Should You Refinance Your Car Loan? A How-To Guide
Refinancing a car loan involves applying for another loan with different terms to pay off your previous car loan’s balance. An auto loan is secured with a car and repaid in predetermined fixed monthly installments, usually over several years.
Many people refinance their car loans to ease their financial burden, allowing you to pay off the loan with a lower interest rate.
Even if you fail to qualify for a loan with a lower interest rate, you may be eligible for a loan with a longer repayment period. A more extended repayment period means that you will still pay what you owe but with decreased monthly installments. However, the total interest paid over the entire life of the loan might increase.
Reasons for Refinancing a Car Loan
Life is always going to throw the unexpected your way. You may find one day that a significant event will make it difficult for you to make your monthly payments, but you don’t have to just put up with this hardship and sacrifice other aspects of your life in order to afford your car loan. These are just a few examples of circumstances where refinancing may be in your best interest:
- You want to lower your interest rate:
Reduced rates on your auto loans will save you a lot of money through the lifetime of the loan, allowing you to put money towards more meaningful things.
- You want to extend the loan repayment term for your car loan:
If you’re struggling with repaying your auto loan refinancing could get you a car loan with a longer repayment period, thus decreasing your monthly repayments. Just remember that this will make the total amount paid higher in the end.
- You’ve experienced a change in monthly income:
Job loss or a reduced salary can make it difficult to make your monthly payments, if not impossible. With a refinanced auto loan, you can either reduce your interest rate or extend your repayment period, as mentioned above, making it easier to afford these costs and get back on your feet.
- Benefit from the changing lending landscape:
If you compare the current landscape to when you took up your loan, you may realize that the interest rates have lowered or your credit score has improved. You can refinance your auto loan to reap the benefits. This would lessen your financial burden in the long run.
Tips to Consider Before Refinancing Your Car Loan
Are you having trouble repaying your car loan and thinking about refinancing it? Don’t make a hasty decision due to the decreased interest rate attached to most auto loan refinances. Sit back and take time before making a decision. Here are some important things to consider before making the final decision whether to refinance your car loan or not.
- The requirements for refinancing a car loan: Different lenders will have different requirements for qualification. Ask about all the details of the refinancing requirements before making a decision.
- Penalties for prepayment: Does your current lender penalize early repayment of loans? While some lenders impose penalties for repaying loans early, some do not. As you consider refinancing your car loans, check with your current lender to see if there is a penalty for early repayment. If the amount charged as a penalty is significantly less than the total amount you save for repaying your car loan early, you can proceed with your refinancing application.
- Interest rates: One of the most important aspects to consider when applying for refinancing is the interest rates. Compare the interest rate on your existing loan to the interest rate charged if you refinance your car loan. If you qualify for a loan with the same or higher interest rate, you need to cancel the refinancing process. However, if the interest rate is lower, then you can proceed with your application.
- Current credit score: As you consider refinancing your car loan, remember that lenders will look at your credit score. Many will reject your application if you don’t meet a certain score. At New Roads, we can help you get approved for a reduced interest rate or longer repayment period, whether you have no credit or poor credit.
When Is the Right Time to Refinance Your Car Loan?
So, you know what to consider when refinancing a car loan, but is it the right time? Compare all the refinancing requirements, and draw a conclusion depending on the timing. The right time for refinancing means:
- The interest rates have decreased compared to when you took out your current loan.
- Your current financial situation is better than when you took out your existing loan.
- Your current loan terms are not pleasing
- You’re struggling to foot your monthly bills
Refinancing your car loan does not always make sense. Although you will save money, holding off on refinancing your auto loan can be the right decision in specific scenarios. You should probably wait on refinancing if:
- You have repaid a significant fraction of your total loan amount already.
- If your car is old and worn out, it may no longer make sense to refinance.
- If your car has covered a significant mileage, it’s not the right time for refinancing.
- If the amount of the total fees paid for refinancing in terms of prepayment penalties, additional interest, or loan principal exceed the benefits earned you, you need to hold off on refinancing.
If you’re considering refinancing your car loan, try out our car loan payment calculator to figure out a strategy for paying off your car loan when it’s right for you.