Bills are a lot like bad weather;
you can’t stop or change them.
But that isn’t always the case for your auto loan.
You can make a big difference in your monthly budget with a little legwork.
Refinancing your auto loan can lead to a lower interest rate, lower monthly payments, a shorter term, or a combination of the three!
It depends on a wide range of factors, including:
- the value of your vehicle
- how much you owe on your current loan, and
- your credit standing.
If any of these factors have changed since you bought your car, you owe it to yourself to check out your refinancing options. Let’s look at some common life changes and when they might be cause to look at refinancing.
1. Your credit improves
One of the biggest factors in determining how much you will pay for your auto loan is your credit score. When your lender is building your loan package, a credit report is pulled as the central part of that process. It’s your credit score that helps define your interest rate.
If you didn’t have much experience with credit when you purchased your vehicle, or if you have had a boost in your score, refinancing can do you a world of good. Interest rates as high as 18% are common for borrowers who have little to no credit history and just took the dealership’s financing. Having even a few months of solid payments on your side can cut that rate in half or more.
2. You didn’t shop around
Many people get caught up in the excitement of the car-buying process. You found the car you like, negotiated the price and a monthly payment to just barely fit in your budget. It may seem like the choice of lenders for your car loan is predetermined since you never discussed where to finance the vehicle.
Dealers tend to have a small range of lenders with whom they work exclusively and may not be offering the best interest rates for your auto loan. By doing your own comparison-shopping for auto loan rates and insurances, you could save money on both the loan and any ancillary insurances or warranties you may have purchased.
If you’ve never shopped around for a car loan, it’s definitely worth doing. By getting multiple offers, you can ensure you’re getting the best price available for your loan. Try to do your shopping inside a 15-day period. Otherwise, the multiple checks on your credit could negatively impact your credit score.
3. You need to change your monthly payment
You may be in a much better financial situation now than when you bought your car. You may have a better job or more security. You may have paid off credit card 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. Once the car is paid off, you’ll have all that money to devote to other saving or spending priorities.
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.
Before making this decision, you should also check out an auto loan refinance calculator to make sure
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