If you have a car loan, you might have found yourself in a situation where your monthly payments exceed your budget. That’s when refinancing an auto loan can come to your rescue. Usually, refinancing a car loan reduces your monthly payments and makes it easier to pay off that debt faster.
Before getting into the nitty-gritty of refinancing a car loan, let’s understand when is the right time to refinance your auto loan.
When to Refinance a Car Loan?
Refinancing a car loan is a big deal, and before making that decision, you should analyze your circumstances and then decide whether it’s the right choice.
Take a look at the following scenarios which are ideal for refinancing your car’s loan:
● Improvement in credit score: If your credit score has improved since you got the loan for your vehicle, there’s a good chance for you to qualify for a lower interest rate. You may think that lowering your interest rate by only 2% won’t make a significant difference. But it might save you a lot of money in the long run.
For instance, if you have an existing car loan for $15,000 for 36 months at 5% interest, and your current monthly payment is $449.56. Let’s say your credit score increases, and you refinance your loan. Now your new loan is for $15,000 but at only 3% interest for the same period. Your new monthly payment would be $436.22.
This implies that every month you would save some extra money that you could use for either paying off the loan before the 3 years or for some other use.
In fact, if you pay off the original 5% loan over the scheduled 36 months, your total payout would be $16,184. However, if you opt for refinancing at 3% interest and pay it off as expected, then the total payout would decrease to $15,703.
Also, if you use the monthly savings to pay more, you’d save even more in interest throughout the entire span of the loan.
● Drop-in interest rates: If your credit score is the same, but the interest rates have decreased over time, it’s an excellent time to refinance. In such a situation, the market is on your side even if your credit score is the same.
In fact, you can keep an eye on the interest rates by checking the Bankrate auto loan lender marketplace. Bankrate’s auto finance calculator also lets you compare your existing loan with a new offer.
All you need to do is enter a few details like your current monthly payment and the remaining balance to figure out how much you can save by refinancing.
When You Shouldn’t Refinance Your Car Loan
There are certain situations in which you should never refinance your auto loan, no matter how tempting the offer seems.
● Prepayment penalty on your loan: If your current car loan has a prepayment or early termination penalty, it’s not a good option to refinance. In the end, you want the savings to exceed the fee.
● Extension on the loan’s term: Usually, it’s best to avoid extending your loan’s terms. For example, if your present loan’s term is 36 months, refinancing to a 60-month term is not a good idea. Eventually, it will lower your monthly payments, but you’ll probably end up paying more in interest.
How to Refinance Your Auto Loan
Now that you know about the ideal situations to refinance your auto loan, let’s understand the exact process of refinancing your car loan.
First, you need to apply for an auto refinance loan which will be used for paying the existing balance on your current car loan. Your car will be used as collateral for the new loan. This new car loan will have a fixed interest rate with fixed monthly payments for a certain number of months.
The application process is direct. You simply have to visit a bank of your choice and have this information with you.
1. Personal: Details like your date of birth, home address, and other information that verifies your identity.
2. Financial: Financial details like your monthly income, employment status, credit score, etc. that proves your financial viability.
3. Auto: Car details like the year of manufacture, remaining loan balance, and other information that will determine the terms of your new car loan.
Lastly, you have to sign the closing documents. You also have the option to set up automatic payments from your bank account.
Where to Refinance a Car Loan
When it comes to refinancing a car loan, it’s better to go to more prominent financial institutions. Some of them that you can consider are:
● U.S. Bank offers rates starting from 2.49%
● Capital One offers rates as low as 2.49%
● Bank of America offers rates starting from 2.99%
You can also use online car loan services, such as CarsDirect and MyAutoloan. These services connect buyers with lenders. They also offer you the best tools and information you need to pick the best lender at your convenience.
Final Words on Car Loan Refinancing
Before going to the bank for refinancing your car loan, make sure to analyze your financial situation and the terms of your current loan.
These are the two critical factors that you must consider before deciding whether refinancing your car loan is the right choice. But in most situations, it is a wise financial decision.
If you manage to save some money on refinancing, use it to pay off some debt or put it in your emergency fund and watch your savings double.