Refinancing a Car LoanBy Caitlin in Auto
Most people think that refinancing a car loan is as complicated and drawn-out as refinancing a mortgage, but it is not. The application process and criteria are both considerably less difficult than those involved in a mortgage refinancing. Refinancing your car loan could, in the long run, save you a significant amount of money on interest.
Here’s how to determine whether or not you should refinance your car loan.
When should you refinance your car loan?
Refinancing your car loan is a great opportunity to save money but there are conditions that need to be met in order to be eligible and few things that you should keep in mind before you decide to head to your lender and ask for refinancing.
1. First and foremost, have your credit score and situation improved? If you originally got your car loan when you credit score was low and you were trying to improve it then your interest rate is probably really high.
Refinancing your car loan once your credit score has improved will not only allow you to get a lower interest rate, but a lower monthly payment and maybe even a nicer car.
2. Next, it’s a great idea to review the terms of your loan. Educate yourself about your loan; know what you’re paying each month and how many payments you have left on your loan. Understanding the details of your loan can only help you during the refinancing process.
3. Then you need to find out if your loan qualifies for refinancing. Every lender has their own specific requirements for refinancing but here are some general rules to keep in mind.
- Your car can’t be too old, generally less than 7 years old.
- You have to have a significant amount still left to pay (more than 7,500).
- Can’t be a car you use for commercial purposes.
- Your car can’t have a salvage title (which means it can’t be seriously damaged).
- Some banks or lenders won’t refinance certain makes or models of cars.
4. Determine if the interest rate you’re paying is higher than the current average that people are paying today. The interest rate directly affects the amount you pay each month, so having a lower interest rate can help you save a lot of money.
5. Do you have a long term car loan? If your car loan has a 5 to 8 year term then refinancing might be a good option for you. If you’re only looking at the monthly payment when buying a car then you probably don’t know how much of that amount is actually interest. If you have a longer term loan (5-8 years) then the more interest you will end up paying to your lender, even if you think your monthly payment is low. Refinancing your car loan to get a shorter term will reduce the amount of interest that you pay your lender and in the long run save you money.
When should you avoid refinancing your car loan?
While refinancing your car loan can be a great and smart way to save some money, get a better car and help improve your overall credit history, it’s not always the best idea for certain situations and loans.
1. It’s a bad idea to refinance your car loan if the current loan that you have has a prepayment penalty. This usually happens when you have opted for in-house financing from the car dealership and means that if you try to accelerate your payments and pay off your loan early there will be a fee.
2. Refinancing a car loan can be a great option but it also extends the length of your car loan, which means you’ll be making payments for longer than you originally were with your first loan. If you can, try to avoid refinancing to a car loan that will extend you payment period. If you’re at risk of missing your monthly payments on a regular basis because they are too expensive for you to handle then refinancing can seem like a good idea. Just remember that when you refinance, your monthly payments might decrease but overall you’ll end up paying more because you’ve extended the length of your loan.
There you have it the pros and cons of refinancing a car loan. Just remember that if you choose to refinance your car loan you should do your research first and have a pretty good understanding of the ins and outs of your loan, that way you’ll be prepared and there won’t be any surprises.