As with any refinancing decision, the validity of it depends on your unique situation:
- What is the interest rate with your current auto loan and how does it compare with current rates? Obviously it only makes good financial sense to refinance if you can get a lower rate. Check out auto loan interest rates by FICO® Score range for your State to see if current rates are lower than the rate you are currently paying.
- How far are you into the existing loan term? Remember, interest is “front loaded” in an auto loan (meaning in the beginning of your loan term most of your monthly payment is applied to the interest and not the principle). As such, refinancing in the early part of a loan term is more beneficial as that’s when you are paying the most interest and stand to save more money.
- How old is the vehicle? Some lenders may have policies against financing older vehicles as they have less value.
- Does your current loan have pre-payment penalties? Be careful to check the “fine print” with your existing loan as there may be substantial pre-payment penalties if you pay off the loan early.
- What is the state of your credit? The refinancing lender will likely perform a thorough credit check on you and higher FICO Scores tend towards better interest rates. Do your homework before applying for an auto refinance loan by making sure your credit report is free of errors and you have a high FICO Score.
Ready to check out auto refinancing? The process is fairly straight forward. Invest in the time to do some research to identify companies that offer auto loan refinancing and check out their interest rates.
Apply, and if you are approved, the new lender will provide funds so you can pay off your existing auto loan and transfer the title. After that, you start paying your new lender monthly like before.
Note, there are typically some low dollar amount “nuisance fees” involved (lien-holder fee, state re-registration fees, etc.) – be sure to understand what these will be when interacting with the refinancing lender.
While not as exciting as purchasing a new car, refinancing your existing car loan can provide you with an interesting opportunity to reduce your monthly car payment and save some money over the life of the loan.
Tom Quinn is the Vice President of Business Development for myFICO® , and has over 20 years of experience working with consumers, regulators and lenders and regarding credit related questions and initiatives.