How does a car refinance loan work?
Whether your goal is to lower your monthly car payments or reduce the total interest you pay on your car loan, it’s important you understand how refinancing your car loan works.
Refinancing your car loan is replacing your current auto lender with another lender. This involves changing the name of the company that is listed on your car’s title, which is a document that details proof of official ownership. That means you will make payments to the new lender until your loan is paid off.
Before checking your rate for a car refinance loan check to make sure that when you obtain a quote it won’t be a hard inquiry on your credit report. This can impact your credit score. When you apply, a lender will look at your credit profile, as well as the make, model, trim and mileage of your car to determine your rate. You won’t need to have your car appraised the way you do when you refinance a home. Lenders will look at the value of your vehicle relative to how much you owe on the vehicle, called your Loan-to-Value ratio.
What else lenders will look for
Lenders will also look at how many payments you have left on your current auto loan to understand if refinancing is worthwhile for both parties. Typically, you need a minimum of a few months to show on-time payment history but after that, the more recent your current loan is the more potential refinancing will have to save you money. The way that many auto loans work is that the majority of the interest is paid during the beginning of the loan. Check the amortization schedule of your current loan to see what percentage of your payments are interest payments.
Once you get your rate, you should evaluate if the rate or terms offered meet your financial goals. You should also make sure that you understand any additional fees or prepayment penalties so you can understand the total cost of the loans you’re comparing.
Once you select your lender there are certain documents you need to refinance your car loan. For example your insurance and registration cards.
Once everything is verified and approved, you may be asked to complete a Power of Attorney (POA) form so your car title can be transferred from your previous lender to your new lender. A POA shows that you have authorized the title transfer to the new lender.
Your current lender will then pay off your previous lender. When you receive confirmation that your refinance is complete, your new lender will be responsible for your loan. You’ll make payments directly to them and contact them for any questions or concerns.
Depending on how fast you can submit your documents, many lenders will take between a few days to a few weeks to complete the refinance.
Want to check your rate to see how much you could save with a car refinance loan through Lending Club? Check your rate with no impact to your credit score.
Want to understand more about how car refinancing works at Lending Club? Check out our video below to learn more.