Learn What You Need to Refinance Your Car

What do you need to refinance your car? Learn everything you need to know from our automotive experts. From proof of your gross monthly income to the vehicle's title, you'll need to collect a few important documents to get the ball rolling. The choice to refinance your current auto loan is a big decision. Most financial gurus like Dave Ramsey recommend that consumers steer clear of accumulating more debt, and that's good advice.

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However, refinancing your car loan could save you money on your monthly payment and beyond, especially if you financed your automobile through the dealership. Before you sign on the dotted line, you'll want to confirm you and your vehicle qualify for a refinance and a fixed-rate loan. If you don't meet the necessary refinance requirements, you could be wasting your time.

While each lender has its own conditions, most banks ask for a few documents to get the process started. Before you can save money on your monthly payment, you'll need to retrieve a few records from your files, such as your title. Don't worry if you don't have everything on hand. You can usually get copies with a simple request to your employer, property manager, or insurance company.

We'll explain the importance of these documents and where to find them. You'll also learn about other factors that can improve your chances of approval, including a good credit score. Then, you can decide if you have what you need to refinance your car loan.

On-Time Payments

To refinance your car, you must be current on your existing loan. One of the most beneficial aspects of refinancing is the money-savings. However, if you're already behind on your payments, another lender is unlikely to extend you credit.

Extended Loan Term

Lenders also look at how long you have left to pay on your loan. The amount of time is important because most banks want at least a six-month loan term before they will consider refinancing. This requirement gives the company a look into your payment habits to ensure you have a history of on-time performance that leads to good credit scores.

For example, if your five-year loan only has three months left before you pay it off, it's unlikely you'll be able to get refinanced. Consider whether the best course of action is to pay it off, even if your payment is unusually high.

Large Loan Balance

Your original lender also wants to ensure your balance is large enough to make a profit off the interest. While minimum loan amounts vary, most banks want to refinance at least $3000 to $5000, so you must ensure the vehicle is worth the effort before applying.

The opposite is also true. For example, if you purchased a $70,000 luxury model and want to refinance it within the first year, thanks to depreciation, you might owe more than it's worth. This situation is called negative equity, and finding a lender to refinance your car loan will be challenging until you pay it down.

Minimum Credit Scores

Both car and personal loans can improve or hurt your credit score, depending on your payment habits. This rating is an essential factor in whether you meet the refinancing requirements. If your original loan has a high interest rate, and you've raised your score since you took it out, you might be able to secure a better rate.

Low Debt-to-Income Ratio

Your debt-to-income ratio is the comparison of your monthly loan payments to your income. Lenders use this percentage plus a minimum credit score to determine if you can afford to take on more expenses. While refinance requirements vary between lenders, it's best to keep your figure under 50 percent for the best funding chance. If your ratio is too high, you might have to pay down some of your debt, such as credit card bills, before you can secure approval.

Proof of Income

In addition to a good credit score, one of the best ways to show a new lender your personal finances are in order is with proof of income. Whether you're employed or you get a retirement check each month, providing verification of these funds is a requirement to refinance with any lender. You can document your earnings in a variety of ways, from tax returns to pay stubs, depending on the income source:

• Hourly and salaried employees: Traditional employees should plan to provide pay stubs for the last two pay periods to refinance a car loan.

• Freelance and contract workers: These workers can provide 1099s from all companies or a copy of last year's tax return.

• Self-employed individuals: Most lenders request two years of tax returns from self-employed workers and small business owners. If you don't have your copies, you can request one online from the IRS.

• Odd jobs: If your debt-to-income ratio is on the qualification borderline, providing proof of your income from odd jobs might help convince the lender you have the resources to pay for a new car loan.

Proof of Residency

Some banks might request proof of residence for an auto refinance, particularly if the address on your driver's license differs from where you currently live. A lender might also request proof of residence if there's a discrepancy in your credit report. You can provide proof of residence through your:

• Utility bill

• Bank statement

• Lease agreement

• Property tax bill

• Homeowners insurance policy

Proof of Insurance

Proof of car insurance is another document you'll need to refinance your car loan. A copy of your policy's ID card might do the trick. However, you'll probably want to provide your insurance policy's declaration page. This document contains valuable information about your coverage amounts, including liability limits and comprehensive and collision protection.

Low Mileage Reading

You can't take out a car loan without knowing your vehicle's information. Lenders have specific refinance requirements when it comes to the car's age and odometer reading. If it's too old or has too many miles on it, they'll deny your application. For example, if you bought a heavily used car with more than 100,000 miles on it, after a year or two of use you could rack up enough miles to exceed your lender's cap.