Your interest rate can make – or break – your monthly payment. For many of us, buying a car is a necessity. In places where public transit is limited or non-existent, it’s literally the only way to get around. As workers return to the office and find themselves commuting…
Comparing rates before refinancing your car loan is a key way to avoid leaving money on the table.
Rate shopping can help you land a deal on auto loan refinancing that offers as much savings as possible, which can free up cash in your budget to spend on other things.
According to RateGenius data, borrowers approved for an auto refinance loan in Q1, 2022 saved a whopping $99.68 per month on average. That’s enough to cover another grocery trip or tank of gas each month. If you have plans to refinance, we’ve put together an ultimate guide on how to rate shop from start to finish.
Step 1: Check Your Credit Score
It’s always a good idea to do a credit check to see where you stand before refinancing, whether you’re looking to refinance your current auto loan or mortgage. This is because refinance lenders review scores as part of the application process. The higher your credit score, the better shot you have at landing a low rate on a new loan.
You can get your credit score for free at Experian.com and other free credit scoring sites. After pulling your score, check out current auto refinance rates to get an idea of what you can qualify for.
Step 2: Improve Bad Credit
Taking your credit from poor to fair or good to excellent can drastically improve your interest rate options. So, what’s the best way to go about increasing your score? It depends on what’s currently on your credit report.
There are two popular credit scoring models — the FICO Score and VantageScore. Each model weights these factors from your credit report to calculate your score:
- Your payment history
- How much debt you owe and the available credit you’re using
- The length of your payment history
- The types of credit you have and your credit inquiries
The key to building credit over time is making on-time payments on all credit accounts and keeping debt down to a manageable level.
That said… if you want to refinance your current loan today or next week, you may not have a lot of time on your side to build credit. In that case, here are three steps that may help improve your score relatively quickly:
- Sign up for Experian Boost. Experian Boost is a free service that adds certain on-time payments for utility bills and subscriptions, like Netflix, to your credit report. These on-time payments added to your report could be positive for your credit score, especially if you have limited credit history.
- Dispute incorrect negative records. If you have inaccurate late payments, accounts in collections, or other records on your credit report, disputing them and having them removed could give you a score bump. Each credit bureau has directions on how to dispute records on the website. Thanks to the Fair Credit Reporting Act (FCRA), each credit bureau must investigate valid claims. And if a dispute can’t be confirmed by the credit bureau, it has to be removed from your history. Just keep in mind that the actual dispute process and removal could take several weeks.
- Reduce your credit utilization. Your credit utilization is how much available credit you’re using on revolving accounts (i.e., credit cards), and it’s one of the more important factors weighted in your credit score. Paying off high credit card balances to reduce your utilization could improve your score before you refinance.
Step 3: Get Auto Loan Offers
With your credit checked and improved, it’s time to start shopping around. Getting multiple lender offers is the best way to find the lowest rate you can qualify for, plus getting several quotes gives you leverage. If your preferred lender doesn’t offer the best rate, you could show them a rate you got elsewhere to negotiate a better deal.
There are two options for rate shopping: You can go directly to each individual bank, credit union, or financial institution to get quotes. Or you could use a marketplace (like RateGenius) to find and compare refinance offers from multiple lenders with just one application.
Also, don’t worry about several hard credit inquiries wreaking havoc on your credit score as you hunt for competitive rates. The FICO Scoring model counts many hard inquiries within a shopping window as one inquiry, giving you the opportunity to look for savings without penalty.
Step 4: Understand Interest Rates and Loan Terms
You’ll probably notice that each loan offer you get has an Annual Percentage Rate (APR) and different loan term options — what does it all mean?
APR is a rate that expresses how much interest you pay for a loan annually taking into account lender fees. It’s important to look for the APR when loan shopping because it’s a good indicator of how much a loan will truly cost. A refinance calculator can help you do the math on how APRs can affect your payment depending on your loan amount.
The length of your loan term also contributes to the cost of the loan. Loan terms typically range from 24 to 84 months but can go as high as 96 months. Loans with a shorter loan term tend to cost you less interest, but the trade-off is that they usually have higher monthly loan payments.
Choosing a longer term may offer lower monthly payments, but the drawback is that you generally pay more interest over the life of the loan. Plus, there’s a risk your car could go underwater as the car depreciates.
A car underwater is a car with negative equity, which means you owe more than it’s worth. A car with negative equity can be harder to trade in, and if the car is ever totaled, you could be responsible for paying the difference between the car value and the loan balance unless you have a GAP waiver. We’ll talk about that next.
Step 5: Review Your Refinancing Add-On Options
Financing companies or dealerships might offer supplemental loan products when you refinance your vehicle loan. This can include add-ons like a GAP waiver and vehicle service contracts. Here’s a breakdown of how both work:
Creditors or financing companies that offer a GAP waiver will waive the difference between what the car is worth and what you still owe up to a certain limit if your car has negative equity and it’s damaged or totaled.
For example, say you owe $10,000 on a car that’s worth $7,000. In this case, your loan-to-value ratio (LTV) is 143%. You get into an accident, the car is unrepairable, and the insurance company pays out $7,000 (the value of your car). With a GAP waiver, your creditor or financing company may waive part of the $3,000 balance on the car loan depending on the contract terms.
Purchasing this waiver upfront when refinancing your existing auto loan could save you from a financial bind if you’re at risk of going upside down or your car depreciates quickly.
Vehicle service contracts (VSCs)
Vehicle service contracts provide coverage for repairs and car maintenance problems. VSCs aren’t car warranties but work in a similar way; they pay for specific repairs and maintenance as outlined in the contract, and the coverage window ends when you drive a certain number of miles, or the contract expires.
While VSCs won’t cover fender benders or dents, they may cover the repair of almost all systems in the car, including the transmission, engine, air conditioning, radio, and more. Some contracts even come with roadside assistance. The cost of contracts can vary depending on the age, make, model, and mileage of your new or used car.
Step 6: Compare Offers and Choose the Best One
At this point, you’re in the home stretch, and it’s time to compare the auto loan rates of your refinance offers. Consider writing down the following terms to compare loan options head to head:
- The APR
- Monthly payment
- Loan fees
- Length of the loan term
- Total amount of the loan
- Add-on features
As you weigh between offers, think about your personal finance goals and the full value of each offer. Ultimately, what might seem like the cheapest option might not be when you dig into the details.
Case in point, a loan with the lowest monthly payment may not necessarily offer the most long-term savings. For example, another loan with a slightly higher car payment and an affordable vehicle service contract could be the better option if you end up dealing with unexpected repairs or maintenance.
How To Determine if Refinancing Is Worthwhile
Whether refinancing makes sense depends on your situation. If rates change six months to a year after you buy a car and you’re able to qualify for a lower interest rate and monthly payment, refinancing could be a good financial move.
However, if your credit score is less-than-stellar and you qualify for a higher interest rate than you hoped for, refinancing may be less beneficial. In this scenario, the small savings you obtain may not justify the cost and the effort of refinancing.
While rate shopping can take time, exploring options is time well spent. As the price of everyday goods and services rises, savings you land from comparing loans can bring you budget relief that makes the whole process worthwhile.