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How to Refinance a Car Loan

To refinance your car loan, you'll follow the same steps as when you got your original loan. What’s the difference? This time around, you'll have the benefit of experience up your sleeve.

If you want to change your loan term, or if you think you can get a better Annual Percentage Rate (APR) than before, refinancing might make sense for you. Read on to find out how to refinance a car loan.

When Should I Refinance My Car Loan?

There are a few important factors to keep in mind when considering whether to do a car loan refinance.

Your Term

If you just got your loan, it may not be possible to refinance right away. And if your loan is nearly paid off, the benefits might not be worth the paperwork. But if you're in the middle of your term, a refinance could let you make these changes:

  • A shorter term will let you pay off your loan faster so you'll save on interest and have no more monthly payments.
  • A longer term will lower your monthly payment so your loan will be more affordable (though you may get a higher APR and pay more total interest).

Your APR

Interest is often referred to as an annual percentage rate (APR) and the rate you get is usually based on your credit score. Here's why a refinance could get you a different APR:

  • Making regular payments on a car loan is an easy way to boost your credit score. So if your credit has improved since you took out your original loan, you may now qualify for a better rate.
  • If you feel your original lender gave you up a hiked-up APR, a refinance could allow you to get the competitive rate you deserve.

Prepayment Fees

Some lenders penalize you if you pay off your loan sooner than the planned date, so here's what to do:

  • Check your loan agreement for any extra charges related to early payment. Charges could come as a flat fee, a percentage of your loan balance, or you might have to pay all the remaining interest that would be due on the full amount of your loan.
  • If you find prepayment penalties in your contract, make sure a refinance will save you more than those fees.

How to Refinance a Car Loan

Now that you know the reasons why you may want to refinance a car loan, it’s time to plan out the steps involved in making it happen.

1. Shop for a Lender

The first thing you should do is find a competitive lender. A few things to keep in mind:

  • Shop around for a lender with the most competitive rates and attractive terms for your financial situation.
  • Be sure to look into your local credit union as they often have better rates than major financial institutions because they're not-for-profit organizations – and they care about their members. 

2. Gather Your Documents

Once you've narrowed down your options, it's time to get ready. Here's what you'll need:

  • All your original car loan documents, including information about your monthly payment, remaining balance, and APR
  • Your driver's license and proof of address
  • Your vehicle registration and car insurance details
  • Proof of your current income and your Social Security number

3. Apply for Your Loan

Getting pre-approved for your car loan with one or more lenders has several advantages:

  • You'll be able to find out the current APR you'll get for your credit score.
  • You'll be able to find out your options for choosing a different loan term.
  • Your credit score will take a small, temporary hit when you apply for a new loan. But, if you have multiple applications for a car loan in one to two weeks, you'll only be dinged once so it's a great way to make sure you get the most competitive deal.

4. Finalize Your Loan

Select the lender with the best rates, terms, and conditions for your lifestyle – then go ahead and finalize your loan! This is what will happen next:

  • You'll agree to the new loan amount, new APR, new term, and new monthly payment.
  • Your new lender will pay off your old car loan in full.
  • You'll start making your new monthly payment on a car loan that suits you better than your original loan.

Refinance a Car Loan With Credit Union of America

By now, you might be feeling confident about how to refinance a car loan and ready to take the next steps. At Credit Union of America, we are ready to help you make the best decisions for your future.

But what if you’re still wondering how APR works? After all, the more you know, the better position you're in to drive a great deal. Interest rates can be confusing because different people get different rates based on their credit scores, and because rates can change with the markets.

If you feel you're paying too much interest and want to figure out how you can switch it up, the first step is to get a solid understanding of how it's calculated. Click below to find out more!



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