Are you torn between refinancing your car loan or keeping your existing loan? Before you make a decision, weigh the benefits and drawbacks of refinancing, and conduct a cost-benefit analysis based on your current situation to determine if you should move forward with vehicle refinancing.
How Car Refinancing Works
Car refinancing involves swapping your current car loan with a new one with different terms. The idea of going through the refinancing process is to either get a significantly lower interest rate so you can pay your loan off early and save in interest or to stretch out your repayment period and get a lower monthly payment.
When Car Refinancing Is Worth It
These scenarios could make refinancing beneficial for you:
Your Credit Score Has Improved
Didn’t get the rate you wanted the first time? If your credit score has since improved, you could have luck getting a better deal this time around. But before you apply, scan your credit report for errors or outdated information and file disputes promptly to give yourself the best shot at good or excellent credit.
Remember, the best interest rates generally go to the borrowers with the highest credit scores as they pose the least amount of risk to the lender.
Interest Rates Have Dropped
Interest rates on auto loans tend to fluctuate, which means the average rates could be lower than what they were when you initially financed your vehicle. So, it’s worth scoping out your options to determine if you could qualify for a lower rate and potentially save in interest on your auto loan.
You Need To Lower Your Monthly Payment
Suppose you’re experiencing financial hardship or having other pressing financial goals you want to meet. In that case, a lower car payment could alleviate some of the pressure you’re facing. And refinancing your auto loan allows you to do just that as you’re essentially resetting the clock on your loan term. (Be mindful that you could pay more in interest as you’ll extend the period that the lender can collect from you).
When To Avoid Refinancing Your Car
Even if you can get a lower rate or monthly payment, there are instances where refinancing isn’t sensible.
If Your Car Is Older
Some lenders won’t refinance vehicles that have accumulated more than 100,000 miles or are up there in age. If your car fits into either category, refinancing probably isn’t a good fit.
If You Bought Your Car In The Last 6 Months
Considering when and how often you can refinance your car loan. Ideally, you want to wait to refinance until at least six to 12 months have passed. At that point, your credit score will have rebounded from the hit it took when you applied for a loan, and it appeared on your credit report.
When Refinancing Fees Offset A Lot Of Potential Savings
Refinancing your auto loan could mean incurring prepayment penalties if your current lender charges them for paying off your loan early. You could also be hit with loan origination fees, which could make the costs of refinancing outweigh the benefits.
FAQs About Refinancing a Car Loan
Here are some frequently asked questions regarding vehicle refinancing in case you are wondering if you should refinance your auto loan.
It depends on the loan amount, along with the interest rate and repayment term on your current and new auto loan.
If you refinance for an interest rate that’s 1 percent lower, you could save a sizable sum of money. To illustrate, assume you take out a $30,000, 5-year car loan at a rate of 6.5 percent. Your monthly payment will be $587, and you’ll pay $5,219 in interest over the life of the loan.
If you decide to refinance the remaining balance of $25,202 at the end of the first year into a loan with the same term but a reduced rate of 5.5 percent, your monthly payment will drop to $481. Your interest costs will equal $3,681 for the duration of the loan term.
Be mindful that you made $7,044 in payments during the first year. But only $4,798 went towards the principal, and the remaining $2,246 was allocated to interest. With a refinance, the loan would cost you $5,927 in interest.
Ultimately, refinancing would only make sense in this case if you wanted a lower monthly payment.
As evidenced by the above example, refinancing for a rate that’s 3 percent lower could mean a more affordable monthly payment. But because the decrease is more significant, you may save in interest as well.
Where to Get Started with Refinancing Your Car Loan
When you’re ready to explore vehicle refinancing options to determine your next move, consider an online lender match tool, like Auto Approve, to simplify the process.
Here’s how it works:
- Request a free quote in minutes by visiting their webiste
- View loan options from banks and credit unions in the Auto Approve network.
- Let Auto Approve do the legwork to finalize your vehicle refinance.
There’s no impact on your credit score when requesting a quote, and you’re not obligated to move forward with the application process if the loan matches aren’t suitable for your financial situation.