Should You Refinance Your Auto Loan?
When you first purchased your car – whether new or used – you may have done so in a hurry. If that’s the case and you financed with the dealer or another lender out of convenience in the moment, it may be time to consider refinancing.
Sure, at the time it was easier to accept the financing option that was on the table in front of you because it was faster. And while you’re definitely enjoying your new ride, you may be regretting a higher interest rate that you got stuck with.
Refinancing your auto loan can save you hundreds if not thousands depending on the value of your vehicle, how much you owe on your current loan, and your credit standing. You can lower the monthly payment, opt for a shorter term, or even both.
Let’s look at some common life changes that mean it is time to consider refinancing:
Your Credit Improves
One of the greatest factors in determining your financing options is your credit score. When any lender is preparing to offer you a loan, a credit report is pulled. The “score” on your credit report impacts almost every part of the buying process including your interest rate, whether or not you’ll have to pay a premium for insurance, and what other fees your lender might charge.
It’s worth keeping a copy of the credit report your lender pulled so that you can watch over time to see if your credit score has improved. It can take as little as nine months of consistent, on-time payments to boost your credit score, resulting in a better loan offer if you refinance.
You Didn’t Shop Around Before You Borrowed
The car-buying process can be overwhelming, especially if you’re shopping because you need a car right now due to a wreck or maintenance issue. The dealer wants not only the business from your vehicle purchase, but also your financing. And let’s face it, we all want the one-stop-shop experience that is quick so we can get in and get out.
However, saving time on that one day can cost you big in the long-term. Dealers tend to have a smaller range of lenders with whom they work exclusively. This limits your financing options and can leave you with a higher rate or payment.
Before you seek refinancing options, be sure to read the fine print of your contract with the dealer. If there was any kind of incentive, like a cash-back offer, to finance with the dealer, it may be written into your agreement that you cannot refinance within a certain length of time.
You Need to Change Your Monthly Payment
You may be in a much better financial situation now than when you bought your car. If you have a better job or more money in savings, you might be looking to pay off your loan sooner by paying more each month. Maybe you’ve paid down a credit card balance or other debt. All of these things free up how much you can pay per month.
Most people don’t go into the refinancing process looking to increase their monthly payment, but you can save yourself money in the long-term by committing to a faster repayment plan. If you can afford to pay more per month now, you can pay off the balance on your car faster. Shorter term loans usually also have lower interest rates, since the lender assumes less risk in making the loan.
On the other hand, if money is tight, it might be a good idea to refinance into a longer term. While you might end up paying more in interest, you can reduce your monthly payment and save the money you need right now instead of finding yourself in a bind.