Whatever the reason you refinanced — be it to get a better interest rate and lower your overall costs or just your monthly payment — there are important steps to take following your application being approved. Put yourself in the best possible position for future financing by staying on top of your new loan.
5 steps to take after you refinance your car loan
Once you have shopped around at a few lenders and signed on the dotted line for your new vehicle loan, take the following steps.
1. Keep paying off your existing loan
Until the funds are received, you’ll need to keep making payments on your original loan. If you overpay, you can work with the lender to credit the amount back. It’s better to overpay than under.
2. Receive new car loan
Your new loan will ideally carry improved rates and terms — hopefully without extending your term. The new loan will either be sent to you or directly to the lender holding your original loan. Any fees are either added to the loan amount or taken out of it, depending on your agreement.
3. Pay off old loan
The approach varies by lender but prior to beginning payments on your new loan, you must first pay off your current loan. Either this will be handled directly between the lenders or you will pay it off yourself. In the second case, you will receive a check to give to your initial lender. Be sure to get this done as soon as your payment becomes available to avoid any extra charges.
4. Start making payments
Generally, your first payment is due 30 days following you formally accepting the loan. Keep in mind that pushing off any payments will likely lead to extra incurred interest.
In some cases, autopay is required or can give you a discount. If it’s not available, be sure to make on time payments to avoid fees and potential damage to your credit.
5. Check the state of your credit
Credit applications often temporarily affect your credit score. Fortunately, refinancing your loan can save you money down the road, so this reality shouldn’t hold you back.
After signing off on the loan, you can expect to see a few point drop in your score. The drop is temporary, and you should see it come back up within a few months.
Does refinancing hurt my credit?
It can temporarily lower your credit. But refinancing can actually save your credit in the long run if you are struggling to meet monthly payments.
How to avoid the need to refinance in the future
The key to avoiding a second refinance comes down to taking out the right loan. Consider the following tips to ensure that you can continue affording your new loan.
- Focus on the total loan, not just the monthly cost. While it can be easy to focus on the monthly payments, you must only consider that number when determining how much you want to spend on the car, all in. A low monthly cost is likely due to longer loan terms, which costs more in the long run.
- Shop around. Loans are available from credit unions, banks and online lenders. Consider all options when shopping for the best rate for your needs. And be sure to read the fine print before signing off to make sure you are getting the best loan for your specific needs.
The bottom line
Refinancing your auto loan is a great way to continue driving your car while ensuring you don’t become upside down on your loan or fall into repossession. Once you get your new loan, pay off your old one, start making on-time payments and check on the state of your credit in the coming months.