinance your car.
It’s important you understand exactly how the loan process will work.
How Refinancing a Car Loan Affects Your Credit?
Every time you make a new full application to refinance a car loan, it can leave a hard credit search on your credit report. This can temporarily lower your credit score – Hard Credit Search, Soft Credit Searches What Is All This Crap?
So compare the refinancing loan offers available, but only make a full application when you have picked the lender with the best terms for you. Don’t make several car loan refinancing applications.
Will My Loan Payment Be Cheaper When Refinancing a Car Loan?
Most of the time yes, refinancing a car through a credit union will usually reduce your monthly car payment and can have a really positive impact on your finance situation.
Auto loans from credit unions are usually a little bit cheaper than personal loans or the annual percentage rate on credit cards.
They normally have a better rate as your new auto loan is secured against your car, so if you stop paying your current car loan, the credit lender could repossess your car.
Your car is their security, this is why a car loan is seen as a type of secured loan.
If you have a low credit score, bad credit or an awful credit history, it is unlikely that you will get the lowest interest rate on a new car loan from potential lenders. You just won’t get the best deal or competitive rates, it’s as simple as that.
How Does Refinancing a Car Loan Affect the Life of the Loan?
Refinancing a car loan can have a good impact on the life of your loan, the new loan can give you a shorter term and reduce loan amounts for most people.
When you look at the terms of an auto refinance loan make sure you are picking a good deal with the right choice length of loan for you, and the best rate available.
Help Save a Friend Money Today!
If you have a friend in a difficult financial situation make sure you share this article with them today.
It could be the right time for them to refinance a car loan and free up some extra monthly cash flow to take them out of a tight spot.