Refinance a car loan is taking out a new loan to repay the existing balance. These loans are usually secured by a vehicle and paid over fixed monthly payments, which can be as long as a few years.
Refinancing your auto loan could save you money. It could lower your monthly payments and allow you to free up money for other financial obligations.
Even if you are still looking for a better rate, another loan may offer a longer repayment term. This could result in lower monthly payments, but it might increase the total interest cost over its life.
If you are still trying to decide whether refinancing your car loan is the right choice, continue reading to find out when it makes the most sense.
When Is It Time To Refinance Your Vehicle?
The outcome of a decision like auto refinancing is dependent on many factors. You might want to consider the following:
Interest Rates Dropped Since You Took Out Your Initial Auto Loan
Rates frequently change, so rates may have dropped since you originally took out an auto loan. A drop of 2 to 3 percentage points could result in substantial savings over the loan’s life.
Let’s assume your original auto loan was $25,000 with a 7% interest rate and a loan term of 60 months. You’ll pay $29,702 total if you keep the loan. Your balance now stands at $20,673 after a year of making payments on the loan. Refinance would allow you to get a loan of $20,673 over the remaining 48 months at a lower interest rate of 5.5%. You’d pay $22,852 total on your refinance loan. You would have paid $2522 less if you had kept the original loan. This is in addition to the $4,327 you already owe on loan. You can use refinancing car loan calculator to know your monthly payments.
Your Financial Position Has Improved
Lenders may consider a variety of factors when determining your auto loan rate. This includes your credit scores and your debt-to-income ratio (DTI). This is calculated by taking your monthly income and your monthly debt payments.
So improving your credit score and decreasing your DTI can help you get a refinanced loan with better terms.
The Best Offer Didn’t Come The First Time
Shopping around for better terms may be worthwhile, even if interest rates aren’t dropping or your financial situation needs to improve significantly. You may have been offered a loan at 7%, but other lenders offered lower rates.
This is especially true if your original loan was from a dealer. Dealers sometimes offer higher interest rates to make more money.
It Isn’t Easy To Keep Up With Your Bills Each Month
You may be able to get a loan with a lower interest rate, but it is worth looking for a loan with a longer repayment term to reduce your monthly car payment.
You can negotiate a shorter repayment term if you cannot find the right loan. Keep in mind, however, that the interest you pay is more expensive if you spend more time repaying your loan than you do pay it back. You will pay more interest overall if your loan has a longer term.