Refinancing Auto Insurance: A Guide To Lowering Your Premiums

Refinancing your auto insurance can be a great way to save money and find a loan that better suits your needs. Refinancing involves taking out a new loan to pay off your original one, which can help you secure a better interest rate or lower your monthly payments. Before deciding to refinance, it's important to review your current loan, check your credit score, and determine if refinancing makes sense for your situation. When you're ready to refinance, you'll need to gather important documents, such as proof of income and insurance, and compare offers from different lenders.

Review your existing auto loan

Reviewing your existing auto loan is the first step in the refinancing process. Here are some detailed instructions on how to do this:

Find Your Current Auto Loan Contract:

Locate the contract for your auto loan and review the following key details:

• Your current monthly payment amount.
• The Annual Percentage Rate (APR) of your loan, which includes the interest rate and represents the cost of borrowing money.
• The number of months left until your loan is fully repaid.
• The remaining loan balance and the payoff amount (these may differ).

Understand the Value of Your Car:

It's important to know your car's current market value, especially with rising car prices and fluctuating values in recent years. Resources like Kelley Blue Book and Edmunds.com can help estimate your car's worth. If your car's market value is less than the loan balance you owe, you may have negative equity or be "upside-down" on your loan, which can make refinancing challenging.

Evaluate Fees and Add-ons:

Be cautious about extra fees and add-ons that may increase your total loan amount. While some fees are legitimate and required, others may be unnecessary. Common fees include state sales tax, documentation fees charged by dealerships, and registration fees based on your car's value and weight. Lenders may also include add-ons like extended warranties, gap insurance, or dealer-installed options like floor mats or wheel locks. Understand what is essential and what you can opt-out of to reduce costs.

Compare with Other Offers:

Before committing to refinancing, it's beneficial to compare your current loan terms with other offers in the market. Get quotes from multiple lenders based on the same terms: the loan balance and length. This direct comparison will help you identify the most favourable offers and make an informed decision.

Consider Your Goals:

Are you primarily interested in lowering your monthly payments, or are you seeking the lowest possible interest rate? Remember that extending the life of your loan will likely increase the total cost in the long run, whereas shortening it can lead to savings. Evaluate whether the potential benefits of refinancing align with your financial goals and long-term plans.

By carefully reviewing your existing auto loan, you can make a well-informed decision about refinancing and ensure you're getting the best deal possible.

Determine the value of your car

Knowing the value of your car is important when refinancing your auto insurance, especially with car prices rising to record highs in recent years. You can use resources like Kelley Blue Book and Edmunds.com to estimate what your car is worth. Online car retailers like CarMax and Carvana can also provide cash offers that you can use as a baseline.

When determining the value of your car, you should also consider whether you have positive or negative equity. Negative equity, also known as being upside-down on your car loan, means that you owe more than your car is worth. Refinancing a car loan with negative equity can be difficult unless you have good credit. The best way to get into a positive equity position is to continue making timely car payments and pay extra each month, even if it's a small amount. Ensure that your lender applies any extra payment to the principal amount and not to interest.

In addition to online tools and resources, you can also take your car to multiple used car lots to get an idea of what it's worth. This will help you understand the high and low-end values for your car. Keep in mind that the value of your car can vary depending on local market conditions, the dealer's inventory, and their ability to resell the vehicle.

Evaluate your credit score

Evaluating your credit score is an important step when refinancing your auto insurance. Your credit score is a three-digit number that indicates the likelihood of you repaying a loan with no issues. It demonstrates whether you have paid off debt in the past and whether you pay your other current bills on time.

Credit scores typically range from 300 to 850, and according to Equifax, anything above 670 is considered "good", while a score of 740 to 799 is "excellent". A higher credit score will generally help you receive a better interest rate and more favourable terms. However, a lower credit score does not mean you will be denied a loan. It may simply result in a higher interest rate as you will be considered a more risky borrower.

You can check your credit score for free to see where you stand. Checking your own credit score will not lower your score. If your credit score could do with some improvement, there are a few steps you can take. Firstly, review your credit report to pinpoint areas for improvement. Make sure you are paying all your bills on time and limit your hard credit inquiries. You can also use tools like Experian Boost to increase your score, as this includes reporting for your phone and utility bills. Applying with a cosigner who has good credit can also improve your chances of getting approved.

While credit score is important, it is not the only factor that will be considered when refinancing your auto insurance. Lenders will also look at your income, debt, existing car loan, and vehicle.

Gather documents for your application

Gathering the right documents is an important step in the process of refinancing your auto insurance. Here is a list of documents you may need to provide:

• Personal information: This includes your Social Security number, previous addresses, monthly mortgage or rent payments, and employment history. Lenders want to ensure that you will be able to repay your loan, so be prepared to provide a recent pay stub or tax return.
• Proof of identity: You will need to provide a government-issued photo ID, such as your driver's license.
• Vehicle information: Make sure you have the make, model, mileage, and year of your vehicle. The Vehicle Identification Number (VIN) can usually be found on the driver's side of the windshield.
• Proof of auto insurance: You may need to provide proof of insurance to your lender. This can be done through an insurance card or other official documentation.
• Loan information: It is essential to know the details of your current loan, including the lender's information, the remaining balance, interest rate, and loan term.
• Registration and title: You will need a copy of your vehicle registration and title.
• Proof of income: Lenders will want to see proof of your income, such as W-2s, recent pay stubs, bank statements, or tax returns.
• Proof of residency: You may be asked to provide recent utility bills, lease agreements, mortgage statements, or tax bills to confirm your address.
• Co-owner consent form: If you have a co-owner for your vehicle, you will need their consent to refinance the loan.
• Proof of resolution for claims: If you have had any open claims or second liens on your vehicle, provide proof that these have been resolved.

It is important to note that the specific documents required may vary by lender and your location. Therefore, it is always a good idea to contact your lender and confirm the exact documents needed for the application process.

Compare lenders and rates

When comparing lenders and rates, it's important to shop around and not settle for the first offer you get. This is because lenders vary when it comes to the criteria they use for approving auto loans and setting rates.

You can start by applying to several lenders that offer pre-qualification with a soft credit check. This won't affect your credit score and you'll receive pre-qualified loan offers with rate and payment estimates. You can then use an auto loan refinance calculator to compare these pre-qualified loan offers to your existing loan.

When comparing loans, pay attention to the loan terms. You can leave the length of your loan unchanged, but some loan offers may be for a longer term than you currently have. While a longer-term loan can give you a little financial breathing room, it also means you will pay more interest in the long run.

You should also check that their rates are competitive, they have a repayment option that works for you, and that the details and any fees are clear and transparent.

It's worth noting that when the Federal Reserve increases the federal funds rate, auto loan interest rates usually follow. So, while the Federal Reserve rate doesn't directly shift auto rates, it does affect the number that auto lenders base their rates on.

Frequently asked questions