Is refinancing your car a good or bad idea? Remember. Refinancing an auto loan doesn’t always save money. Here´s how to determine whether a refinance is a good deal.
The average car loan payment in America is now anywhere between $400 – $500 according to an Experian report.
For many Americans, owning a car is a necessity that would be difficult to do without. This can be a financial strain if you don’t have enough savings to buy a car without financing.
One option people might consider to save money is refinancing their car loan. When is the best time to refinance a car and is it ever a bad idea? In this article, we’ll discuss how the refinancing process works along with some key pros and cons to consider before making your decision.
What Happens When You Refinance a Car (How it works)?
Refinancing a car is similar to refinancing your student loans. It involves obtaining a new car loan that is used to pay off the existing car loan. Your vehicle is used as collateral and you can either refinance with your current lender (if they will agree to lower your rate) or choose a new one.
Your new auto loan might give you a lower monthly car payment or a lower interest rate.
If you want to refinance your auto loan, the process involves three main steps. SuperMoney simplifies the process by allowing you to receive multiple loan offers without hurting your credit and by filling a single short form.
Just like with any other loan application, you’ll need important documents and information ready to go to make the process run smoothly.
According to Cory Sarrett, a consultant for Superior Honda in New Orleans, you’ll need information like
- Current monthly payments, remaining loan amount, current interest rate
- Vehicle information
- Driver’s license
- Proof of employment
- Social security number
“You might also want to run a credit report to check up on your score and how it may have changed throughout the light of your auto loan,” Sarrett adds. “Your credit score will impact the kinds of deals you can get.”
How to apply for an auto loan refinance
Once you have all your important documents organized, it’s time to complete and submit your application. Some lenders may allow you to do this online.
One of the downsides of applying to refinance your auto loan is that you may have to do it more than once and apply with different lenders to see who can give you the best rate. This could result in several inquiries.
Sarrett recommends making all your loan inquiries within a 15-day period so they will be counted as one inquiry toward your credit score.
How to choose your loan
If your application is accepted, you’ll then choose which loan terms will work best for you and sign new loan paperwork with the agreed-upon conditions.
Now that we know what happens when you refinance a car, it’s time to go over a few questions you may want to ask yourself to determine if it’s the right decision for you.
Is the Vehicle Worth Less Than the Loan?
Before you refinance, it’s important to consider how much your vehicle is worth. The value of cars depreciates very quickly. Thus, it may not make much sense to refinance if what you owe on your car is more than what it’s worth.
You can use sites like Kelley Blue Book, Edmunds, or AutoTrader to determine the current value of your car.
Is the Amount Outstanding on the Loan Too Much to Refinance?
You may owe too much on your auto loan to consider refinancing in the first place. Some lenders have guidelines that prevent them from accepting a refinance application is the outstanding loan is too high.
You can avoid running into this problem by checking out our Auto Loan Comparison page where you can browse through lenders and see what their loan amount requirements are.
What Is the Interest Rate?
If interest rates are lower than your original loan, you may be able to save some money by refinancing.
For example, if you have a $16,000 auto loan at a 10% APR on a 60-year term and you refinance to a 3.89% auto loan, you could save more than $4,500 and possibly pay off your loan earlier.
Did My Credit Score Improve?
To secure the lowest interest rate, you need to have a good credit score. If you’ve been paying on your existing auto loan and all your other bills, your credit score could have increased since obtaining your original loan.
However, if you’ve been struggling to make payments on some of your bills and have some account in collections, you may not even qualify for some of the best interest rates. In that case, refinancing your auto loan wouldn’t be a good idea for you.
It’s important to check and monitor your credit score you start considering the idea of refinancing. You can check your full credit report for free each year by going to AnnualCreditReport.com and utilize one of these credit monitoring tools to keep track of your progress.
Do I Need to Lower My Monthly Payment?
If your circumstances have changed and it’s now become difficult for you to afford your car loan payment, refinancing may be a good option. The only caveat is you may have to make your loan term longer to reduce monthly payments.
“By making the loan terms longer, you will increase the amount you pay in total, but each month’s payment will decrease providing temporary relief,” says Sarrett.
Do I Want to Pay Off My Loan Faster?
If payments aren’t a problem and you want to pay off your auto loan faster, refinancing may still be a good option for you.
In this case, you even opt to raise your monthly payment and secure a lower interest rate so you can pay it off faster.
Pros and Cons of Refinancing Your Car
Here are some of the pros and cons of refinancing a car.
Here is a list of the benefits and the drawbacks to consider.
- Lower interest rate
- Potential to lower your payment
- Can help you pay off your loan faster
- May cost more if you extend your loan term
- Adds a credit inquiry
- Starting a new loan means the amortization table resets (meaning the bulk of your monthly payment could be going to interest during the beginning stages of repayment)
So is it a good idea to refinance your car? It depends on whether you can obtain a new loan with better terms. SuperMoney makes it easy to check the terms available without hurting your credit
First, you need to ask yourself the questions above and carefully weigh the pros and cons. If it still sounds like something you’d be interested in doing, shop around and compare quotes on our Auto Loan Comparison page.