Many Americans need to use a car to get from one location to another, making auto loans a necessary expense. Since it’s an unavoidable cost, it might be a good idea to make sure that you have the best interest rate possible during the life of your loan.
Unlike refinancing your mortgage, replacing your existing auto loan with a better, newer loan is a relatively quick and easy process. However, under 10% of people with auto loans use it to get a better rate and, in turn, potentially save thousands of dollars. This could be because they don’t know what refinancing an auto loan involves. The good news is that this article will help you answer the question of whether or not you should you refinance your auto loan.
Reasons to refinance your auto loan
Your personal finances have changed. You deserve to be rewarded for all of your hard work. If your credit score has increased since you bought your car, you might as well reap the benefits that a higher credit score can bring.
People with fair credit pay about six times more to finance a car compared to people with high credit, according to Wallethub’s 2017 Auto Financing Report. Chances are that your current lender might not want to change your contract, but there are many other lenders who will be happy to give you and your higher credit score a lower interest rate.
The market has changed. Interest rates fluctuate and, fortunately, that can work in your favor. If interest rates are lower than when you first bought your car, refinancing might be a good way for you to get lower interest rates and lower monthly payments.
You got a bad deal in the first place. We get it. Sometimes, it can be easy to be seduced by a convincing sales pitch. Next thing you know, you’re overpaying for a sports car and you’re barely keeping up with the payments. You can extend the life of your loan by refinancing, lowering your monthly payments as a result. However, keep in mind that you’ll also end up paying more interest in the long run.
When refinancing an auto loan isn’t an option
While refinancing an auto loan is a quick and easy process, unfortunately, not everyone is able to take advantage of this money-saving solution.
Situations that might make it hard for you to refinance your auto loan:
- If you have an old, used car… Lenders might not give you a new loan if you owe more than the value of the car.
- If you don’t have a history of on-time payments… This might indicate to lenders that you won’t be able to make on-time payments with a new loan.
- If your credit score has decreased since you first purchased the car… You probably won’t be able to get a better rate if your credit score is lower than before. In that case, wait until it increases to refinance your auto loan.
- If you don’t have much time left on your initial loan or you have a small or large loan to begin with… Some lenders have a minimum and a maximum amount that they’ll finance. For example, LendingClub refinances auto loans with a minimum of $5,000 and a maximum of $50,000.
When should you refinance your auto loan?
It might be a good idea to refinance your auto loan sooner rather than later if the above situations don’t apply to you. Auto loans are structured so that you pay the most interest during the first half of the loan. So, the sooner you can refinance your loan, the more you’ll end up saving.
Plus, lenders tend to have age requirements. For example, Capital One won’t refinance an auto loan for a car that is more than seven years old. Some lenders don’t have age restrictions, but they are few and far between.
Even if you do qualify to have your auto loan refinanced, you may realize that it isn’t worth it if the amount you end up saving doesn’t make that much of a difference.
Refinancing isn’t for everybody, but it still might be a good idea to keep your options open. Refinancing your auto loans is such a painless process, that you might as well shop around and see what’s out there. You might not save any money or you might save thousands. You won’t know if refinancing will benefit you or not if you don’t apply or at least use an auto loan calculator to see what you’re missing out on.
Quick tip: Apply to different lenders over the course of 15 days. Since the applications are similar, they’re all categorized as one query, so your credit score won’t be affected as much.