Want to refinance your auto loan? Here's what you should consider.
An auto loan refinance can be tempting. It seems like just yesterday you mastered how to buy a new car, and now you are in the strange new territory of auto loan refinancing.
The most common reasons consumers refinance their auto loans are to reduce their interest rate or lower their monthly payment amount. To refinance your auto loan, you’ll need to find another lender to pay off your existing loan—then you’ll continue making payments to the new lender at a reduced interest rate or payment amount.
A lower interest rate or smaller payments seems like a no-brainer, but there are a few things to consider—and evaluate using an auto loan payment calculator—before you sign on the dotted line.
Has your credit score improved, or has it decreased?
After making timely payments on your loan for a year or so, your credit has likely improved. You may qualify for a lower interest rate, saving you loads of cash long-term. If this is the case, shop around with a few lenders and see what kind of offers they make.
If your credit score has gone down, you are unlikely to find a reduced interest rate, unless your original interest rate was highly inflated. Use an auto loan payment calculator to see how your interest rate impacts your total amount paid.
Are you at risk of missing payments in the near future?
Job loss, illness, or other major changes can throw a wrench in your budget. It may be wise to refinance in favor of a lower payment. This is done by extending the length of the loan, giving you more time to pay off the same amount.
You’ll end up paying more in total interest, but it’s a worthwhile sacrifice if a lower payment will save your credit. Again, an auto loan payment calculator comes in handy!
Are you saving for a big purchase, like a home?
Another reason to go for a lower monthly payment is a big upcoming expense, such as a new home or even a new baby! Lower payments give you more room in the budget to stash cash away from the next exciting milestone in your life.
Are you upside down on your auto loan?
Owing more on your auto loan than your vehicle is actually worth, also called being upside down or underwater, is a frustrating situation. To solve this problem, some consumers look to refinance their auto loan. Unfortunately, lenders typically avoid refinancing in these situations. Occasionally a refinance is possible, but you may need to look into other ways to alleviate your negative equity situation.
An auto loan refinance can save you money, or save your credit! But if you’re not going to shave down your interest payments or prevent defaulting on your existing loan, you may want to rethink that refinance. A savvy assessment of your loan and your financial situation will give you all the tools you need to make the right decision.