Is An Auto Loan Refinance Right For You?
If you’re in the process of paying off the loan you took out to purchase your car, you might be wondering if it’s possible for you to refinance that loan, and if it makes sense to do so.
While moving to more manageable monthly payments or lower overall interest cost might seem like a no-brainer, it’s important to carefully think through whether refinancing is right for you before you make any big decisions.
Let’s take a look at some of the factors that you should keep in mind if you’re considering refinancing your car loan.
When Does It Make Sense To Refinance A Car Loan?
The first step is to evaluate your situation and determine whether anything has changed that could get you a better deal this time around.
The most compelling reason to refinance your car loan is that you’re able to snag a better interest rate. When you lower your interest rate, you decrease the amount of money you’ll pay in interest over the life of the loan, saving you money in the long term.
Why might you be able to get a better rate than what you received the first time around?
The first possibility is that rates have gone down since you first got your loan. Interest rates are always changing and tend to trend either up or down depending on the market. If rates are currently lower than they were when you initially financed your car purchase, you could potentially save enough money over the life of the loan to make it worthwhile.
Another possibility is that your credit has improved significantly since you got your loan. Part of your interest rate is determined by how creditworthy you are. If you had a low credit score that you’ve since built up and gotten into the “good” or even “excellent” range, it may be worth it to see what kinds of rates are available to you now.
It could also be that you simply didn’t know to shop around for the best deal when you were initially purchasing your car. If you financed your purchase through your dealership, it’s possible that you didn’t get as good of a rate as you could have. If you went with the first bank that offered you a loan or got dealer-arranged financing, you might want to do some research and see if it’s possible for you to refinance into a loan with a better rate.
You can also refinance to adjust the loan term to your advantage, either by refinancing into a shorter term (so you pay off your loan faster and pay less in interest over the life of the loan) or into a longer one (if you find yourself needing lower monthly payments).
If you can afford it, refinancing into a shorter term can make a lot of sense. Maybe your income increased significantly since you first got the loan, and now you’re able to comfortably handle a larger monthly payment. If you’re interested in paying off the loan as quickly as possible so you can own your car free and clear and reduce the amount of money you’ll pay overall in interest, you might want to look into refinancing into a shorter loan term. Just be sure to calculate how much your monthly payment would increase and double check that your budget can handle it.
You also have the option to refinance into a longer term, but this generally isn’t ideal. While you’d be lowering the amount you’d pay each month, you’re increasing the amount you’ll pay in interest. However, this can be a useful measure to avert disaster if you’re at risk of defaulting on your loan. If you’ve suddenly hit hard times and are having trouble with large monthly car payments, extending the loan to lower your monthly cost may be your best option.
The first thing you should do if you run into this predicament, though, is to get into contact with your current lender, let them know what’s going on, and see if there are any options aside from refinance to prevent you from defaulting on your loan. They may be more amenable to helping you out than you think.
When Can’t (Or Shouldn’t) You Refinance?
There are also certain situations where you may run the numbers and decide that it doesn’t make sense to refinance your car loan. Or, you may apply for a refinance and find that you aren’t eligible.
Auto loans depend on the value of the car to secure the loan. Cars tend to depreciate pretty rapidly through the years that you own them, and you may find that your now-older car won’t catch as good of a rate as it did when it was brand new. You may even find that lenders aren’t willing to do a refinance on your car at all.
For example, some lenders set limits on the age and mileage of cars that they’ll lend on, so if your car is over 7 years old or has more than 100,000 miles on it, you’ll likely have a harder time finding a lender that would be willing to work with you. Same goes if you’re upside down on your loan, meaning you owe more on the loan than the car is worth.
Even if a lender is willing to do a refinance on your car loan, you should still do your own math to make sure it makes sense for you, and that you won’t be paying more in fees or interest than it’s worth.
For example, if your current loan includes a prepayment penalty, it might not make sense to refinance unless the money you save is greater than the penalty you’ll pay for paying off your loan early.
Best Way To Refinance An Auto Loan
If you’re seriously considering refinancing your car loan, your first question may be whether you can refinance with your current lender.
It depends, but it’s not a bad place to start. While you may or may not be able to refinance with your current lender (some lenders won’t refinance loans they originated), you should shop around for the best deal either way.
Once you’ve run the numbers and found that refinancing makes sense for you, you’ll want to check out rates with a few different lenders and compare them. Some borrowers might be worried about multiple hard inquiries on their credit report bringing down their scores and only rate shop at one or two lenders as a result, but you needn’t worry about rate shopping hurting your credit too dramatically. As long as you keep all your hard inquiries within a 14-day period, they’ll be counted as a single inquiry for the purposes of calculating your credit score.
If you’re wondering if an auto loan refinance could make sense for you, your first step should be checking your current credit score. To do so for free, create an account with Rocket HQ℠ to view your TransUnion® Credit Report and VantageScore® 3.0 credit score. You can also view other resources like this one on our credit and personal finance learning centers.
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