In finance, refinancing refers to the process of replacing one or more existing loans with a brand-new loan, which is typically obtained from a different lender. You must take into account several factors when deciding when to refinance your car loan, including current interest rates, your credit score, the terms of your existing loan, and other factors, among others. Overall, refinancing is recommended when it will allow you to save money on interest throughout your loan.
If you’ve recently received an offer to refinance your car, or if you’re simply interested in learning more about how to refinance a car loan, there are a few things you should be aware of before proceeding.
When is a good time to refinance my car loan?
To save money in the long run, it’s best to car loan refinancing as soon as possible. However, it may also be beneficial if you’re hoping to reduce your monthly payments. Here are a few examples of when it might make sense to refinance your home:
• Interest rates on refinancing car loans have decreased: Interest rates on most car loans fluctuate based on the prime rate and other factors, such as the loan’s term. If you bought your car a while ago, interest rates on car loans may have decreased in the meantime.
The fact that you’ve improved your credit score may be enough to get you a lower interest rate, even if market rates haven’t changed at all. In general, the better your credit is, the more favorable loan terms you’ll be able to obtain. If your credit score has improved since you took out your first loan, you may be able to qualify for better loan terms going forward.
• You obtained your initial loan from a dealership: Dealers have a reputation for charging higher interest rates than banks and credit unions. You may be able to get a lower interest rate if you refinance directly with a lender rather than through a dealer if you obtained your initial loan through dealer-arranged financing.
• You require lower monthly payments: In some cases, refinancing a car loan may be your ticket to a more affordable payment, whether or not you also require a lower interest rate reduction. If your finances are tight and you need to lower your car payment, you may be able to refinance your loan to a longer repayment period (from 36 months to 48 months, for instance). It’s important to remember, though, that while you’ll pay less in interest per month with this strategy, you’ll pay more in total throughout the longer loan.
Refinancing your automobile loan: some pointers
When it comes to refinancing your auto loan, timing isn’t the only factor to take into consideration. When it comes time to refinance your home, the following are some pointers to keep in mind.
1. Look around for the best deal.
Before applying with a lender, shop around and compare interest rates and terms from several different lenders. Obtaining more than one quote is important because each lender has its formula for calculating your rate. There are some situations where you can get prequalified before applying and receive a rate quote with only a soft credit inquiry, which will not affect your credit score.
If there is no prequalification tool available, keep your application submissions to a bare minimum.
Rate quotes will allow you to calculate how much money you can save by refinancing and whether it is worthwhile to pursue the option.
2. Take into consideration fees
Before you refinance, think about whether fees will have an impact on your overall savings. In the case of your current auto loan, there may be a prepayment penalty associated with it. If this is the case, you will be required to make a payment to the original lender when the new lender settles the debt. You can check the contract you received from the dealer to see if there is a penalty for not following through.