Refinancing your car loan can help you save money by lowering the interest rate on your loan. But, when is refinancing your vehicle the right decision and when should you wait?
If you have taken out a loan to pay for your car, you may be looking at refinancing your auto loan.
When you refinance your car loan, you may be able to reduce your monthly payment and save money by decreasing your interest rate. When you refinance an auto loan, you are applying for a new loan to pay off the balance of your existing car loan. Over the length of the loan, you are expected to pay fixed monthly payments for a set period of time.
Typically, refinancing is done to save money and decrease your monthly payments. Some people may even go after auto loan refinance to get a longer repayment period. This will lower your monthly payment but may increase the amount of interest your loan accrues.
Should you refinance?
Refinancing your car is a huge financial decision to make with a lot of things to consider when making a decision that can affect your finances in the long run. There are a couple of reasons why you may want to apply for a new personal loan for your car:
Interest rates are lower
Interest rates will change regularly, so rates may fall from higher interest rates to lower ones over the life of the loan. If they have fallen even 2 or 3%, you can save a lot of money on lowered interest charges and experience significant savings over the loan’s term. Lower interest rates can also help you to pay off your loan early.
Better financial situation
Lenders use a variety of factors to determine your auto loan terms, including your credit score or your debt-to-income ratio. If you have recently worked on improving your credit and have improved the health of your finances, you may qualify for more favorable loan terms when you refinance.
Reducing your car payment
If you are having trouble keeping up with your bills, refinancing can be a way to reduce your monthly payment by offering you a longer repayment period. However, you may not be able to secure a lower interest rate, and often the longer repayment period will cost you more money over the term of the loan. By lengthening your loan terms, you end up paying more interest on the loan.
Your current loan terms are unfavorable
If your current loan terms aren’t great, it can be worth it to look around for a better loan, even if current interest rates are the same. You may be able to qualify for more attractive loan terms from other lenders.
Removing or adding someone as a co-signer
Sometimes people will refinance to add or remove someone from their car loan. Because refinancing gives you a new contract, it is an easy way to change who is on your auto loan.
When to hold off
There are a few reasons why you should wait on refinancing and continue paying off your original car loan.
Most of the loan is paid off
If you have already paid off most of your loan, refinancing is not for you. This is because most interest is paid off during the beginning of your loan – meaning, that the longer you wait to refinance, the less money you will save.
Older vehicles or high mileage vehicles
Cars lose value and depreciate quickly. Refinancing is often only successful if your car is relatively new and has lower mileage. Most lenders, banks or credit unions will not refinance an automobile with over 90,000 miles.
You need credit in the near future
Refinancing can negatively impact your credit score, so if you want to apply for a mortgage soon or a new credit card, hold off on the refinancing to boost your approval odds.
Auto loan refinancing can be expensive, due to extra fees and prepayment penalties for your current loan. Look out for any hidden fees in refinancing to decide if the benefits are worth it.
In a nutshell
Refinancing your auto loan can help you save money in interest or even stretch out your repayment period. Only refinance when the situation is right for you. Check out this refinance calculator to get a better idea of how refinancing your vehicle can help you.