Should I Refinance My Car? 9 Times It Makes Sense
When you finance a car, you sign a contract that determines your loan length, interest rate, payment amount and other critical details — which might not be the best terms available to you.
Refinancing a car simply means getting a new auto loan, typically with a lower interest rate or more affordable payments, which pays off the old loan with the new one, resulting in more favorable loan terms for you.
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Reasons to refinance a car loan are personal and depend on your financial situation, so it might be tricky to know if and when refinancing is right for you. If any of these nine reasons to refinance your car apply to you, explore auto refinance companies to find the best car loan for you.
9 Times You Should Refinance Your Car Loan
If any of these scenarios remind you of your own life, it might be time to refinance your car loan. Here are nine times it makes sense for you to refinance your vehicle’s loan:
1. You Want to Reduce Your Monthly Car Payments
If your circumstances change and your current car payment amount is a burden, refinancing the loan could reduce your payments if you extend the loan length or get a lower interest rate. While you might ultimately pay more in the long term, it might be the right choice for you if the lower payments would ease the strain on your monthly budget and help keep you from defaulting on the loan.
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2. You Didn’t Get the Best Loan Rate
If you have bad credit or took the first car loan you could get, you might have unfavorable loan terms like an extremely high interest rate. Sometimes you get a loan through the car dealer for convenience and discover that it was marked up significantly, as the average dealership interest rate markup is $3,753, or 9.9% over the manufacturer’s suggested retail price MSRP- but don’t expect a dealer to tell you this, as they aren’t required to disclose this information.
You should be able to find better options offered by auto refinance companies or your local credit union.
3. Your Credit Score Went Up
If you were in a lower credit tier when you bought your car and had to end up paying a higher interest rate because of it, you might qualify for better auto refinance rates if your credit score has improved. Managing your finances responsibly and checking your credit report to ensure it’s free of errors are just a few ways to improve your credit score.
See if you qualify for a better interest rate once your score improves. You’ll save money by refinancing the car at a lower rate.
4. Interest Rates Dropped
Even if your credit score hasn’t improved significantly, you might still be eligible for a better interest rate on an auto loan if overall interest rates drop. The Federal Reserve adjusts interest rates periodically, and might be planning to do so again in the not too distant future. This means that car loan rates can rise or fall as a result. Keep an eye on current auto loan refinance rates at auto refinance companies and banks so you can consider refinancing if they go down.
5. Your Loan Has a Low or No Prepayment Penalty
Sometimes your car loan contract includes a penalty for paying the loan off early. If you’re hoping to refinance a car loan to save money, weigh what you’d save with a lower interest rate or shorter loan term as compared to that penalty. Some auto refinance companies help you determine this with online loan calculators. Refinance the car loan if the overall savings offset the early payoff fee.
6. You Want to Remove a Cosigner from Your Loan
Refinancing is a simple way to remove your cosigner if your financial situation improves and you’re able to get approved for a new loan by yourself. Have the other person removed when you refinance the car loan by filling out the new contract that’s in your name only.
7. You’re Still in the Initial Months of Your Car Loan
If you’re still in the early months of your car loan, you’ll have more options for lenders willing to refinance your car, and you’ll save additional money by getting more favorable terms as soon as possible. The farther you are into your auto loan, the less attractive you look to auto refinance companies because cars depreciate rapidly. And, if your credit score was marginal when you got the initial loan, you won’t find good auto loan refinance rates until you take some time to improve it.
8. You’re Upside Down on Your Car Loan
If you have a car loan with a long term and owe more than your car is worth, an auto refinance can help the situation if you have good credit. Refinance the car loan for a shorter period at a lower interest rate to lower the balance you owe more quickly.
9. You Found an Auto Refinance Discount
Some banks, credit unions and other auto refinance companies offer special discounts to customers who want to refinance a car loan. Watch for special promotions and ask about discounts if you don’t see anything available.
Jake Arky contributed to the reporting of this article.
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