Refinancing replaces an existing loan with a new one, usually from a different lender. Most consumers use it to lower their monthly payments by lowering their interest rate or extending their loan terms.
Refinancing can save you money on interest over the loan’s term. It’s not always a wise choice, especially if interest rates rise, so think carefully before applying.
4 Guidelines To Follow When Refinancing Your Vehicle Loan
Refinancing is a terrific method to save on interest and lower your monthly payment. Take your time comparing lenders and choosing a good offer to save money down the road.
1. Shop Around
Compare lenders’ rates and terms before applying. All lenders have different rate-calculation formulas, so acquire numerous quotations.
In most cases, you can get preapproved before submitting a full application and receive a rate estimate with a light credit inquiry.
2. Consider Fees
Before refinancing, examine how fees will affect your overall savings. Some auto refinancing loans have a prepayment penalty, which means paying off your loan early can cost you more than cutting the interest rate.
3. Understand How Your Credit Will Be Impacted
Every hard inquiry lowers your credit score. Opening a new loan account can lower your average account age, which may lower your credit score.
4. Check Where You Already Have An Account
Start your refinancing search with existing financial institutions. This strategy is beneficial.
First, a lender, bank, or credit union may offer a loyalty discount on some loan fees. If you have a good track record with the bank, such as paying on time or keeping positive balances, refinancing may be possible.
When Should You Refinance My Vehicle Loan?
There is no perfect moment to refinance your auto loan — if it saves you money, it’s a good time. There are a few occasions where refinancing makes sense.
• Refinance when auto rates go down. Most vehicle loan interest rates fluctuate depending on the prime rate and other factors.
• You’ve increased your credit score. Even if market rates haven’t moved dramatically, raising your credit score may be enough to secure a reduced rate.
• You obtained your first loan from the dealer. Dealers charge higher rates than banks and credit unions to earn a profit. If your initial loan was dealer-arranged, refinancing with a separate lender could lessen your rate.
• You need reduced monthly payments. Refinancing a car loan may be your ticket to a more inexpensive auto payment, with or without a lower interest rate.
Lenders judge eligibility differently. Before refinancing, review the requirements for you, your vehicle, and your current loan.
• Consistent income, a low debt-to-income ratio, and strong credit.
• Proof of residencies, such as a lease agreement, mortgage statement, or utility bill.
• Make, model, year, vehicle identification number (VIN), and miles to value your automobile.
• Your loan balance, monthly payment, and repayment amount to see if you fulfill minimum loan requirements.
When Refinancing Doesn’t Make Sense
Not all auto loans should be refinanced. Refinancing may not save you money if you’re near debt repayment. Keep going until you need to extend your loan term to reduce payments.
Flipping a debt makes refinancing difficult. If you owe more than the car’s worth, lenders won’t accept you. “Underwater” on a loan is difficult to escape.
Lastly, higher interest rates may make refinancing more expensive. The Fed tries to curb inflation by raising the federal funds rate, which raises credit card and car loan rates. 4.8% to 6.6% are current auto loan rates.