Everyone is talking about using the current low interest rates to refinance mortgages. What about auto loans? Why shouldn’t people consider using these same low rates to refinance their car loans? Well, they should… and they are.
Why should you refinance?
Whether it be a mortgage, auto or other type of loan, there are many reasons people choose to refinance.
- Save money by refinancing with a lower rate – paying less interest and lowering your monthly payments.
- Increase your term length in order to lower monthly payments or decrease your term length to pay the debt off sooner.
- Personal reasons like removing a co-signer from the loan or having the peace of mind knowing you’re getting the best possible rate.
Whatever the reason, it’s important to understand the impact of refinancing and also decide what you’d like your payments to be. (You can calculate your new payments by plugging in different interest rates at myFICO’s auto loan calculator.)
When should you refinance?
So when does it make sense to consider refinancing your auto loan? The answer is different for every borrower, but you might want to ask the following:
- Have interest rates dropped since you first took out your loan and refinancing would help you save money?
- Has your credit improved since you initiated the loan and you want to take advantage of your higher FICO® Score? (There’s actually an auto-industry specific score used by auto lenders to check your creditworthiness.)
- Did you realize that the auto dealer charged you a much higher interest rate than what you deserve and you want to borrow from a different lender at a lower rate?
- Are you having problems keeping up with the current payments? If financial hardship is the issue, you can extend the loan’s term which can help lower your payments. However, extending the term means paying more interest, so do your calculations carefully.
How should you refinance?
Refinancing an auto loan can happen a lot faster than it previously did. As long as you have a history of six to twelve months of consistent, on-time payments, refinancing should be very possible. You can even refinance online – it’s the best place to do your research and find a lender who can help you save money. However, before you begin, make certain that your current loan does not incur a prepayment penalty. Most auto loans don’t, but just check to be sure so you can feel secure that the refinance process will be worthwhile.
- Find the lowest rate. Check with two to three lenders to identify the lowest interest rate for which you qualify. Comparing offers provides the greatest opportunity for finding the best rate, and lowest payments.
- AutoPay. You can get the best interest rate by selecting the AutoPay option during the application process. Many lenders lower your interest rate even further if you choose to pay your monthly bill this way.
- Make higher payments. If, and only if, you can afford higher payments you should consider doing so. It shortens the term of the loan so that you can pay it off sooner and save a lot money down the line on interest.
A quick example.
Here’s an easy-to-understand example of how refinancing an auto loan can save you money… big money.
Loan Amount: $16,500
Loan Term: 60 months
Interest Rate: 21% APR
Monthly Payment: $446.38 Interest on Loan: $10,282.83
After refinancing at 7%
Monthly Payment: $330.63 Interest on Loan: $3,337.57
Every percentage point the interest rate is decreased can make a big difference in your monthly payment and the total interest paid.
SIDE NOTE: A few things to remember when refinancing…
- The new loan needs to be in the same name as the current loan
- Have your car loan account number available
- Have the car’s year, make, model and VIN handy
- You will not be required to have the car appraised in order to refinance your loan
- A refinance of less than $7,500 is probably not worth the lender’s time
- Borrowing more than the car’s value will not be possible