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Follow these guidelines to determine if an auto loan refinance may be right for you
Sure, you've heard about refinancing your mortgage or refinancing your student loans—but have you heard about refinancing your auto loan?
Much like any loan or method of borrowing, there are terms, conditions, fees and interest rates. And, while you'll most likely always have to pay interest on your loan (unless you get a wicked deal!), the goal is to pay less interest over time. Paying less in interest is essentially just paying your lender less money for borrowing the same amount of money. Sounds like a deal, right?!
Before you make any moves, you'll want to take a look at your current interest rate, credit score and terms of your existing loan.
Why Refinance Your Auto Loan?
Simply put, the goal of refinancing your auto loan is to save money! While the sticker price of your car won't change, the interest rates (or, the "fee" you're paying the lender to be able to borrow money) can. A small variance in your interest rates can make big changes to your wallet.
Take, for example, a 60-month loan with a 5.27% annual percentage rate (APR) for a $25,000 car. That equates to a $438 monthly car payment, with a total interest payment of $1,317.50 over the five-year loan.
However, what if you could refinance your loan and get a better APR? Let's say you qualify for a 4% APR for that same loan duration. Your monthly car payment would instead be $433 and you'd only pay $1,000 in interest. This refinance would save you $317.50 in interest.
Top Reasons to Refinance Your Car Loan
It's clear that the tippy-top reason to refinance your car loan is to save money. But, what are some indicators that show it's time to refinance or that refinancing can save you money?
Your credit score is rocking an all-time high.
Has your credit score seen a lift? Great! Lenders are far more apt to let you borrow money when you have a higher credit score. And, they'll oftentimes give you better deals. Your good credit score proves to them that you're a trustworthy borrower and you're able to pay back your loans on time. Nice work! Now, reap the benefits! (Still need to boost your credit score? See: How to Build Good Credit.)
Refinance car loan rates have gone down.
Refinance car loan rates change over time, due to many factors. If it's been awhile since you purchased your car, chances are the refinance car loan rates have changed. Just make sure that they've gone down, before you decide to refinance.
You're strapped for cash.
Sometimes you just need lower monthly payments. And that's fine! (TBH, even if you're not strapped for cash, who doesn't want a lower monthly payment if it's out there!?) When refinancing, you can get a lower monthly payment, since you're paying less in interest. BUT, you can also get a lower monthly payment by extending the length of your loan. Keep in mind that extending the length means paying more interest over time. So, while you may save more today, you'll be paying for it tomorrow.
Top Reasons Not to Refinance Your Car Loan
It's always a good time to save money, right?! Well, kind of.
You might run into fees.
When you refinance your loan, you're typically borrowing from a new lender. Some lenders have a prepayment penalty, such that you will have to pay the original lender when your new lender pays off your loan in full. Just check the paperwork from the car dealer to ensure this clause isn't in place. If it is, you might not end up saving enough money in the refinance to offset the original lender's fee. If the clause isn't in the contract, keep moving!
Keep an eye our for other fees, such as processing fees on loan refinancing deals. Some lenders charge this fee, which also dips into your potential savings.
You might not be the new lender's top candidate.
Different lenders have different preferences and prerequisites when loaning money. Some, for example, have minimum loan amounts and won't offer a refinanced loan to a car that has depreciated too much in value. It's not so much the model year of the car in this case, as it's more likely to be the number of miles on 'er.
Likewise, if you have borrowed more than the car is now worth, a new lender is not likely to offer you a new, refinanced loan.
The timing might not be right.
Another partial speed bump to your auto loan refinance is where you are in your loan schedule. Keep in mind that, if you're far along in your loan repayment, the refinance savings might not be big enough to matter. Your interest payments decrease over the life of your loan, as you're paying interest on the principal (i.e., "total") amount owed. So, near the end of your loan, you've already paid the majority of the total interest on your car. In other words, the burden of refinancing might not be worth the payoff.
Will refinancing affect my credit score?
The short answer: kind of.
Your recent credit inquiries and your credit history affect your credit.
Any time you apply for credit—whether that's a Home Depot credit card or auto loan—you credit report gets a ding. Likewise, any time you open a new loan account, the average life of your credit history declines.
Keep in mind, however, your payment history outweighs your new loan account or line of credit when calculating your credit score. If you've had a credit card for 10 years and consistently pay it off, your credit will be plenty high to experience a ding here or there.
Final to-do list for refinancing your car loan
At the end of the day, it's up to you whether or not you want to refinance your auto loan. Just keep the following things in mind:
Credit score. Is it high enough to prove you're a trustworthy borrower?
Loan schedule. Have you already paid most of the interest?
Fees. Do you have any prepayment fees in your contract?
Savings. Can you get a better interest rate than what you have?
Shop around! Compare prices with various lenders. Get the best deal around!
Good luck!