If you’re in the middle of repaying the auto loan you took to buy your automobile, you might wonder if you can refinance it. You may wonder, “Should I refinance my car?”
The benefits of an auto refinance include the following
- Cheaper monthly payments.
- Lower overall interest charges.
- The ability to change the length of your loan.
- However, the new loan may be more expensive than it is worth.
We simplified a complex financial choice for you into a simple screening procedure.
When Is It Time To Refinance Your Car Loan?
First, assess your present financial requirements to see if anything has changed that might result in a cheaper interest rate, shorter loan term, or lower monthly payment this time around.
Let’s look at why you should consider refinancing your car loan and see whether now is the ideal time for you.
Interest Rate Reduction
The most compelling argument to refinance your car is if you can get a lower interest rate. Lowering your interest rate reduces the amount of money you’ll pay in interest over the life of the loan, which saves you money in the long run. You can obtain a lower interest rate than your initial loan for various reasons.
- Interest rates have dropped since you took out your current loan. Interest rates are always changing based on the market. If interest rates are now lower than when you applied for your current vehicle loan, you can save enough money on interest over the life of the loan to make it beneficial.
- Your credit score has dramatically improved since you received your loan. Lenders use your credit score to determine your creditworthiness, which influences your interest rate significantly. If you’ve improved your terrible credit to the “good” or “excellent” category, you should research to see what interest rates are now accessible to you on a new loan.
- You now understand auto lenders better than when you applied for your current loan. If you financed your purchase via your dealership, you might have yet to get the best interest rate feasible. If you accepted the first bank that gave you an auto loan or received dealer-arranged financing, you should discover how to compare APR with other auto lenders or credit unions.
Loan Term Reduction
You can also refinance into a shorter term, allowing you to pay off your auto loan faster while paying less interest throughout the loan. If the following conditions are met, refinancing into a shorter term can make a lot of sense:
- Your income has dramatically grown since you originally received the loan. You may now have the resources to pay off your debts as fast and cheaply as feasible. Just make careful to compute the increase in your monthly payment and double-check that your budget can take it.
- Your existing loan includes a prepayment penalty. Nobody wants to be penalized for making an additional auto payment now and then. You now understand the importance of reading the fine print in your vehicle refinancing.
If you can make prepayments on your original loan, refinancing may only make sense if you get a lower interest rate. However, if your present loan has a prepayment penalty, refinancing may only make sense if the money saved in interest exceeds the prepayment penalty.
Reduced Monthly Payment
You may also refinance into a longer term for a lower monthly payment, but there are better options than this because you’ll pay more interest. However, if you are in danger of defaulting on your loan, this might be a beneficial precaution. If you’ve recently fallen on hard times and are struggling with big monthly auto payments, extending the loan to reduce your monthly cost may be your best alternative.
If you found yourself in this situation, you should first call your existing lender and see if any alternatives to auto refinancing will save you from defaulting on your loan. They could be more willing to assist you than you believe.